New Tax World for Registered Domestic Partners

New Tax World for Registered Domestic Partners

It took five years and a Presidential election to get the Internal Revenue Service (“IRS” or “Service”), through its Office of the Chief Counsel, to issue a ruling that, generally, community income of registered domestic partners (“RDP’s”) in California should be treated the same way as community income of heterosexual married couples.  But the hard work was not over.  The 2011 filing season (for 2010 returns) reaffirmed the old adage that the devil is in the details.

The PLR and the CCA

PLR 201021048 (the “PLR”) was issued on May 5, 2010, to a gay couple in Berkeley.  Because its holding was directly applicable to all registered domestic partners (“RDP’s”) in California, the Internal Revenue Service issued a public version, CCA 201021050 (the “CCA”), on the main issue in the ruling.

Basically the PLR and the CCA recognize that RDPs in California have full community property rights.  They hold, as a result, that when the RDP’s file their individual tax returns – under the Defense of Marriage Act, 1 U.S.C §7 (“DOMA”), RDP’s are not “spouses,” so they cannot file joint federal income tax returns, at least until DOMA is ruled unconstitutional or Congress changes the law – they must equally split their community income and deductions.  This income splitting rule, as applied to spouses, has been in the tax law since the United States Supreme Court decided Poe v. Seaborn, 282 U.S. 101 (1930) (“Seaborn”).

Pursuant to a request for a private ruling the Berkeley couple had filed in 2005, the Service issued Chief Counsel Advice 200608038 (the “2006 CCA”) in February 2006 ruling that Seaborn applied only to spouses, and not to RDP’s.  The 2010 PLR, issued in response to a resubmission of the request in 2009, reversed that position, effective beginning in 2007.

Why the change?  It certainly wasn’t a reexamination of the rationale of the 2006 CCA.  That CCA said that, in order for Seaborn to apply, the community property rights had to be an ”incident of marriage by the inveterate policy of the State.” Seaborn could not apply outside of a marriage of a husband and a wife.  Thus, the 2006 ruling was about marital status.  The 2010 PLR and CCA ignore marital status and implicitly justify the 2006 CCA by stating that it wasn’t until 2007 that California RDP’s had full community property rights.  Once California RDP’s had full community property rights, Seaborn applied.  Thus the 2010 RDP and CCA are about federal taxation of state property rights, not about marital status.

The rationale for the implicit justification of the 2006 CCA is disingenuous.  It is true that in 2005 and 2006, California did not treat earned income as community property for state income tax purposes.  But that didn’t mean that California RDP’s did not have full community property rights.  Federal tax law is supposed to follow state property law; state tax law should be irrelevant. No, the change occurred because the Bush White House dictated the holding of the 2006 CCA, and the Obama Administration has a nondiscrimination policy regarding same-sex couples.  Interestingly, the 2006 CCA had so little support among the attorneys in the Office of Chief Counsel that no principal author was named – a departure from longstanding protocol.

Publication 555

The Internal Revenue Service has a booklet, Publication 555, entitled Community Property (“Pub 555”).  Until this year it was used only in the relatively unusual case that a married couple in one of the nine community property states decided to file separate, rather than joint, tax returns.  It answers questions like whether the spouse in whose name an IRA has been maintained should report the deduction for a contribution of community property funds to, or report the income for a distribution from, the IRA, or whether each spouse should report half (answer: only the participant spouse).  But this year it had to be used by all RDP’s in California, Washington and Nevada, the only states granting RDP’s community property rights, because the RDP’s cannot file joint returns.

Learning all of these splitting rules significantly increased the work for tax return preparers; and the complications it introduced significantly increased the costs for RDP’s who had their returns prepared by professionals.  In the Bay Area, a group of wonderfully dedicated certified public accountants and enrolled agents worked to get ahead of the curve.  This same group had met in 2004 and 2005 to think about how AB 205, the significant expansion of registered domestic partnership rights, would impact taxes when it became effective on January 1, 2005 (retroactive to the prior date of registration for existing domestic partnerships).  Throughout the filing season they maintained a listserv for professionals to discuss the issues that arose.  Things were even more difficult for RDP’s not using professionals; TurboTax, for example, did not update its software to deal with RDP community income until after April 15.

The IRS also tried to get ahead of the curve.  Early in 2011 it issued a revision of Pub 555 to take into account the community property rights of RDP’s.   The IRS had a legitimate problem:  many provisions of the Internal Revenue Code (“IRC”) that deal with community property use the word “spouse;” and under DOMA, a RDP is not a spouse.  For example, IRC § 66 describes situations in which one spouse filing a separate return does not have to include community income earned by the other spouse.  Because the word “spouse” is used, the Service stated in Pub 555 that these relief rules, akin to the “innocent spouse” rules for joint returns, do not apply to RDP’s.  Unfortunately, the IRS is probably right, and this will have to be fixed by Congress.

However, the IRS got some things quite wrong when it revised Pub 555.  Even though the Obama Administration believes that DOMA is unconstitutional and will not defend it in court, the Administration has stated that it will enforce DOMA, and the Service is adhering to that promise even where it is unnecessary.  The example of this that proved most vexing during the filing season involved the self-employment tax (“SECA”).  Social Security and Medicare taxes are paid one half by the employer and, through withholding, one half by the employee.  Whether the employee lives in a community property state, is married, and files a separate return is irrelevant.  Only the actual employee is taxed, and the taxes are credited only to the actual employee’s Social Security and Medicare accounts.  These employment taxes do not appear on the employee’s income tax return.   SECA is the Social Security and Medicare tax for the self-employed.  It is reported on the self-employed person’s income tax return, principally on schedule SE.  To make SECA parallel, IRC § 1402(a) states, in part:

The term “net earnings from self-employment” means the  . . . income derived by an individual from any trade or business carried on by such individual, . . .  plus his distributive share . . .  of income or loss . . . from any trade or business carried on by a partnership of which he is a member . . . [emphasis added]

Thus, the self-employment tax is imposed on the earnings of the person carrying on the business or who is the partner of the partnership business.  Section 1402(a)(5) makes clear that Seaborn style income-splitting does not apply to SECA:


(A) any of the income derived from a trade or business . . . is community income under community property laws applicable to such income, the gross income and deductions attributable to such trade or business shall be treated as the gross income and deductions of the spouse carrying on such trade or business . . . ; and

(B) any portion of a partner’s distributive share of the ordinary income or loss from a trade or business carried on by a partnership is community income or loss under the community property laws applicable to such share, all of such distributive share shall be included in computing the net earnings from self-employment of such partner, and no part of such share shall be taken into account in computing the net earnings from self-employment of the spouse of such partner;

The Service concludes that since the word “spouse” is used in section 1402(a)(5)(A), that provision cannot apply to RDP’s; and it then follows, despite the general language of section 1402(a), that the opposite rule applies and DRP’s must split their income for SECA purposes.  Arguments that the general rule should apply when the exception doesn’t and that the IRS approach treats same-sex partners in community states as the only people taxed on self-employment income earned by another person fell on deaf ears at the Service.

The Infamous “J. Bell Letters”

Recognizing that they were filing unfamiliar returns, preparers adopted the practice, recommended informally by the IRS National Office, of writing “FILED UNDER CCA 201021050” at the top of their RDP returns.  Despite this legend, and despite the CCA having been issued almost a year before the returns were filed, a large number of RDP taxpayers received a letter from “J. Bell” of the Fresno Service Center rejecting the returns because they included income of another person to whom the taxpayer was not married.  Even after the National Taxpayer Advocate’s office declared that the problem was fixed, some J. Bell letters continued to arrive.


A lot of work has yet to be done to smooth the tax return filing process for RDP’s.  The expense should go down, after this first season, but the cost of preparing joint (or married-filing-separately) state returns and individual federal returns will persist.  Same-sex couples still do not have estate and gift tax marital deductions, nor are property divisions and spousal support on divorce treated as favorably as for heterosexual married couples.  Not until Proposition 8 and DOMA are declared unconstitutional will same-sex couples have anything close to equality.

Don Read is an attorney and certified taxation law specialist practicing in Berkeley, Palo Alto, San Francisco and, occasionally, Bolinas. Learn more at  Together with Patricia Cain, now the Inez Mabie Distinguished Professor of Law at Santa Clara, he filed the private ruling requests discussed in this article.

Don earned his J.D, cum laude, at Columbia University and his LL.M. (Tax) at NYU, where he was in the top 10% of his class.  He has been a partner in law firms in Honolulu, San Diego and San Francisco and is currently tax counsel to Lakin-Spears in Palo Alto and Severson & Werson in San Francisco.  He was an attorney-advisor in the US Treasury Department’s Office of Tax Legislative Counsel and an adjunct professor at USF School of Law.  He is currently chair of the Taxation Committee of the ABA Family Law Section and co-president of the East Bay Tax Club.

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