ASK THE EDD ATTORNEY – How Does the Supreme Court’s Doma Ruling Impact a Same-Sex Married Couple’s Exposure to The Edd
by Robert S. Schriebman
This is Part 1 of a two-part article discussing the exposure of a same-sex married couple to the EDD for assessments and deficiencies. In Part 1we will discuss the general rules of marital community property in California. In Part 2 we will discuss both pre-marital and post-marital exposure to an EDD debt. I will make a few suggestions on how a same-sex married couple can protect their respective assets against pre-marital and post-marital EDD assessments and deficiencies. Please understand that we are exploring new territory. Things are going to develop and change.
On June 26, 2013, the U.S. Supreme Court issued its decision in United States v. Windsor, 570 U.S. ___(2013); 2013-2 ustc 50,400.The Court ruled that section 3 of the Defense of Marriage Act (DOMA), which precludes the federal government from recognizing a same-sex partner in the definition of “spouse,” is unconstitutional. Since the decision was issued the IRS has issued guidelines to tax professionals and the public on how to interpret the Court’s decision. Some states still do not recognize same-sex marriages. The IRS understands that a same-sex couple can be legally married in one state but reside in a state that does not recognize the legality of their marriage. To couples in this situation the IRS has also ruled that a valid marriage will be honored for tax purposes regardless of where the couple resides so long as their marriage was legal in the state in which the marriage was officiated. By doing so the IRS has recognized a very old law that says, in substance, that a marriage valid where celebrated is valid all over the world.
The Supreme Court held that the DOMA law, as originally written, violates the guarantee of equal protection under the Constitution. This means that same-sex couples who are legally married are considered spouses under the tax law entitling them to take advantage of a number of tax breaks and benefits afforded only to traditionally-married heterosexual couples.
Some of the federal tax advantages resulting from the Court’s decision are the ability to file joint federal income tax returns and to be eligible for spousal retirement plan benefits as well as tax-free healthcare coverage. There are also new opportunities to take advantage of health plans and continuation of COBRA benefits as well as benefits under Social Security and the Family Medical Leave Act. I will not discuss these ramifications at this time.
Basic California Community Property Law – Introduction
California is one of only nine community property states. California law determines whether, and to what extent, a taxpayer has “property” or “rights to property” subject to taxation as well as exposure to tax assessments and collection.
Common Law vs. Community Property Law
There are two types of property systems in the United States: common law and community property. The theory underlying common law is that each spouse is a separate individual with separate legal and property rights. In California we are governed by the rules relating to community property. The theory underlying community property is very similar to a partnership. Each spouse contributes labor for the benefit of the marital community and shares equally in the profits and income earned by that community. It does not matter if one spouse stays at home to raise children while the other spouse works to earn a living, each spouse owns an automatic 50% interest in all community property. In California, spouses may also hold separate property which they solely own and control. In other words, in a marriage there can be both community property and separate property co-existing at the same time. Sometimes things can get mixed up and confusing.
Same-sex spouses in California have mutual exposure to community debts. Creditors of spouses, such as the EDD, may be able to reach all or part of the community property, regardless of how the property is titled, to satisfy the debts incurred by either spouse. The marital community property assets may also be liable for the pre-marital debts of either spouse. I believe this will be a major problem to same-sex couples if not addressed prior to marriage.
Tax Assessment and Collection under California Community Property Rules
For income tax purposes, when spouses file joint 1040 or 540 individual income tax returns, they are jointly and severally liable for each others tax debt. This is the same concept as a general partnership liability. One spouse may argue that he or she is an “innocent spouse” under IRS and FTB exceptions; however, this only applies to income tax liabilities and does not apply to employment tax liabilities (The “innocent spouse” argument may not be used against the EDD). If spouses file separate returns, each spouse is taxed on 50% of the total community property income regardless of which spouse acquired that income.
For collection purposes the IRS, FTB, and EDD may collect taxes owed by only one spouse entirely from community property assets. This includes community property earned by the non liable spouse. The marital community property is liable for the pre-marital and separate debts of the debtor spouse who was assessed by the IRS, FTB, and EDD prior to the marriage. This can be very confusing and very dangerous at the same time.
In Part 2 we will review real-life examples of how a non debtor spouse, in a same-sex marriage, can fall into a trap of being exposed to both the pre-marital and post-marital tax deficiencies assessed by the EDD and collected by an aggressive EDD collector.
An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD attorney, Robert S. Schriebman has successfully dedicated more than 30 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House and the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.