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Posted by rick++ on December 1, 2006, 9:21 pm
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Sounds like a real nightmare coming down the road, unless you
a tax-preparer charging by the clock. California's registered
domestic partners(*) may file for 2007 as marrieds. However,
since the feds dont recognize DPs, and California taxes boot
off fed returns, the solution becomes complicated. The
couple has to create a "phantom" married federal return and
use that as a basis for their CA return claims:
http://www.mercurynews.com/mld/mercurynews/business/16139170.htm
What does MA do?
(* include same-sex and opposite-sex DPs)
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Posted by Stuart A. Bronstein on December 3, 2006, 3:46 pm
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> Sounds like a real nightmare coming down the road, unless you
> a tax-preparer charging by the clock. California's registered
> domestic partners(*) may file for 2007 as marrieds. However,
> since the feds dont recognize DPs, and California taxes boot
> off fed returns, the solution becomes complicated. The
> couple has to create a "phantom" married federal return and
> use that as a basis for their CA return claims:
>
> http://www.mercurynews.com/mld/mercurynews/business/16139170.htm
I really hate it when supposed journalists write articles
like this but don't include information such as the bill
number. Here's the legislation:
http://www.leginfo.ca.gov/pub/05-06/bill/sen/sb_1801-1850/sb_1827_bill_20060929_chaptered.html
The law used to have a provision that income earned by
domestic partners would not be treated as community property
for income tax purposes. That provision, apparently, has
been deleted.
I haven't researched this in detail. But it looks like the
proper way to do the federal tax returns of domestic
partners is to treat it like a subchapter K partnership (due
to community property) with each partner having half the
income and half the deductions.
> From there the state return should be a bit easier.
Stu
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Posted by Shyster1040 on January 13, 2007, 1:53 am
Please log in for more thread options Notwithstanding the IRS' position in CCA 200608038
(2/24/2006), it is probably reasonable to apply the ruling
of Poe v. Seaborn, 282 U.S. 101 (1930), to California
registered domestic partners.
The essence of the Poe holding is that, where for rational
state policy concerns a state has determined that the
beneficial ownership of a particular item is automatically
vested in one or more identifiable persons other than the
person who actually acquires that item and that such
beneficial ownership arises immediately by operation of law
at the time, and to the extent, that the actual acquirer
first obtains ownership, and where that rule is mandatory
rather than voluntary, then each of the persons in whom
beneficial ownership is vested is treated as an "owner" of
that item for federal tax purposes.
The fact that Poe and its progeny dealt only with
heterogeneous spouses should be irrelevant. While federal
tax law looks to the substance and not the form of a
transaction or relation to property, and will ignore merely
formal differences imposed under state law, if state law
dictates the substantive relationships, then federal law
will respect those relationships unless Congress has
legislated otherwise. Thus, for example, prior to the
enactment of the grantor trust rules, the Supreme Court, in
holding the transferor/trustee of a trust to be the "owner"
of the transferred assets for federal tax purposes, ignored
the state-law relationships because, as a matter of
substance, the transferor/trustee still had control over the
beneficial enjoyment of the property. On the other hand, if
under state law the heirs of a decedent under a will become
the beneficial owners of the bequeathed property as a matter
of law upon the decedent's death, the heirs are treated as
the beneficial owners as of the date of date notwithstanding
that legal title is either still in the decedent's name or
is in the estate representative's name.
Viewed in this light, the essence of Poe is that where state
law, for rational policy reasons, provides that person A
receives, by operation of law, a beneficial interest in
income earned by person B as of the instant person B obtains
a vested beneficial interest in that income himself, then
person A's interest is a substantial beneficial interest
that will be given effect for federal tax purposes. The
fact that the persons in question in Poe were spouses, i.e.,
husband and wife, is irrelevant, except to the extent that
the argument can be made that there must be some sort of
rational basis underlying the state's decision to give
person A an automatic beneficial interest in any income
earned by person B. The only conclusion that can be drawn
from the IRS memo regarding the limitation of Poe to husband
and wife spouses is that the decision was a political one,
not one based on sound tax policy.
Thus, to the extent that California's decision to give each
registered domestic partner a community property interest in
income earned by the other registered partner has a rational
basis (which it almost certainly does, it is very difficult
to win the argument that there was no rational basis for a
considered legislative decision by a state government), that
decision should be respected, and the beneficial interests
created in registered domestic partners should be respected
for federal tax purposes.
That being said, there is a significant risk that any
application of Poe v. Sanborn to registered domestic
partners will be challenged by the IRS, and anyone taking
that position should be prepared to go to court. From a
strategic point of view, it would be useful to develop a
number of test cases with taxpayers who are almost identical
to the taxpayers in Poe except for the difference of gender.
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Posted by Stuart A. Bronstein on January 15, 2007, 1:47 am
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> Notwithstanding the IRS' position in CCA 200608038
> (2/24/2006), it is probably reasonable to apply the ruling
> of Poe v. Seaborn, 282 U.S. 101 (1930), to California
> registered domestic partners.
I agree completely. I can't see any legal difference
between that case and the current domestic partner situation
in California, with the exception that California community
property law now gives both spouses and domestic partners
even more control over the property of the community than
the Washington law did in Poe. So the case for income being
taxed to both is even stronger now than it was then.
Stu
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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Posted by Herb Smith on December 3, 2006, 3:46 pm
Please log in for more thread options rick++ wrote:
> Sounds like a real nightmare coming down the road, unless you
> a tax-preparer charging by the clock. California's registered
> domestic partners(*) may file for 2007 as marrieds. However,
> since the feds dont recognize DPs, and California taxes boot
> off fed returns, the solution becomes complicated. The
> couple has to create a "phantom" married federal return and
> use that as a basis for their CA return claims:
>
> http://www.mercurynews.com/mld/mercurynews/business/16139170.htm
>
> What does MA do?
>
> (* include same-sex and opposite-sex DPs)
Sure glad I work in a state with no state income tax (WA) :-)
<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>
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