Adam C. Libman

You are RSVP’d for our May 20th Client Appreciation Day

acl — Tue, 24 Apr 2012 16:55:09 +0000

If you’ve landed on this page, it means you have successfully RSVP’d for our May 20th 1pm celebration.

The location will be:

904 South Canyon Blvd
Monrovia CA 91016

How will this new IRS position affect California married same-sex couples who are not also California RDPs?

acl — Thu, 15 Mar 2012 04:43:19 +0000

The IRS has stated that its new position will apply equally to
both California married same-sex couples and California RDPs:
“A RDP in . . . California (or a person in California who is
married to a person of the same sex) generally must report half
the combined community income earned by the individual and
his or her domestic partner (or same-sex spouse).” See
Publication 555 (2010).
As noted in Q&A #1, the new IRS position reflects longstanding federal law that the IRS generally must defer to state
laws that determine who owns what property, and in particular,
what comprises an individual’s ownership of community
property. Thus, the new IRS position applies to any same-sex
couple subject to California community property law. Under
California law, this would include any same-sex couple in
California who:
 married before November 5, 2008 (the date California’s
Proposition 8 took effect) in any country or state, including
California, that at the time of the marriage permitted samesex couples to marry,
10
or
 married on or after November 5, 2008 outside of California
in any country or state, such as Canada or Massachusetts,
that at the time of the marriage permitted same-sex couples
to marry.
11
There may be some confusion about whether the federal socalled “Defense of Marriage Act” (DOMA) requires an
exception to the settled rule that state law determines ownership
of property, such that the community property owned by a
same-sex couple because they are married (rather than in an
RDP) should not be recognized for federal income tax purposes.
It does not. The IRS’s change of position to recognize the
community property owned by RDPs, despite the lack of any
federal law acknowledging the existence and rights of RDPs,
confirms that the IRS appreciates and intends to follow

How does this new IRS position affect what happens with the income taxes withheld from a California RDP’s paycheck?

acl — Thu, 15 Mar 2012 04:41:11 +0000

When a California RDP’s wages are community income, each
RDP should report one-half of the credit from the income tax
withheld. If California RDPs have entered into an agreement to
opt out of community property treatment, however, the
treatment of withholdings would be different. See Q&A #8.
For example, Sally and Lisa are California RDPs with no
dependents, and their only source of income is their wages,
which are community income. In one tax year, Sally has
$80,000 in wages and had $16,000 of income tax withheld from
those wages. In the same year Laura has $180,000 in wages and
$45,000 of income tax withheld. Unless they have opted out of
community property treatment, Sally and Lisa should each
report $130,000 in wages and take a credit for $30,500 of
income tax withheld.
Both Sally and Lisa could be owed a refund, if they have not
had their employers adjust the amount of federal income tax
withheld to reflect the way community property law affects
ownership of their income and the corresponding deductions
In our example, Sally and Lisa would be in different tax
brackets if they were not subject to community property laws.
So, relative to their individual tax liabilities based on
community property treatment, “too much” would be withheld
from Lisa’s wages but “too little” would be withheld from
Sally’s wages. Moreover, the amount over-withheld from Lisa
would be larger than the amount under-withheld from Sally,
because Lisa’s income would be withheld at a higher tax rate
than Sally’s income. Just as they would split their aggregate
wages and aggregate withholdings equally when filing their
separate federal tax returns, Sally and Lisa would also split
equally the net total amount over-withheld. Both of them could
therefore be entitled to receive a refund.
As noted in Q&A #4, however, the Alternative Minimum Tax
(or “AMT”) may also affect any net benefit to Sally and Lisa,
including whether either or both of them would be owed a
refund in our example above, due to the new IRS approach to
California RDPs’ community income.

Can California RDPs opt out of community property treatment

acl — Thu, 15 Mar 2012 04:39:54 +0000

Yes. California RDPs, just like different-sex married couples in
California, can enter into an agreement that affects the
“community” or “separate” status of property or income. For
example, such an agreement between RDPs could be used to
convert certain property from separate to community property or
vice-versa.
Such an agreement, however, must generally satisfy various
requirements, such as the requirement that it be in writing. It
could also possibly be treated as a taxable gift for purposes of
federal gift tax if the agreement converts property that already
exists (as opposed to future community property that has yet to
be earned). Same-sex couples should consult with an attorney or
tax professional with relevant expertise about the advisability of
such an agreement in their particular situation.
If California RDPs have not opted out of community property
treatment through such an agreement, they must apply
community property laws when completing their federal tax
returns for tax year 2010 and after. For more details on the tax
periods covered by the new IRS position

Are a California RDP’s tax exemptions affected by this new IRS position?

acl — Wed, 14 Mar 2012 18:26:55 +0000

A California RDP’s tax exemptions could be affected. For
example, when one RDP earns little income, he or she can
sometimes be claimed as a dependent by his or her RDP, which
usually means an additional exemption for the taxpaying RDP.
Community property law can change the amount of income
each RDP is recognized as earning, however. That may affect
whether the primary wage-earner in the RDP couple can claim
the no- or very low-wage-earning partner as a dependent.
Consider Susan and Laura, who are California RDPs. In one
year, Susan has $100,000 in wages, and Laura has only $1,000
of investment income. Under the old IRS position, which didn’t
treat Susan’s wages as community income, Laura’s income
probably would have been low enough to permit her (if she also
met other requirements) to qualify as Susan’s dependent for U.S.
tax purposes. Under the new IRS position recognizing Susan’s
wages as community income, however, Laura is treated as
owning $50,000 of Susan’s wages – which probably would
prevent Susan from claiming Laura as a dependent

Does this new IRS position change all amounts that California RDPs report as income, deductions, or penalties?

acl — Wed, 14 Mar 2012 18:25:30 +0000

No. Separate (in other words, non-community) income
described in Q&A #2, and associated deductions and penalties,
are all unaffected. Under the new IRS position, each California
RDP must continue to report the full amount of his or her
separate income on his or her federal income tax return.
In addition, as discussed further in Q&A #11 below, the IRS has
suggested that same-sex RDPs covered by the new IRS position
should follow its guidelines for different-sex spouses filing
separate federal tax returns, set out in IRS Publication 555,
1
when preparing the separate federal tax returns for each RDP.
As described in IRS Publication 555 and other IRS authority,
income, deductions, and penalties associated with particular
items are always treated as separate under federal tax law, even
for different-sex spouses in community property states.
2
Such
items include:
 Individual retirement arrangements, including Individual
Retirement Accounts (IRAs), SEP-IRAs, SIMPLE IRAs,
and Roth IRAs. Whether distributions from a 401(k) plan
are treated as separate or community property is a complex
question. The answer may depend in part, on the extent to
which contributions to the plan were made from separate or
community property. Because of that complexity, as well as
some potentially conflicting authority in the area, RDPs
should consult with a tax professional about their individual
situations regarding the appropriate treatment of 401(k)
plan matters.
 All or part of the distributions from a pension plan. The
extent to which federal tax law treats a pension plan as
separate property, community property or both separate and
community property (in part) may depend on the particular
facts and circumstances.
 Coverdell Education Savings Accounts (ESAs).
 FICA (Social Security and Medicare withholding).
 Estimated tax payments. For taxable income that is not
subject to withholding, each individual RDP may need to
make his or her own separate estimated federal tax
payments to cover federal taxes on his or her share of all
community income plus their own separate income.

Note, however, that the IRS has indicated in Publication 555
that RDPs and same-sex spouses in California should report
community income for self-employment tax purposes the same
way they do for income tax purposes. Thus, applying this rule
to the example in Q&A #4, Dan and Steve would each be
responsible for half of the self-employment taxes related to the
nursery business, even though Dan carried on the business.
Same-sex couples should consult with a tax professional with
expertise in this area about the applicability of this rule to their
individual situations.

Depending on your personal situation, you might have
additional items that are always treated as separate for federal
tax purposes.

How does “income-splitting” under this new IRS position affect the amount of income each California RDP reports on his or her federal income tax return?

acl — Wed, 14 Mar 2012 18:24:28 +0000

Under the old IRS position, California RDPs’ community
property was not recognized as community property for federal
income tax purposes. Rather, under the old approach, each RDP
was required to report the full amount of his or her individual
income notwithstanding that those funds actually were halfowned by his or her registered partner.
Under the new IRS approach of recognizing the actual
ownership of California RDPs’ income as determined by the
state’s community property laws, each RDP reports one-half of
the community income that is earned by either RDP. Hence, as
noted above in Q&A #1, this community property treatment is
sometimes referred to as “income-splitting.” But it is important
to note that, under the new IRS approach, each RDP continues
to report the full amount of his or her separate income.
Reporting income from wages under the new IRS position:
As an example of the treatment of wages under the new IRS
position, consider Kyle and Freddie, who are California RDPs.
Kyle is a graduate student earning $10,000 a year, while Freddie
is an accountant earning $90,000 a year. Under the old IRS
position, Freddie and Kyle would each have to file a federal tax
return, Freddie would report all $90,000 of his earned income in
his return, and Kyle would report only his $10,000 in his return.
Under the new IRS position, however, the community property
character of the couple’s respective wages, as established by
California law, is recognized. That means the couple’s
community income is owned equally and should be split equally
for federal income tax reporting purposes. Therefore, although
Freddie and Kyle will still file separate returns, each will report
an income of $50,000 – one-half of their total community
income of $100,000 (Freddie’s $90,000 plus Kyle’s $10,000).

This change can be significant. Although they still report a
combined $100,000 of income, Freddie and Kyle’s overall tax
burden should be lower. Because income tax rates generally
increase as an individual earns more, the combined taxes on two
incomes of $50,000 each may be less than the combined taxes
on one income of $10,000 and one income of $90,000.
If Kyle and Freddie earned comparable salaries (or, if each
would be in the top federal tax bracket under both the old and
new IRS position regarding the community income of California
RDPs), this change in IRS approach probably would make less
of a difference to their combined income tax liability. If Freddie
or Kyle were subject to the Alternative Minimum Tax (“AMT”),
that also could affect the extent to which they benefit from the
new approach.
Reporting income from a business or investment under the
new IRS position:
The change in IRS position does not affect—and “incomesplitting” does not apply to—the tax treatment of separate
(rather than community) income. For example, if Kyle owns
certain investments as his separate property, he still reports all
the income from those separate property investments himself.
Freddie reports none of that income on his federal tax return.
Income from investments that either Freddie or Kyle hold as
community property, however, should be split evenly between
Kyle and Freddie’s two separate tax returns in the same way as
their income from wages.
As an example of the treatment of business income and
expenses under the new IRS position, consider Dan and Steve,
who are California RDPs. Dan is the sole proprietor of a garden
nursery which is community property. In one year, the nursery
incurred $22,000 in cost of goods sold and $24,000 in rent and
other business expenses. That same year, the nursery had gross
receipts of $120,000.
Because the nursery expenses and revenue arise out of a trade or
business that is their community property, if the new IRS
position is applied to the year in question, Dan and Steve would
split those amounts evenly between their respective separate
federal tax returns. As a result, Dan and Steve each would report
$60,000 in revenue as well as $12,000 of rent and other
expenses, and $11,000 of cost of goods sold, most likely on
their respective Schedules C on their federal tax returns.
For a discussion about who is responsible for self-employment
taxes related to the nursery business, see Q&A #5.
Exceptions to “income-splitting” community property
treatment under the new IRS position:
Under the new IRS position, federal tax law now clearly
respects California RDPs’ state law community property rights
to the same extent it has long respected the state law community
property rights of different-sex spouses. In certain respects,
however, state community property laws still do not affect
federal tax treatment, even for different-sex spouse.

Does this new IRS position mean a same-sex couple can file their federal income taxes in a joint return like married heterosexual couples?

acl — Wed, 14 Mar 2012 18:09:11 +0000

No. At present, neither RDPs nor married same-sex couples can
file a joint federal income tax return. Under current IRS rules
and the federal so-called “Defense of Marriage Act,” RDPs and
same-sex spouses must continue to file separate federal income
tax returns as “single” or, if applicable, as “head of household.”
The new IRS position could, however, prevent one member of
the same-sex RDP couple from filing as “head of household,”
because the “income-splitting” might prevent that member from
claiming the other RDP as a dependent. See Q&A #6.

What are “community income” and “separate income” under California law

acl — Wed, 14 Mar 2012 18:07:59 +0000

Community income: What constitutes community income may
vary from state to state. Under California’s community property
laws, two individuals who have married or registered with the
state as domestic partners are seen as having created a
“community” of two when they formalized their status as a
couple. They are presumed by law to acquire at least some of
their income jointly as “community property,” which is owned
equally by both of them, unless they have taken specified steps
to opt out of the community property system.

Under California law, “community income” generally is income
from the following:
 Salaries, wages, or pay for services that either spouse or
RDP, or both, received during the marriage or registered
domestic partnership, for periods that the couple lives in
California (or somewhere else that applies community
property law to their relationship).
 Community property, which generally includes property
that either spouse or RDP, or both, acquired with
community funds during the marriage or registered
domestic partnership while living in California. Community
property generally includes all real estate so acquired, even
if the real estate is located outside of California.
Separate income: In California, separate income is income from
separate property, which generally includes the following:
 Property that either spouse or RDP owned separately before
the marriage or domestic partnership registration.
 Money earned while living in a state that did not apply
community property laws to the earnings.
 Property either spouse or RDP received as a gift or separate
inheritance during the marriage or registered domestic
partnership.
 Property bought with separate funds, or exchanged for
separate property, during the marriage or registered
domestic partnership.
 The part of property bought with separate funds, if part was
bought with community funds and part with separate funds.
There are also certain types of income, such as social security,
for which it is presently unclear whether they are community or
separate income.

Conversion of “community” to “separate” (and vice-versa) by
agreement: California RDPs, just like married different-sex
couples in California, can enter into an agreement that affects
the status of property or income as community or separate
property. Such an agreement sometimes can result in a federal gift tax. See Q&A #8. Couples should consult with an attorney
or tax professional with expertise in this area about whether
such an agreement is sensible in their particular situation.

How did the IRS change its position on the federal income taxes of California RDPs

acl — Wed, 14 Mar 2012 18:06:07 +0000

In May 2010, the IRS issued a memorandum concluding that
community property earned by California RDPs by operation of
state law must be recognized as such when determining each
California RDP’s income for federal income tax purposes. As a
result, the IRS now will treat community property earned by
California RDPs the same way it long has treated community
property earned by married different-sex couples in California
who file separate federal tax returns, which is to add together all
the community income earned by both members of the couple
and to allocate half to each one’s separate return. This is called
“income-splitting.” Accordingly, in most cases, one-half of
community income earned by each California RDP similarly
should be reported by the other RDP for federal income tax
purposes.

This is a change from a prior IRS position. In 2006, the IRS
announced that it would treat community income earned by
each California RDP as fully taxable to that individual, despite
the fact that community income is earned jointly by both RDPs
by operation of California law. Lambda Legal has believed th
prior IRS position was incorrect. It has been settled law for
many decades that, for federal income tax purposes, state law
determines ownership of property and federal law then
determines how much federal tax the owner must pay. The U.S.
Supreme Court has held that it is unconstitutional to require an
individual to pay income tax on monies the individual does not
own. The IRS position in 2006 appeared to be consistent with
California’s income tax treatment of RDPs’ community
property from 2003 through 2006. It has been clearly
inconsistent since 2007.

Under its new approach, the IRS appropriately will apply
California’s community property principles to determine
California RDPs’ taxable income for federal tax purposes. As
discussed in Q&A #13, the new IRS approach can be applied
retroactively back to January 2007, when a change in California
income tax law took effect. For a discussion of the tax periods
to which the new IRS approach applies, see Q&As #12 and #13.
The effect of the new IRS position on the combined tax
obligations of a same-sex couple in a California RDP will
depend on the couple’s particular situation. See Q&As #3 – #10.
As a result, same-sex couples should consult with an attorney o
tax professional with experience in this area of law about how
the new IRS position may affect them.