ONE LARGE (TAX) STEP FOR DOMESTIC PARTNERS!
On May 28, 2010, The Internal Revenue Service of the United States issued a Private Letter Ruling which respected the income and gift tax rights and obligations of a registered domestic partnership as if the two were married.
The ruling has implications only for those in community property states. The status of “community property “ exists in the following: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington , Wisconsin and Puerto Rico.
WHAT DOES THE RULING SAY?
Because of the California laws
Registered domestic partners have the same rights….as spouses,
Registered domestic partners shall be treated by CA law as if federal law recognized domestic partners in the same manner as CA law,
These provisions apply to earned income and income from community assets for property law purposes and state income tax purpose,
and because
The Supreme Court has concluded that when earnings are treated as community property under state law, such earnings vest one-half in each spouse for federal tax purposes and
The Supreme Court’s rationale regarding the effect of state law on the characterization of Taxpayer’s earnings applies equally to gift taxes. Therefore, the vesting of half of Taxpayer’s earnings in his partner does not result in a transfer of property by Taxpayer to his partner for federal gift tax purpose,
1. Each taxpayer must report on individual federal income tax return one-half of combined earned and unearned income.
2. Each taxpayer is entitled to one-half of the income tax withholding credits.
3. These reported income and credits do not constitute transfers of property for gift tax purposes.
WHAT STRENGTH DOES A PRIVATE LETTER RULING HAVE?
Any private letter ruling is directed only to the taxpayer requesting it. The IRS Code provides that it may not be used or cited as precedent.
While this may be overturned by a Revenue Ruling, it provides hope and is encouraging that sooner or later, this issue will more formally be addressed.