Overtaxing Same-Sex Couples

Overtaxing Same-Sex Couples

By Scott Forsyth This article appeared in the ‘Daily Record’ on April 8, 2009. Four weeks ago I updated you on the status of three cases involving the recognition of marriages between persons of the same sex validly performed outside of New York. The first arose in Monroe County and featured an employee of MCC who wanted the county to cover her spouse under its contract with Blue Cross Blue Shield. Martinez v. Monroe County, 50 A.D.3d 189 (Fourth Dept. 2008). The others feature groups of workers seeking benefits for their same-sex spouses. All of the employees won. Many private and government employers routinely provide fringe benefits, such as health insurance, to the same-sex spouses of employees. What is the downside to that policy? Employees will be taxed on the value of the benefits, in contrast to employees who are married to persons of the opposite sex. Section §106 of the Internal Revenue Code excludes from gross income the value of “employer-provided coverage under [a] health plan.” By regulation, the IRS has expanded the exclusion to coverage of the spouse and the dependents of an employee. Treas. Reg. §1.106-1. Neither the IRC nor the regulations define “spouse,” however. Normally, the tax law would default to state law for that definition, but Congress intervened in 1996. Fearful that states would allow same-sex marriages and, in doing so, trigger federal benefits, Congress adopted the Defense of Marriage Act, which states in relevant part that “[i]n determining the meaning of any act of Congress, or of any … regulation, … the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.” 28 USC §1783C. As a result of the Act, the IRS is required to treat same-sex spouses differently from spouses of the opposite sex. The former, for one, cannot file jointly, and the value of all employer-provided fringe benefits — not just health — must be counted as gross income. Employers must withhold federal tax on the value of the fringes, and a surviving same-sex spouse does not qualify for the marital deduction. The list goes on. Where does the Act leave the New York State Department of Taxation and Finance? In a quandary. Last year, Gov. David A. Paterson instructed all state agencies to comply with Martinez. Most agencies responded by announcing that they would recognize same-sex marriages if those marriages were entered into validly outside of New York. Three years ago, the Department of Taxation and Finance issued an opinion that a same-sex couple married in Canada cannot file a joint return in New York. That portion of the opinion is supported by two explicit statutes that tie state filing status to federal filing status. The opinion then concluded that the department would not recognize same-sex marriages for any purpose. This is dictum. New York does not have a statute or a regulation on the subject of health coverage. Instead, the state attempts to incorporate by reference the federal definition of gross income, “unless a different meaning is clearing required.” The federal definitions are contained in the “internal revenue code of 1986, and any amendments thereto, and other provisions of the laws of the United States relating to federal income taxes.” Tax Law §607(a). Could New York exclude from state income the value of health benefits provided same-sex spouses? Yes. The regulation adding spouse is not part of the “internal revenue code of 1986” and, technically, is not a law. The IRS, an agency just like the state’s taxation department, issued it. The Defense of Marriage Act only restricts the federal government, and explicitly permits states to give “legal effect” to same-sex marriages solemnized in another jurisdiction. Legal effect includes defining the tax treatment of those marriages, to the extent that the IRC has not already done so. Excluding the value of health care coverage from New York gross income would bring the department in line with Martinez and the 120 years of case law that preceded it. Once a person establishes that he or she entered into a valid marriage outside of New York, he or she has been treated as married for all purposes. The department might argue that having different tax treatments of health coverage will impede the orderly administration of the tax laws, but that overlooks the fact that New York’s tax law makes 27 modifications to federal gross income and offers taxpayers myriad credits not available at the federal level. Preparing the New York income tax return is no easy task. April 15 is approaching quickly, and the department dithers. Hopefully, it will break its long silence by announcing that the value of health care provided to the same sex-spouses of employees is not income.