Category: Constitutional Law

IRS Clarifies How Plan Sponsors Should Handle Same-Sex Spouses in Qualified Retirement Plans

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On April 4, 2014, the IRS issued Notice 2014-19, requiring that qualified retirement plans apply “spouse” and “marriage” to same-sex spouses just as the plan would to opposite-sex spouses and establishing criteria for what plan amendments are needed and the timing for doing so.

Background

In September of 1996, Congress enacted the Defense of Marriage Act (DOMA), which provided that same-sex marriages would not be recognized under federal law. On June 26, 2013, however, the U.S. Supreme Court held in the Windsor case that DOMA’s treatment of such marriages was unconstitutional. Following Windsor, the IRS issued Revenue Ruling 2013-17 on August 29, 2013 (effective September 16, 2013), requiring same-sex marriages legally performed under state law to be recognized for federal tax purposes in any state regardless of whether the state recognizes the validity of same-sex marriages. This Revenue Ruling further provided that individuals who entered into registered domestic partnerships, civil unions, or other similar relationships under state law did not qualify as “spouses” and that these relationships did not qualify as “marriages” for federal tax purposes.

The newly issued April 4 Notice gives further guidance respecting qualified retirement plans on a wide range of subjects including qualified joint and survivor annuity rules, the Retirement Equity Act’s spousal beneficiary safeguards, required minimum distribution calculations and timing, control group determinations, ESOP rules, and the QDRO exceptions to the Code’s anti-alienation rules.

Notice 2014-19

The new IRS Notice describes when qualified retirement plans must be in administrative and documentary compliance with Windsor and the August 2013 Revenue Ruling. Plan sponsors and recordkeepers must have been administering their retirement plans consistent with Windsor as of June 26, 2013, even if these plans did not contemplate valid same-sex marriages. The corollary to this is that failing to recognize same-sex marriages before June 26, 2013, will not disqualify a plan. Furthermore, because last summer’s Revenue Ruling was not effective until September 16, 2013, there will be no risk of disqualification during the gap period between the effective date of Windsor and September 16 for plans that recognized same-sex marriages only if a participant was domiciled in a state that recognized same-sex marriages. The IRS further clarified that plan sponsors could operate their plans prior to June 26, 2013 to reflect Windsor on some or all qualification requirements without risk of disqualification so long as the basic qualification rules were satisfied, i.e., plan sponsors could be more generous than the Code required if it was feasible administratively.

From a documentation standpoint, all qualified retirement plans must be consistent with Windsor and both the IRS Revenue Ruling and the new Notice. Depending on how a plan uses or defines the terms “spouse” and “marriage,” plan amendments may or may not be needed. If a plan uses or defines these terms in a neutral manner without reference to “opposite-sex” or DOMA and they can be reasonably construed in harmony withWindsor and the IRS guidance, then no plan amendment is likely needed. However, if a plan couches the terms “spouse” and “marriage” in accordance with DOMA or inconsistently with Windsor, then the plan will need to be amended retroactively to June 26, 2013 to maintain its qualified status.

The deadline for adopting any needed amendments is generally going to be December 31, 2014, although for some plan sponsors, the amendment deadline could be later depending on their unique circumstances.

Next Steps

In response to Notice 2014-19, plan sponsors will need to review the terms of their retirement plans to ensure each plan contains a proper definition of “spouse” and “marriage” and to timely amend their plans, as necessary. Additionally, plan sponsors should confirm the administrative aspects of their plans with their recordkeepers. Based on all of this, Notice 2014-19 is welcome news as it provides certainty: individuals can better plan their benefits and retirements, recordkeepers can confidently begin any needed programming and website changes, and plan sponsors can undertake any needed revisions to their plan documents, summary plan descriptions and other communications.

Article By:

Jorge M. Leon
Kirk A. Pelikan
Charles P. Stevens
Of:
Michael Best & Friedrich LLP

Illinois Trust Taxation Deemed Unconstitutional

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In Linn v. Department of Revenue, the Illinois Fourth District Appellate Court reviewed the state’s statutory framework for taxing trusts. Linn v. Department of Revenue, 2013 Il App (4th) 121055.  On constitutional grounds, the court limited Illinois’ power to impose taxes under its “once subject to tax, forever subject to tax” regime.

This case creates planning opportunities to minimize Illinois income taxes.  However, it should be noted that the Linn case applies to trusts that pay Illinois income tax on trust dividends, interest, capital gains or other income retained by the trust and not distributed to a beneficiary.  This case does not apply to income distributed to an Illinois beneficiary; that income clearly can be taxed by Illinois.

Illinois Trusts

Illinois trusts are subject to a 5 percent income tax plus a 1.5 percent personal property replacement tax.  A nonresident trust is subject to taxation only on income generated within Illinois or apportioned to the state.  Resident trusts, on the other hand, are subject to tax on all income, regardless of the source of that income.  For an individual, state income taxation on a resident basis generally requires domicile or residence within the taxing state.  With respect to a trust, one or more of the grantor, trustees and beneficiaries may have contacts with a state sufficient to uphold as constitutional a tax on all of the trust income.

Illinois defines a resident trust based solely on the domicile of the grantor. 35 ILCS 5/1501(a)(20).  A resident trust means:

  • A trust created by a will of a decedent who at death was domiciled in Illinois or
  • An irrevocable trust, the grantor of which was domiciled in Illinois at the time the trust became irrevocable.  For purposes of the statute, a trust is irrevocable when it’s no longer treated as a grantor trust under Sections 671 through 678 of the Internal Revenue Code.

The Illinois statute would forever tax the income generated by the trust property, regardless of the trust’s continuing connection to Illinois.  One can analogize the Illinois statute to a hypothetical statute providing that any person born in Illinois to resident parents is deemed an Illinois resident and subject to Illinois taxation no matter where that person eventually resides or earns income.  Many lawyers believe that the Illinois statute is unconstitutional.

Linn

Linn involved a trust established in 1961 by A.N. Pritzker, an Illinois resident.  The trust was initially administered under Illinois law by trustees who lived in Illinois.  In 2002, the trustee exercised a power granted in the trust instrument to distribute the trust property to a new trust (the Texas Trust).  Although the Texas Trust generally provided for administration under Texas law, certain provisions of the trust instrument continued to be interpreted under Illinois law.  The Texas Trust was subsequently modified by a Texas court to eliminate all references to Illinois law, and the trustee filed the Texas Trust’s 2006 Illinois tax return as a nonresident.  At that time:

  • No current trust beneficiary resided in Illinois;
  • No trustee or other trust officeholder resided in Illinois;
  • All trust assets were located outside Illinois; and
  • Illinois law wasn’t referred to in the modified trust instrument

The Illinois Department of Revenue (the IDR) asserted that the trust was a resident trust for 2006 and that, as such, the trust pay Illinois income tax on all income.  The trustee countered that the imposition of Illinois tax under these circumstances was unconstitutional as a violation of the due process clause and the commerce clause.  The court held the statute was unconstitutional based on due process grounds (not reaching the commerce clause arguments), and stated that the following are the requirements for a statute to sustain a due process challenge:  (1) a minimum connection must exist between the state and the person, property or transaction it seeks to tax during the period in issue and (2) the income attributed to the state for tax purposes must be rationally related to values with the taxing state. Quill Corp. v. North Dakota, 504 U.S. 298, 306 (1992).

This was the first case in Illinois on this issue so the court cited cases from other jurisdictions, including Chase Manhattan Bank v. Gavin, 733 A. 2d 782 (Conn. 1999), McCulloch v. Franchise Tax Board, 390 P.2d 412 (Cal. 1964), Blue v. Department of Treasury, 462 N.W.2d 762 (Mich. Ct. App. 1990) and Mercantile-Safe Deposit & Trust Co. v. Murphy, 242 N.Y.S.2d 26 (N.Y. App. Div. 1963).  Gavin, which upheld the application of the Connecticut income tax on the undistributed income of a lifetime trust created by a Connecticut grantor, was cited at length by the court.  A critical fact in that case was that the beneficiary resided within the state for the year in question and the court assumed that the beneficiary would receive all trust property shortly.  In Linn, the court noted, there were no Illinois beneficiaries.  Relying on Blue and Mercantile, the court found that a grantor’s residence within a state isn’t itself enough to satisfy due process.

The IDR argued that significant connections with Illinois existed, maintaining that the trust owed its existence to Illinois law and listing legal benefits Illinois provides to the trustees and beneficiaries. The IDR cited some cases that involved trusts created by a will (i.e.,testamentary trusts).  The Illinois court disagreed with the testamentary trust cases the IDR relied on, finding that a lifetime trust’s connections with a state are more attenuated than in the case of a testamentary trust.  Further, the court found that the Texas Trust wasn’t created under Illinois law, but rather by a power granted to the trustees under the original trust instrument.  The court proceeded to dismiss the trust’s historical connections to Illinois and focused on contemporaneous connections, finding that “what happened historically with the trust in Illinois courts and under Illinois law has no bearing on the 2006 tax year.”  Linn at ¶30.  For 2006, the court concluded that the trust received the benefits and protections of Texas law, not Illinois law.

Steps to Consider

The IDR did not appeal the Linn decision to the Illinois Supreme Court.  We anticipate that additional cases will test and define the boundaries of the Linn decision.  Of course, Illinois might change its statute. For the time being, however, the Linn decision is binding authority for trustees of trusts that can eliminate all contact with Illinois.

Trustees of resident trusts with limited contacts to Illinois (in particular, those trusts without trustees, assets or non-contingent beneficiaries in Illinois) should consider the following issues.

  • Review state taxation:  The trustee should review connections to Illinois and consider whether actions could be taken to fall within theLinn holding.  Contacts with other states and those states’ rules for taxing trusts should also be reviewed.
  • File Illinois return with no tax due:  Pending guidance from the IDR, the trustee could consider filing an IL Form 1041, referencing theLinn case and reporting no tax due.  For each tax year, a tax return must be filed in order to commence the running of the statute of limitations.  An Illinois appellate court decision that supports the taxpayer’s position will ordinarily provide a basis for the abatement of tax penalties. 86 Ill. Admin Code Section 700.400(e)(8). However, if the facts are not exactly like those in Linn, a penalty cold be imposed on the trustee.  A safer method for trusts when the facts are not the same as in Linn would be to file and pay the Illinois tax in full but then file a claim for refund.  This should eliminate penalties but likely will result in a dispute with the IDR.
  • Amend prior tax returns:  The trustee could consider filing amended tax returns for prior years and claim a refund.  A trustee that has timely filed prior year tax returns may file an amended tax return at any time prior to the third anniversary of the due date of the tax return, including extensions.  For example, the 2010 tax year return may be amended at any time prior to October 15, 2014.

Other Considerations

Given the holding in Linn and uncertainty regarding trust tax law, trusts that offer flexibility and can adapt to changing circumstances may have a distinct advantage.

  • Officeholders:  Carefully consider the residency of trustees and other trust officeholders (such as investment advisers) and provisions regarding the appointment and removal of those officeholders.
  • Decanting provision:  Consider providing the trustee with broad authority to distribute trust property in further trust.
  • Lifetime trusts:  While the legal basis for the continued income taxation of a testamentary trust may also be questionable, testamentary trusts can be avoided by creating lifetime trusts.
  • Situs and administration:  Consider establishing and administering the trust in a state that doesn’t assess an income tax against trust income.
  • Governing law:  Consider including trust provisions that allow the trustee to elect the laws of another state to govern the trust.
  • Discretionary dispositive provisions:  Consider including discretionary rather than mandatory trust distribution provisions, as some states may tax a trust based on the residence of beneficiaries with non-contingent trust interests.
  • Division provisions:  Consider including provisions authorizing a trustee to divide a trust without altering trust dispositive provisions.  This type of provision may allow a trustee to divide a trust into separate trusts and isolate the elements of a trust attracting state taxation.  For example, a trust may simply be divided into two separate trusts, one trust for the benefit of a child and his descendants that live in Illinois and a second trust that might not be subject to Illinois taxation, for a child and his descendants that don’t live in Illinois.
Article By:

James H. Cundiff
L. Timothy Halleron
Of: 
McDermott Will & Emery

 

U.S. Supreme Court Finds Aggregate Limits on Federal Campaign Contribution are Unconstitutional

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On April 2, 2014, the United States Supreme Court held in a 5-4 decision that aggregate contribution limits, those limits placed on an individual’s overall direct contributions during a two-year election cycle, were unconstitutional as a violation of the First Amendment. The case, McCutcheon v. Federal Election Commission, No. 12-536 (U.S. April 2, 2014), is the latest case in which the Supreme Court has loosened federal regulation of campaign contributions.

In a fractured decision, Chief Justice John Roberts authored a plurality opinion that struck down the aggregate limit as a “mismatch” between the government’s goal of curbing corruption and its chosen means of imposing an aggregate limit. Although the government has a valid interest in limiting quid pro quo corruption between contributors and elected officials, the Court explained, an aggregate limit imposed across all candidates does not limit the risk of corruption enough to justify the way it significantly limits the right to support candidates in an election. In the face of core First Amendment guarantees, the aggregate limit could not survive because it was not “closely drawn to avoid unnecessary abridgment of associational freedoms.” Slip opinion at 30 (citation omitted).

The Chief Justice was joined by three of his colleagues: Justices Antonin Scalia, Anthony Kennedy, and Samuel Alito. Justice Clarence Thomas wrote separately to say that he would both strike down aggregate limits and overturn key Supreme Court precedent sanctioning a wide array of campaign finance restrictions.

The Dissent

Writing for the four Justices in dissent, Justice Stephen Breyer argued that aggregate campaign contribution limits had been previously held to be constitutional and that the reversal of existing precedent will come at a grave cost to the U.S. political system. In his view, the decision of the plurality “undermines, perhaps devastates, what remains of campaign finance reform.” Slip opinion at 30 (Breyer, J., dissenting). Justice Breyer was joined by Justices Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan.

Unchanged Rules

Prior to today’s decision in McCutcheon, campaign contributions were subject to two key limitations. The first limit, which remains intact, is the base limit on individual contributions to a single campaign, party committee, or political action committee. That limit remains unchanged, thus there is still a limit of $2,600 that an individual may contribute to a candidate for each election in the two year election cycle. As a result, one may contribute $2,600 for a primary election, $2,600 for a general election, and an additional $2,600 if there is a runoff election. Limits on contributions to other committees may be seen on the below chart.

In addition, the decision has no impact on the operation of a Super PAC, otherwise known as an “independent expenditure-only committee.” Nor does the decision permit corporations to make contributions to federal candidate committees.

New Rule

The limit that was struck down today restricted the overall amount individuals can contribute to election campaigns during a given two-year election cycle. Those aggregate limits were most recently set at $48,600 for federal candidates and $74,600 for other political committees, including national and state party committees, for an overall limit of $123,200 per two-year cycle. As such, prior to this decision a person could give the maximum base contribution of $5,200, for both a primary and a general election, to a maximum of nine federal candidates, whereas now a person can contribute to all federal candidates if she so desires. Similarly, an individual may now contribute to as many PACs as desired, including state and federal committees, such as the Democratic National Committee and the Republican National Committee, as long as each contribution is within the base limit currently set at $32,400 for the national party committees.

In viewing the below chart from the Federal Election Commission, the box in the upper right corner, under Special Limits, has been eliminated. All the other listed limits continue to be the federal legal limits.

Kedar Bhatia contributed to this article.

Article By:

Laurence A. Levy
Of:
Bracewell & Giuliani LLP

 

It’s That Time of the Year Again Re: Wisconsin Property Taxes

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It’s time to open up the unwelcome envelope with your property tax bill inside. Property taxes are necessary, of course, for roads and schools and all of the other services your property receives, but you should take some time to make sure that you are not paying more than your fair share of these taxes.

Wisconsin’s State Constitution has a provision requiring that all real estate be taxed “uniformly.” Regular real estate and personal property is taxed by the local municipality. Property which is used for manufacturing purposes, is taxed by the State of Wisconsin, in an effort to make sure that manufacturing property throughout the State is taxed in the same manner. Land which is in agricultural use enjoys a separate “use value assessment” system, which not only allows a lower assessment for land in that use, but also requires a per-acre penalty if that land is removed from the ag use, as defined by those statutes.

Of course, each of those taxing categories is controlled by pages of regulations containing definitions and limitations which are too complicated to insert into this article. Be aware that if you bought a parcel during calendar year 2013, your tax assessment may rise next year to the sale price named on the Transfer Tax Return filed with that deed, and you will receive a notice next spring of that increased assessment. The notice will tell you the procedure for contesting that new higher assessment and the time period, usually very short, during which you must file an appeal or lose the opportunity for another year. However, if your tax assessment should have been reduced and was not, you might not receive a notice at all, which means you must affirmatively seek out the date for filing the tax challenge and the forms needed to preserve the right to challenge. You must affirmatively notify the assessor if you demolished a building, lost a tenant, suffered a casualty loss, signed new leases for lower rents or had to offer rent concessions to renew a lease, or moved a parcel of land into or out of ag use, if you want to be sure the tax assessment is properly calculated for the actual use of the land and actual income from it. We can help you evaluate behind the scenes if the property is accurately assessed, and if it is not, file and defend a claim for you. We often charge a nominal amount for the investigation and then take the tax challenge on a contingency basis so you are only billed if we secure a tax savings for you.

Article by:

Nancy Leary Haggerty

Of:

Michael Best & Friedrich LLP

It's Official—The Supreme Court Announces That It Will Review The Contraceptive Mandate

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On Nov. 26, 2013, U.S. Supreme Court announced that it will review two cases in which for-profit employers challenged the application of the contraceptive mandate under the Patient Protection and Affordable Care Act. The cases are Sebelius v. Hobby Lobby Stores and Conestoga Wood Specialites Corp. v. Sebelius.

Both employers say that their religious beliefs bar them from providing employees with drugs or other items that they consider abortifacients. These employers argue that the Free Exercise Clause of the First Amendment and the Religious Freedom Restoration Act protects their religious beliefs and therefore bars the application of the contraceptive mandate. In contrast, the government argues that for-profit corporations cannot exercise religion and therefore have no protection from the mandate.

Supreme Court

At present, the federal courts of appeal are deeply divided on this issue. Three circuits—the Seventh, Tenth, and D.C. Circuits—have upheld challenges to the mandate, while two circuits—the Third and the Sixth—have rejected these challenges. The most recent decision came from the Seventh Circuit in Korte v. Sebelius, Case No. 12-3841, and Grote v. Sebelius, Case No. 13-1077.  The court’s ruling, issued Nov. 8, 2013, held that the Religious Freedom Restoration Act barred the application of the mandate to closely held, for-profit corporations when the mandate substantially burdened the religious-exercise rights of the business owners and their companies.

The Supreme Court will likely hear oral argument in the consolidated Hobby Lobby andConestoga case in March 2014. The decision is expected to decide whether—and to what extent—for-profit corporations have a right to exercise religion. Many commentators see parallels between this case and the Citizens United case in which the Court held that corporations had a First Amendment right to make certain political expenditures. If the Court finds that corporations also have religious rights, it could have significant impact on the application of other laws—including the Title VII, the ADA, the FMLA, etc. For example, could a religious employer object to providing FMLA leave for an employee to care for a same-sex spouse, even in a state that recognizes same-sex unions? Keep an eye on this case—it could have far-reaching consequences.

Article by:

Mark D. Scudder

Of:

Barnes & Thornburg LLP

A Quick Reminder Regarding Complaints in the Workplace

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Last year we reported on a landmark EEOC decision where the Agency concluded that discrimination against transgender individuals is actionable under Title VII. In that case, the EEOC held that Title VII prohibits an employer from taking adverse action based on the fact an employee/applicant fails to “adhere” to gender-based expectations or norms. It remains to be seen whether courts will agree with the EEOC’s position, but the decision appears to suggest that the argument may be viable in some jurisdictions.

There’s another angle to this issue, though: Can an employer be held liable for Title VII retaliation stemming from a complaint alleging transgender harassment? The biggest hurdle a Plaintiff will face in this context is whether the complaint amounts to “protected activity” under Title VII. Generally speaking, an employee can establish that she engaged in “protected activity” for purposes of a Title VII retaliation claim by demonstrating a “reasonable belief” that a violation of the statute occurred. This is true regardless of whether the underlying conduct amounts to actionable discrimination and/or harassment. A clever Plaintiffs’ attorney could conceivably point to the EEOC’s decision and argue that his or her client held a “reasonable belief” that a complaint regarding transgender-based harassment was protected activity under Title VII (and the adverse employment action was somehow linked to that complaint).

Bottom line: Even a “routine” complaint of unfair treatment can form the basis of a retaliation claim down the line. That being said, employers must be certain to thoroughly investigate all workplace complaints, regardless of how petty they may seem.

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Your Facebook “Like” May Be Constitutionally-Protected Speech

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According to a recent decision by the United States Court of Appeals for the Fourth Circuit, pressing the “like” button on your Facebook page constitutes substantive speech that may be protected by the First Amendment.

Six employees of the Hampton, Virginia Sheriff’s Office were dismissed because they showed support for Sheriff B.J. Roberts’ electoral opponent. They filed suit against Sheriff Roberts, claiming in part that their terminations violated the First Amendment. The United States District Court for the Eastern District of Virginia granted summary judgment to Sheriff Roberts, in part because the court found that the employees failed to allege that they had engaged in protected speech.

The plaintiff of significance in this matter, Roy Carter, Jr., claimed his protected speech in support for Sheriff Roberts’ opponent came in the form of a Facebook “like” for the opponent’s page. The Eastern District of Virginia held that the thumbs-up button by itself did not constitute sufficient speech to merit First Amendment protection. Not so, ruled the Fourth Circuit – when Carter pressed “like,” he caused to be published on his Facebook profile and on his friends’ news feeds that he liked Sheriff Roberts’ opponent’s campaign, which is a substantive statement.

“That a user may use a single mouse click to produce the message that he likes the page instead of typing the same message with several individual key strokes is of no constitutional significance,” held the court. Further, the Court stated that hitting the “like” button is the internet equivalent of displaying a political sign in one’s front yard, which the Supreme Court has held constitutes substantive speech.

The district court’s ruling was reversed for Carter and two other plaintiffs and the matter was remanded. Although the three remaining plaintiffs may not recover monetary damages because of the sheriff’s Eleventh Amendment immunity, they may have an opportunity to be reinstated.

The full text of Bland v. Roberts may be found here.

Treasury Department Recognizes All Legal Marriages for Tax Purposes

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On August 29, 2013, the Treasury Department issued Revenue Ruling 2013-17, Internal Revenue Bulletin 2013-38, which states that same-sex couple legally married in jurisdictions that recognize their marriage will be treated as married for ALL federal tax purposes. As a result, legally married same-sex couples are treated the same as legally married opposite-sex couples for federal tax purposes if the state of ceremony of their marriage recognizes same-sex marriage even if their state of residence does not recognize same-sex marriage.

This Ruling has significant impact for legally married same-sex couples and their tax advisors. However, it does not impact state law rules regarding the definition of marriage and may complicate income tax filings for same-sex couples legally married but living in a state that does not yet recognize their marriage, like Wisconsin and Illinois.

Background Leading Up to the Ruling

The Defense of Marriage Act (DOMA) was enacted by President Clinton in 1996. Section Two of DOMA says states do not have to recognize same-sex marriages performed in other states. Section Three of DOMA defined marriage for all federal purposes as only between one man and one woman.

On June 26, 2013, in Windsor v. United States (Windsor), the United States Supreme Court held that Section Three of DOMA was unconstitutional. Therefore, any same-sex married couple that lives in a state that recognizes same-sex marriage is to be treated the same for all purposes as any other married couple, and thereby are entitled to all of the 1,138 rights and privileges under federal law that are granted to married persons, which includes federal tax law.

Section Two of DOMA was unaffected by Windsor. Therefore, a same-sex couple that marries in one of the thirteen states that recognizes same-sex marriage who then moves to one of the thirty-seven states that does not recognize same-sex marriage would not be treated as married if the state of residence determines whether a couples is considered married, as opposed to the state of ceremony determining if a couple is married.

Absent guidance from the Treasury Department, a same-sex couple legally married in a recognition jurisdiction who then move to a state that does not recognize same-sex marriage, would most likely not be treated as married for federal tax law purposes. This is because the majority of federal tax laws are determined by a couple’s state of residence, not the state of ceremony of their marriage.

State of Ceremony Versus State of Residence

Consider the following examples to illustrate Windsor and this Ruling:

Britney and Jason are married in a drive-through chapel by an Elvis impersonator in Las Vegas and then go home to California. Their opposite-sex marriage is recognized for federal tax law purposes in California (and all other states) because California recognizes legal Nevada marriages. Sadly, Britney and Jason’s marriage only lasted 55 hours.

Mitchell and Cam are a same-sex couple married in New York (New York being a state of ceremony that recognizes same-sex marriage) and move back to Milwaukee (Wisconsin being a state of residence that does not recognize same-sex marriage). Prior to the Revenue Ruling, Mitchell and Cam are not married for federal law purposes, even though their marriage would be recognized if they stayed in New York. This is because Article Two of DOMA says that Wisconsin does not have to recognize New York marriages.

After the Revenue Ruling, with an effective date after September 16, 2013, Mitchell and Cam in Wisconsin will be treated as married for federal tax law purposes just like Britney and Jason in California. Mitchell and Cam will be able to utilize all federal tax laws Britney and Jason would be able to utilize (if Britney and Jason had respected the sanctity of their marriage).

Federal Tax Impact of Ruling

As a result of the Revenue Ruling, regardless of a couple’s state of residence, if they are married in a state that legally recognizes their marriage, the couple will be entitled to the following federal tax law benefits (among others): filing status as married filing jointly, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, spousal rollovers of IRA’s, unlimited marital deduction for estate and gift tax purposes, gift tax splitting, and estate tax exemption portability.

The Revenue Ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law that are not considered “marriage” under state law.

Legally married same-sex couples must file their 2013 income tax returns as either “married filing jointly” or “married filing separately.” They may also, but are not required to, file amended returns for open years (generally 2010, 211, and 2012) to be treated as married for federal tax law purposes.

Also, if an employee purchased health insurance coverage from their employer on an after-tax basis for their same-sex spouse, they may now treat the amounts paid for that coverage as pre-tax and excludable from their income, and file amended returns for a refund for open years. Further, if their employer paid Medicare and Social Security tax on those taxable benefits to the employee, the employer may file for a refund for both the employee and employer portions of those overpayments for open years.

Continuing Issues in Non-Recognition States

As of August 30, 2013, the District of Columbia and thirteen states (California, Connecticut, Delaware, Iowa, Maine, Massachusetts, Maryland, Minnesota, New Hampshire, New York, Rhode Island, Vermont, and Washington) recognize same-sex marriage. Therefore, clients who get married in those states or have employees who get married in those states, but subsequently reside in a non-recognition state, need to be aware of the new federal tax law benefits and obligations.

Even though married same-sex couples may now file as “married filing jointly” for federal income tax purposes, states like Wisconsin and Illinois that do not recognize same-sex marriage would still require those couples to either file as single or as married filing separately on their federal returns. This is because most state income tax forms use federal income tax amounts as the starting point for preparing the state return, and most state returns require the federal return to be attached to the state return. Without further guidance from state tax authorities, this could complicate income tax filings for same-sex married couples in non-recognition states.

Estate, gift, and generation skipping transfer tax laws now treat all legally married same-sex couples the same as opposite-sex couples, but, like opposite-sex couples, the Revenue Ruling does not mitigate the need for same-sex married couples to prepare estate plans. Many property law issues are driven by whether someone is classified as a “spouse” under state law, including who inherits under intestacy and other survivorship rights, all of which can be controlled by a will or trust in non-recognition states (like Wisconsin and Illinois). Finally, some states (like Illinois) have state estate and gift tax exemptions that are lower than the current federal estate and gift tax exemptions, which requires careful estate tax planning for all married couples, be they opposite-sex or same-sex.

The impact of Windsor and how same-sex couples are recognized for federal and state laws is a fast changing arena, and additional federal and state guidance will be required.

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U.S. Department of Labor (DOL) Clarifies Family and Medical Leave Act (FMLA) Leave Entitlement for Same-Sex Spouses

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In the wake of the Supreme Court’s Windsor decision, employers should review and, if necessary, revise their FMLA policies and procedures to ensure compliance.

The U.S. Department of Labor (DOL) recently clarified that same-sex spouses are now covered by the Family and Medical Leave Act (FMLA) to the extent that an employee’s marriage is recognized in the state in which the employee resides. This clarification, which follows the U.S. Supreme Court’s decision in United States v. Windsor,[1] is consistent with the existing FMLA regulatory language defining a “spouse” for purposes of FMLA coverage.

The DOL did not issue any new formal, stand-alone guidance but instead revised several existing FMLA guidance documents to remove references to the Defense of Marriage Act (DOMA). It also affirmatively stated in a newly released Field Operations Handbook section on the FMLA that “[s]pouse means a husband or wife as defined or recognized under state law for purposes of marriage in the State where the employee resides, including common law marriage and same sex marriage.”

Moving forward, FMLA spousal leave will only be available to employees who reside in a state that recognizes same-sex marriage, given that the existing FMLA regulatory language tied spousal coverage to the place of residence prior to the Windsor decision. However, the U.S. Office of Personnel Management (OPM), which has jurisdiction over FMLA rights for federal employees, recently issued post-Windsor guidance that extends FMLA leave rights to the spouses of federal employees without regard to states of residence.[2] OPM’s approach could eventually be followed by DOL for private sector employees and those employees otherwise covered by DOL rules but likely would require regulatory changes that would involve a notice and comment period.

It is worth noting that, while DOL’s clarification reflects a general increase in federal FMLA leave rights available to same-sex couples, in some circumstances, the availability of FMLA leave rights could mean a decrease in a given employee’s overall leave entitlement. For example, same-sex spouses residing in states recognizing same-sex marriage will now be subject to the FMLA’s restrictions on the combined amount of leave that spouses working for the same employer can use in certain circumstances. Similarly, an employee might have been entitled pre-Windsor to leave pursuant to state (but not federal) law to care for a same-sex spouse, which meant that the employee’s state and federal leave entitlements could not be exhausted concurrently.

Conclusion

In light of DOL’s updated guidance, employers should make sure that their FMLA policies allow spousal leave for employees in a same-sex marriage that is lawful in the state in which the employee resides. Employers, however, will need to think carefully about how they will administer such policies to avoid both employee relations issues and sexual orientation discrimination claims. For example, if an employer does not request documentation from an employee in an opposite-sex marriage as to whether the employee’s marriage is recognized in the state in which he or she resides, issues may arise if this information was requested of an employee in a same-sex marriage. While some employers may choose simply to grant FMLA leave to all employees regardless of domicile, employers need to be aware that such time may not be recognized as statutory FMLA leave. Employers should also pay close attention to future developments in this area as more states consider recognizing same-sex marriages.

[1]. United States v. Windsor, 133 S. Ct. 2675 (2013).

[2]. See U.S. Office of Personnel Admin., Benefits Administration Letter No. 13-203, Coverage of Same-Sex Spouses (July 17, 2013).

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First Post-Supreme Court Defense of Marriage Act (DOMA) Case Rules in Favor of Same-Sex Spouse

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In one of the first post-Supreme Court DOMA cases, the Eastern District of Pennsylvania, applying Illinois state law, held that the surviving same-sex spouse of a deceased participant in an employer sponsored pension plan was entitled to the spousal death benefit offered under the plan. See Cozen O’Connor, P.C. v. Tobits, Civil Action No. 11-0045; 2013 WL 3878688 (E.D. Pa., July 29, 2013).

This case is significant because it is the first case after the Supreme Court’s June 26, 2013 decision in United States v. Windsor, 133 S. Ct. 2675 (2013) to grapple with choice of law in determining whether a marriage is valid for purposes of obtaining spousal benefits under an ERISA-covered plan. While Windsor ruled that Section 3 of DOMA defining marriage only as between persons of the opposite sex unconstitutional for purposes of applying federal law, it did not address or invalidate Section 2, which permits states to decline to recognize same-sex marriages performed in other states.

Case Background

In 2006, Sarah Farley and Jean Tobits were married in Canada. Shortly after they were married, Ms. Farley was diagnosed with cancer, and she died in 2010. At the time of her death, Ms. Farley was employed by the law firm of Cozen O’Connor and a participant in the firm’s profit sharing plan (the Plan). The Plan provided that a participant’s surviving spouse would receive a death benefit if the participant died before the participant’s retirement date. If the participant was not married or the participant’s spouse waived his or her right to the death benefit, the participant’s designated beneficiary would be entitled to the death benefits. The Plan defined “Spouse” as “the person to whom the Participant has been married throughout the one-year period ending on the earlier of (1) the Participant’s annuity starting date or (2) the date of the Participant’s death.”

Ms. Farley’s parents and Ms. Tobits both claimed a right to the Plan’s death benefits. Ms. Farley’s parents claimed that they had been designated as the beneficiaries, but it was undisputed that Ms. Tobits had not waived her rights to the death benefits. Cozen O’Connor filed an interpleader action in the Eastern District of Pennsylvania asking the court to determine who was entitled to the benefits. Therefore, the case focused on whether Ms. Tobits qualified as a “Spouse” under the Plan and thus was entitled to the death benefits.

The Court’s Ruling

The court noted that Windsor “makes clear that where a state has recognized a marriage as valid, the United States Constitution requires that the federal laws and regulations of this country acknowledge that marriage” irrespective of whether the marriage is between a same-sex couple or a heterosexual couple. With Windsor’s emphasis on states’ rights to define marriage, lower courts are left with the complicated task of deciding which state law applies when determining whether a same-sex spouse is entitled to benefits under federal law in those instances, as in Cozen, where multiple jurisdictions with different laws on same-sex marriage are implicated.

Apparently, because Cozen O’Connor is headquartered in Pennsylvania, the Plan is administered there, and the Plan’s choice of law provision references Pennsylvania law, the Farleys asked the court to apply Pennsylvania state law to determine the validity of the marriage. Pennsylvania’s mini-DOMA statute expressly defines marriage as between a man and a woman. The court concluded that ERISA preempted Pennsylvania law. It reasoned that if courts were required to look at the state in which the plans were drafted, plan administrators might be encouraged to forum shop for states with mini-DOMA laws to avoid paying benefits to same-sex couples. The court thought this kind of forum shopping would upset ERISA’s principle of maintaining national uniformity among benefit plans. Without further analysis, the court concluded Pennsylvania state law was not an option for determining Ms. Tobits’ status as a spouse within the meaning of the Plan.

Instead, the court applied Illinois law, the state where Ms. Farley and Ms. Tobits had jointly resided until Ms. Farley’s death. It was undisputed that Ms. Farley and Ms. Tobits had a valid Canadian marriage certificate. The court concluded that the marriage was valid in Illinois and that Ms. Tobits was Ms. Farley’s spouse within the Plan’s definition. Accordingly, the court held that Ms. Tobits was entitled to the Plan’s death benefit. Although not entirely clear, the court presumably came to this conclusion based on Illinois’ civil union statute (even though it was enacted after Ms. Farley’s death). The statute provides that (i) same-sex marriages and civil unions legally entered into in other jurisdictions will be recognized in Illinois as civil unions and (ii) persons entering into civil unions will be afforded the benefits recognized by Illinois law to spouses. See 750 Ill. Comp. Stat. An. 75/5 and 75/60 (West 2011).

Impact of Cozen on ERISA Benefit Plans

Cozen is the first ruling in the wake of Windsor to address which state law might apply when there are conflicting state laws as to whether a valid marriage is recognized for the purpose of being a “spouse,” and therefore whether the spouse is entitled to benefits under an ERISA-covered plan. In Cozen, Ms. Farley and Ms. Tobits were lawfully married in Canada, and the court ruled that Illinois’s civil union law recognizes lawful marriages performed in other jurisdictions. The court applied the law of the domicile state to support its holding that Ms. Tobits was a surviving spouse entitled to the Plan’s death benefit.

The Cozen decision may have little value outside of cases where a valid same-sex marriage is performed in one state (the “state of celebration”) and the state where the couple is domiciled recognizes same-sex marriages. In other situations, faced with a choice of law where the law of the state of domicile conflicts with the law of the state of celebration, the outcome could be different, because Section 2 of DOMA survives after the Windsor decision. Unless the federal government creates a uniform method of determining the choice of law question, ERISA cases raising benefit entitlement questions in the context of same-sex marriages are likely to continue to complicate plan administration, and ERISA’s goal of maintaining national uniformity in the administration of benefits will remain elusive.

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