The Gay Divorc'

Marriage and its dissolution have been within the exclusive province of the state since colonial times. See, e.g., Maynard v. Hill, 125 U.S. 190 (1888). Notwithstanding this principle, DOMA was passed in 1996 creating a federal definition of “marriage” as “a legal union between one man and one woman as husband and wife.” According to DOMA, any and all federal benefits available to a “spouse” were limited to heterosexual couples; accordingly, legally married same-sex couples are prohibited from availing themselves of any federally granted benefits that are available to their heterosexual counterparts. Same-sex couples legally married in the state of New York (or the five other states where such marriages are legal) are not married in the eyes of federal law, and may not enjoy the benefits available to “spouses” in heterosexual marriages.

According to the U.S. General Accounting Office, DOMA precludes the availability to same-sex legally married couples of approximately 1,138 federal benefits, protections, rights and/or responsibilities that arise upon marriage, including entitlement programs such as Social Security and health benefits. (U.S. Gov. Accountability Office, GAO-04-353R Defense of Marriage Act (2004).) Accordingly, federal laws permit married individuals to sponsor their non-citizen spouses for naturalization, as well as to obtain conditional permanent residency. DOMA precludes same-sex spouses from availing themselves of these immigration protections and avoiding deportation of their “spouse.” (Matthews v. Gonzales, 171 F. App'x 120 (9th Cir. 2009) (where the Court of Appeals found that plaintiff had no standing to attempt to invalidate the INA's definition of “spouse” because she was not party to a legal union, and “[a]lthough the INA contains a partial definition of 'spouse' ' the Defense of Marriage Act ('DOMA') ' introduced a complete and exclusive definition that controls the interpretation of 'any Act of Congress.'”) Similarly, the Family and Medical Leave Act entitles federal employees who are married to 12 weeks of unpaid leave (without fear of losing one's job) in order to care for a spouse suffering from a serious health condition; DOMA prevents same-sex legally married couples from availing themselves of the Family and Medical Leave Act.

The constitutionality of DOMA has been raised several times in federal district courts. (See Gill et al. v. Office of Pers. Mgmt. et al., 699 F.Supp.2d 374 (D. Mass 2010) (where court held that DOMA violates the equal protection principles embodied in the Due Process Clause of the Fifth Amendment); Massachusetts v. U.S. Dept. of Health and Human Services, 698 F.Supp.2d 234 (D.Mass.2010)(“[A]s DOMA imposes an unconstitutional condition on the receipt of federal funding, this court finds that the statute contravenes a well-established restriction on the exercise of Congress' spending power); In re Levenson I, 560 F.3d 1145, 1149-51 (9th Cir.2009) (“The supposed governmental interest offered in support of DOMA fails even the lowest standard of constitutional scrutiny (rational basis), and thus necessarily could not meet a heightened standard”); In re Levenson II, 587 F.3d 925, 931-33 (9th Cir.2009); Dragovich v. United States, 764 F.Supp.2d 1178 (N.D.Cal.2011).)

The Obama administration declared on Feb. 23, 2011, that it would no longer defend DOMA in those federal cases where it is being contested. Thus, the U.S. Department of Justice has withdrawn presently from defending challenges to the constitutionality of DOMA. More importantly, the Justice Department went a step further and determined that the federal government would no longer limit the definition of a spouse to heterosexual couples with respect to immigration applications. (Matter of Paul Wilson Dorman, 25 I&N Dec. 458 (A.G. 2011); New Hope for Bi-National Gay Couples, www.washingtonblade.com/2011/07/02; DOMA Immigration Cases Create Balancing Act for Administration, http://equalitymatters.org/blog/201105090010.) Whether the aforementioned policy will ultimately be applied to other federal laws remains uncertain; however, it is important to note that this is merely a policy change by a specific administration. DOMA could be enforced by subsequent administrations regardless of political affiliation.

Thus, same-sex legally married couples will continue to be prohibited from sharing in federally granted benefits and protections until DOMA is repealed. A bill was introduced by Sen. Dianne Feinstein (D-CA) in the U.S. Congress to repeal DOMA. ( Respect for Marriage Act of 2011, S.598, 112th Cong. (2011).) With 42 states having enacted laws or having passed amendments to their state constitutions defining marriage between one man and one woman, passage of a bill in both houses of Congress repealing DOMA seems extremely unlikely. Equality for same-sex legally married couples, as was the case in racial issues, will have to come from the U.S. Supreme Court (Loving v. Virginia, 388 U.S. 1 (1967)).

Transfer of Assets

For legally married couples who seek to divorce (in New York or any other jurisdiction that recognizes the legitimacy of their relationships), DOMA presents some serious obstacles. Presently, the Internal Revenue Code (IRC) treats transfers between spouses (and former spouses) incident to a divorce as a non-taxable event. (I.R.C. ' 1041.) Transfers between spouses (and former spouses) following a divorce are rather frequent events. It is not uncommon for lump sum cash payments to be made between spouses; the former marital residence may be transferred from one spouse to the other (either immediately following the granting of the divorce or years later when the last child leaves for college); personal property is routinely transferred between spouses; assets held in retirement vehicles and securities accounts are frequently transferred between spouses. Section 1041 of the IRC permits the aforementioned transfers to be made tax-free if the transfer occurs between heterosexual spouses (or former spouses) incident to a divorce.

However, if the same transfers followed a divorce of a legally married same-sex couple, those transfers could be taxable events. Because same-sex marriages are not recognized by the U.S. federal government, the parties to those relationships are viewed as “strangers.” In the event of a divorce between a same-sex couple legally married in New York, the transfers could be considered by the U.S. federal tax authorities as a taxable event. For example, the transfer of the marital residence between same-sex spouses incident to their divorce could be considered a “third-party” sale, which could trigger capital gains taxes owed by the transferor (i.e., the seller). Similarly, a lump sum cash payment between same-sex spouses legally married that is incident to a divorce could be recognized by the U.S. federal tax authorities as income to the recipient spouse and a gift by the payor spouse. (The New State Tax Code provides that New York State personal income tax follows the Internal Revenue Code. See N.Y. Tax Code ' 611 (a) (2009). However, a conflict now exists because New York's Marriage Equality Act provides that “[n]o government treatment or legal status, effect, right, benefit, privilege, protection or responsibility relating to marriage, whether deriving from statute, administrative or court rule, public policy, common law or any other source of law, shall differ based on the parties to the marriage being or having been of the same sex rather than a different sex.” The New York State Department of Taxation and Finance recently issued two memoranda regarding the implementation of the Marriage Equality Act. TSB-M-11(8)M provides that for New York estate tax purposes, the term spouse shall now include same-sex spouses. TSB-M-11(8)C provides that same-sex legally married couples must file New York personal income tax returns as married even if their marital status is not recognized for federal tax purposes.)

A transfer of retirement assets between same-sex couples incident to a divorce would also likely trigger a taxable event. Ordinarily, a transfer of retirement assets between heterosexual spouses incident to a divorce would not be a taxable event. The Employee Retirement Income Security Act (ERISA) provides that such transfers may be made tax-free if pursuant to a judgment of divorce and made using a Qualified Domestic Relations Order (QDRO). (If a spouse (or ex-spouse) transfers funds from one individual retirement account (IRA) to the other spouse's IRA, no QDRO is necessary and the event is treated as a non-taxable event for heterosexual couples.) Generally, when a transfer is made from one spouse's retirement account to another spouse's retirement account (using a QDRO), ERISA and the IRC provide that no taxable event has occurred. However, DOMA precludes the application of ERISA to same-sex marriages because the same-sex couples are not recognized as “spouses” under federal law.

As a result, transfers of retirement assets between same-sex spouses incident to a divorce could be a taxable event. In those situations, the same-sex spouse transferor could be charged with a withdrawal from his or her retirement account and thereby incur a tax liability along with penalties for early withdrawal. In the case of a same-sex couple transferring retirement assets incident to divorce, a QDRO would be ineffective in these instances to shield the transfer from a tax liability.

Spousal Support

The payment of spousal support at the conclusion of a marriage by one spouse to the other ' either while the action is pending in the form of pendente lite maintenance or subsequent to the entry of a judgment of divorce ' is another common event in divorce. The support payments can be taxable to the recipient and deductible to the payor spouse; similarly, spousal support may be non-taxable to the recipient and non-deductible to the paying spouse. (I.R.C. ' 71; I.R.C. ' 215.) Moreover, direct payments to a third party on a spouse's behalf (i.e., mortgage payments, real estate tax payments, utility payments, etc.) can be considered “support.” Similarly, payment of a percentage of a spouse's earned income to an ex-spouse could be considered “support” for these purposes.

However, the (non)taxability and (non)deductibility of the aforementioned payments as afforded by the IRC are only available to heterosexual couples as a result of the passage of DOMA. As a result, receipt of support by a spouse in a same-sex legally performed marriage by the other spouse could be treated as income by the IRS and thereby taxable to the recipient; the payor in the aforementioned situation would not be permitted a deduction for such payments. The (non)taxability and non(deductibility) of these payments by the IRS would be regardless of whether those payments were court-ordered (or by judgment of divorce) or arranged by an enforceable separation/settlement agreement. DOMA precludes application of Section 71 and 215 of the IRC to the payment of support between legally married same-sex couples.

Creating Solutions

Once the issues have been identified, creating a solution is the next logical step. To do so, the legal practitioner should call upon the “trinity” of professionals: the trusts and estates attorney; the tax attorney; and the accountant. It is only with the guidance of all three professionals that an effective solution can be crafted. For instance, the transfer of a residence is not an uncommon result upon a divorce. For federal tax purposes, the transfer of one same-sex spouse's share in the residence to the other same-sex spouse could be treated as a sale between the two parties; in that situation, a capital gains tax could be owed to the federal taxing authorities and the divorcing same-sex spouses would have to arrange who would be responsible for the tax liability.

Alternatively, the same transfer of real property could be treated as a gift with the same-sex spouse transferor giving a gift to the other same-sex spouse. In this alternative situation, the transferor may incur a gift tax liability ' which could be satisfied utilizing that individual's lifetime exclusion. It is important to recognize that these issues exist and realize that with the appropriate assistance of professionals, creative solutions can be crafted that allow both parties to dissolve their relationship and not incur major, federal tax liabilities in the process. Of course, the easiest solution to these myriad problems is the repeal of DOMA ' which would require the assistance of the “Holy Trinity” to accomplish!

Eric I. Wrubel is a partner at McLaughlin & Stern. Laura Levy, an associate at the firm, assisted in the preparation of this article. Mr. Wrubel is a member of the LGBT community and has advocated on its behalf. This article also appeared in The New York Law Journal, an ALM sister publication of this newsletter.

Since July 24, 2011, same-sex couples may legally marry in New York. (Marriage Equality Act (2011), www.governor.ny.gov/assets/marriageequalitybill.pdf.) While same-sex couples will now enjoy numerous benefits that were previously denied to them, a panoply of benefits provided by federal laws available to heterosexual married spouses continue to be unavailable to similarly situated same-sex married couples. This unequal treatment of legally married same-sex couples arose with the passage of the Defense of Marriage Act (DOMA) in 1996 by the U.S. federal government. (Defense of Marriage Act, 1 U.S.C. ' 7 (1996).) The enactment of DOMA permitted the federal government only to recognize the legitimacy of heterosexual marriages. (28 U.S.C. ' 1738C.) In other words, discrimination against same-sex couples legally married has been codified by the federal government since 1996. (See article infra, p. 1.)

The federal government's non-recognition of same-sex couples has far-reaching effects. This article does not attempt to address all of the current inequalities, but rather focuses on specific federal tax advantages that are unavailable to legally married same-sex couples who subsequently divorce ' advantages that are unavailable solely due to the couple's sexual orientation. As a result, until DOMA is repealed, practitioners must continue to utilize the remedies previously developed for the dissolution of same-sex relationships (when marriage was unavailable to same-sex couples) to overcome the existing federally sanctioned discrimination.

Federal Benefits

Marriage and its dissolution have been within the exclusive province of the state since colonial times. See, e.g., Maynard v. Hill , 125 U.S. 190 (1888). Notwithstanding this principle, DOMA was passed in 1996 creating a federal definition of “marriage” as “a legal union between one man and one woman as husband and wife.” According to DOMA, any and all federal benefits available to a “spouse” were limited to heterosexual couples; accordingly, legally married same-sex couples are prohibited from availing themselves of any federally granted benefits that are available to their heterosexual counterparts. Same-sex couples legally married in the state of New York (or the five other states where such marriages are legal) are not married in the eyes of federal law, and may not enjoy the benefits available to “spouses” in heterosexual marriages.

According to the U.S. General Accounting Office, DOMA precludes the availability to same-sex legally married couples of approximately 1,138 federal benefits, protections, rights and/or responsibilities that arise upon marriage, including entitlement programs such as Social Security and health benefits. (U.S. Gov. Accountability Office, GAO-04-353R Defense of Marriage Act (2004).) Accordingly, federal laws permit married individuals to sponsor their non-citizen spouses for naturalization, as well as to obtain conditional permanent residency. DOMA precludes same-sex spouses from availing themselves of these immigration protections and avoiding deportation of their “spouse.” ( Matthews v. Gonzales , 171 F. App'x 120 (9th Cir. 2009) (where the Court of Appeals found that plaintiff had no standing to attempt to invalidate the INA's definition of “spouse” because she was not party to a legal union, and “[a]lthough the INA contains a partial definition of 'spouse' ' the Defense of Marriage Act ('DOMA') ' introduced a complete and exclusive definition that controls the interpretation of 'any Act of Congress.'”) Similarly, the Family and Medical Leave Act entitles federal employees who are married to 12 weeks of unpaid leave (without fear of losing one's job) in order to care for a spouse suffering from a serious health condition; DOMA prevents same-sex legally married couples from availing themselves of the Family and Medical Leave Act.

The constitutionality of DOMA has been raised several times in federal district courts. (See Gill et al. v. Office of Pers. Mgmt. et al., 699 F.Supp.2d 374 (D. Mass 2010) (where court held that DOMA violates the equal protection principles embodied in the Due Process Clause of the Fifth Amendment); Massachusetts v. U.S. Dept. of Health and Human Services , 698 F.Supp.2d 234 (D.Mass.2010)(“[A]s DOMA imposes an unconstitutional condition on the receipt of federal funding, this court finds that the statute contravenes a well-established restriction on the exercise of Congress' spending power); In re Levenson I, 560 F.3d 1145, 1149-51 (9th Cir.2009) (“The supposed governmental interest offered in support of DOMA fails even the lowest standard of constitutional scrutiny (rational basis), and thus necessarily could not meet a heightened standard”); In re Levenson II, 587 F.3d 925, 931-33 (9th Cir.2009); Dragovich v. United States , 764 F.Supp.2d 1178 (N.D.Cal.2011).)

The Obama administration declared on Feb. 23, 2011, that it would no longer defend DOMA in those federal cases where it is being contested. Thus, the U.S. Department of Justice has withdrawn presently from defending challenges to the constitutionality of DOMA. More importantly, the Justice Department went a step further and determined that the federal government would no longer limit the definition of a spouse to heterosexual couples with respect to immigration applications. (Matter of Paul Wilson Dorman, 25 I&N Dec. 458 (A.G. 2011); New Hope for Bi-National Gay Couples, www.washingtonblade.com/2011/07/02; DOMA Immigration Cases Create Balancing Act for Administration, http://equalitymatters.org/blog/201105090010.) Whether the aforementioned policy will ultimately be applied to other federal laws remains uncertain; however, it is important to note that this is merely a policy change by a specific administration. DOMA could be enforced by subsequent administrations regardless of political affiliation.

Thus, same-sex legally married couples will continue to be prohibited from sharing in federally granted benefits and protections until DOMA is repealed. A bill was introduced by Sen. Dianne Feinstein (D-CA) in the U.S. Congress to repeal DOMA. ( Respect for Marriage Act of 2011, S.598, 112th Cong. (2011).) With 42 states having enacted laws or having passed amendments to their state constitutions defining marriage between one man and one woman, passage of a bill in both houses of Congress repealing DOMA seems extremely unlikely. Equality for same-sex legally married couples, as was the case in racial issues, will have to come from the U.S. Supreme Court ( Loving v. Virginia , 388 U.S. 1 (1967)).

Transfer of Assets

For legally married couples who seek to divorce (in New York or any other jurisdiction that recognizes the legitimacy of their relationships), DOMA presents some serious obstacles. Presently, the Internal Revenue Code (IRC) treats transfers between spouses (and former spouses) incident to a divorce as a non-taxable event. (I.R.C. ' 1041.) Transfers between spouses (and former spouses) following a divorce are rather frequent events. It is not uncommon for lump sum cash payments to be made between spouses; the former marital residence may be transferred from one spouse to the other (either immediately following the granting of the divorce or years later when the last child leaves for college); personal property is routinely transferred between spouses; assets held in retirement vehicles and securities accounts are frequently transferred between spouses. Section 1041 of the IRC permits the aforementioned transfers to be made tax-free if the transfer occurs between heterosexual spouses (or former spouses) incident to a divorce.

However, if the same transfers followed a divorce of a legally married same-sex couple, those transfers could be taxable events. Because same-sex marriages are not recognized by the U.S. federal government, the parties to those relationships are viewed as “strangers.” In the event of a divorce between a same-sex couple legally married in New York, the transfers could be considered by the U.S. federal tax authorities as a taxable event. For example, the transfer of the marital residence between same-sex spouses incident to their divorce could be considered a “third-party” sale, which could trigger capital gains taxes owed by the transferor (i.e., the seller). Similarly, a lump sum cash payment between same-sex spouses legally married that is incident to a divorce could be recognized by the U.S. federal tax authorities as income to the recipient spouse and a gift by the payor spouse. (The New State Tax Code provides that New York State personal income tax follows the Internal Revenue Code. See N.Y. Tax Code ' 611 (a) (2009). However, a conflict now exists because New York's Marriage Equality Act provides that “[n]o government treatment or legal status, effect, right, benefit, privilege, protection or responsibility relating to marriage, whether deriving from statute, administrative or court rule, public policy, common law or any other source of law, shall differ based on the parties to the marriage being or having been of the same sex rather than a different sex.” The New York State Department of Taxation and Finance recently issued two memoranda regarding the implementation of the Marriage Equality Act. TSB-M-11(8)M provides that for New York estate tax purposes, the term spouse shall now include same-sex spouses. TSB-M-11(8)C provides that same-sex legally married couples must file New York personal income tax returns as married even if their marital status is not recognized for federal tax purposes.)

A transfer of retirement assets between same-sex couples incident to a divorce would also likely trigger a taxable event. Ordinarily, a transfer of retirement assets between heterosexual spouses incident to a divorce would not be a taxable event. The Employee Retirement Income Security Act (ERISA) provides that such transfers may be made tax-free if pursuant to a judgment of divorce and made using a Qualified Domestic Relations Order (QDRO). (If a spouse (or ex-spouse) transfers funds from one individual retirement account (IRA) to the other spouse's IRA, no QDRO is necessary and the event is treated as a non-taxable event for heterosexual couples.) Generally, when a transfer is made from one spouse's retirement account to another spouse's retirement account (using a QDRO), ERISA and the IRC provide that no taxable event has occurred. However, DOMA precludes the application of ERISA to same-sex marriages because the same-sex couples are not recognized as “spouses” under federal law.

As a result, transfers of retirement assets between same-sex spouses incident to a divorce could be a taxable event. In those situations, the same-sex spouse transferor could be charged with a withdrawal from his or her retirement account and thereby incur a tax liability along with penalties for early withdrawal. In the case of a same-sex couple transferring retirement assets incident to divorce, a QDRO would be ineffective in these instances to shield the transfer from a tax liability.

Spousal Support

The payment of spousal support at the conclusion of a marriage by one spouse to the other ' either while the action is pending in the form of pendente lite maintenance or subsequent to the entry of a judgment of divorce ' is another common event in divorce. The support payments can be taxable to the recipient and deductible to the payor spouse; similarly, spousal support may be non-taxable to the recipient and non-deductible to the paying spouse. (I.R.C. ' 71; I.R.C. ' 215.) Moreover, direct payments to a third party on a spouse's behalf (i.e., mortgage payments, real estate tax payments, utility payments, etc.) can be considered “support.” Similarly, payment of a percentage of a spouse's earned income to an ex-spouse could be considered “support” for these purposes.

However, the (non)taxability and (non)deductibility of the aforementioned payments as afforded by the IRC are only available to heterosexual couples as a result of the passage of DOMA. As a result, receipt of support by a spouse in a same-sex legally performed marriage by the other spouse could be treated as income by the IRS and thereby taxable to the recipient; the payor in the aforementioned situation would not be permitted a deduction for such payments. The (non)taxability and non(deductibility) of these payments by the IRS would be regardless of whether those payments were court-ordered (or by judgment of divorce) or arranged by an enforceable separation/settlement agreement. DOMA precludes application of Section 71 and 215 of the IRC to the payment of support between legally married same-sex couples.

Creating Solutions

Once the issues have been identified, creating a solution is the next logical step. To do so, the legal practitioner should call upon the “trinity” of professionals: the trusts and estates attorney; the tax attorney; and the accountant. It is only with the guidance of all three professionals that an effective solution can be crafted. For instance, the transfer of a residence is not an uncommon result upon a divorce. For federal tax purposes, the transfer of one same-sex spouse's share in the residence to the other same-sex spouse could be treated as a sale between the two parties; in that situation, a capital gains tax could be owed to the federal taxing authorities and the divorcing same-sex spouses would have to arrange who would be responsible for the tax liability.

Alternatively, the same transfer of real property could be treated as a gift with the same-sex spouse transferor giving a gift to the other same-sex spouse. In this alternative situation, the transferor may incur a gift tax liability ' which could be satisfied utilizing that individual's lifetime exclusion. It is important to recognize that these issues exist and realize that with the appropriate assistance of professionals, creative solutions can be crafted that allow both parties to dissolve their relationship and not incur major, federal tax liabilities in the process. Of course, the easiest solution to these myriad problems is the repeal of DOMA ' which would require the assistance of the “Holy Trinity” to accomplish!

Eric I. Wrubel is a partner at McLaughlin & Stern. Laura Levy, an associate at the firm, assisted in the preparation of this article. Mr. Wrubel is a member of the LGBT community and has advocated on its behalf. This article also appeared in The New York Law Journal, an ALM sister publication of this newsletter.