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Same-Sex Marriage Fight Looms Next on IRS Estate Refunds: Taxes

Same-sex couples have reason to wonder who will have the last word: the Supreme Court or the IRS?

Same-sex couples may get a reprieve on estate and gift tax paid when passing property from one spouse to another after the U.S. high court decision that declared the Defense of Marriage Act unconstitutional. It may take another ruling to make the Internal Revenue Service change the statute of limitations for amended returns, Bloomberg BNA reported.

“If a law is unconstitutional, that means it is void ab initio, void from the start. It’s as if it never existed,” said George Karibjanian, senior partner at Proskauer Rose LLP in Boca Raton, Florida. “Shouldn’t that trump whatever statute of limitations says I can’t amend a return?”

The IRS and Treasury Department in August announced that same-sex couples who were legally married in jurisdictions that recognize their marriages will be treated as married for federal tax purposes, whether they live in a state that recognizes same-sex marriage or not.

Taxpayers would be allowed to file a refund claim for gift or estate taxes paid prior to the Supreme Court decision. However, the IRS’s relief was confined to the current three-year statute of limitations, meaning that amended returns will only be accepted for 2010, 2011 and 2012.

There probably will be a challenge to the IRS’s decision, possibly from a disgruntled beneficiary who wants to force the IRS to open up other years to amend a return, Karibjanian said.

Estate Tax

The decision said the law that prevented same-sex couples from taking the marital deduction was unconstitutional, Karibjanian said. For U.S. estate and gift tax purposes, the marital deduction allows a married person to transfer property to a spouse during his or her lifetime or at death without paying tax on the transfer.

If there is a further challenge to the law, Karibjanian said, it will probably come in the area of estate tax.

“It’s very clear that without the marital deduction you are paying a boatload of taxes for property passing to the surviving spouse, which shouldn’t have been paid if you were allowed to have the marital deduction,” he said.

Since it is unlikely that Congress or the IRS would allow an exception to the limitations period, he said it would be up to the courts to decide the issue.

Other practitioners agreed that the IRS isn’t likely to expand the statute of limitations in this instance.

“I don’t think it’s going to happen,” Tamara Kolz Griffin told Bloomberg BNA. Griffin is director of the Estate Planning Clinic at Harvard Law School and an attorney in private practice at the Law Office of Tamara Kolz Griffin in Wayland, Massachusetts. “It could open things up for a really long time and I don’t see the IRS agreeing to that.”

Important Filing

The Supreme Court would probably say it has a rational basis for having to close the loop at some point, and three years is sufficient, “particularly since an aggrieved taxpayer can file a protective claim when litigation is pending to claim the refund which would otherwise be due him or her should the resolution of the litigation extend beyond the statute of limitations,” she said.

Whether the IRS will open up years prior to the statute of limitations for refunds “is absolutely a concern,” said Joshua Rubenstein, partner with KattenMuchinRosenman LLP in New York.

Rubenstein was advising same-sex married couples to file for a protective refund claim even before the ruling. It is even more important now because the statute of limitations is running, he said.

Benefits Depend

Whether Treasury and the IRS agree to open years prior to the current statute of limitations depends on which benefit is involved, Rubenstein said.

“If we are only talking about the fact that a same-sex couple didn’t file jointly and they could have filed jointly because they were married, going past the statute of limitations might not apply there,” he said.

Even with heterosexual couples, being married doesn’t mean they have to file jointly, he said. Many people don’t. On the other hand, if a couple was entitled to a marital deduction and it was determined eight years later that it was wrong not to have given them one, Rubenstein said he would argue there has been an equitable tolling of the statute of limitations.

Because the Supreme Court ruling isn’t likely to affect many same-sex couples, the IRS could afford to go past what would normally be the limit in this case, he said.

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