Sounds like a real nightmare coming down the road, unless you a tax-preparer charging by the clock. California's registered domestic partners(*) may file for 2007 as marrieds. However, since the feds dont recognize DPs, and California taxes boot off fed returns, the solution becomes complicated. The couple has to create a "phantom" married federal return and use that as a basis for their CA return claims:
The law used to have a provision that income earned by domestic partners would not be treated as community property for income tax purposes. That provision, apparently, has been deleted. I haven't researched this in detail. But it looks like the proper way to do the federal tax returns of domestic partners is to treat it like a subchapter K partnership (due to community property) with each partner having half the income and half the deductions.
It ain't "may." It's "must." Beginning with the 2007 tax year, registered domestic partners must file as married filing joint or married filing separate. Community property rules will be used to divide income between partners filing separately. The FTB is working on it. See
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Presumably the software providers, working with the FTB, will figure out how to do this. We hope. Katie in San Diego
Among other things, SB 1827 repealed Family Code Sec.
297.5(g), which required DPs to use the same filing status for California as for federal income tax purposes, and provided that earned income may not be treated as community income for personal income tax purposes, effective Jan. 1,
2007. Connecticut is dealing with this before California; the Connecticut law requiring RDPs to file as married (joint or separate) is effective for the 2006 year. However, CT and MA don't have the community income issues -- unless, of course, one or both spouses are domiciled in a CP state. (The division of income between spouses is generally governed by the laws of their state of domicile, which may or may not be the same as their tax residence.) Katie in San Diego
Me being a tax preparer for california makes it easier for me to understand but if you do your own taxes or even if you go to a tax preparer. you can always opt out of having your state done. You can always get your state done for free by going to the franchise tax board site and doing it there. So if you think you will have a problem with the federal popping up the state just say you don't want to file it and just file it on your own. I hope that helps. if you need more just go to the franchise tax board and leave them questions. also we don't have to really worry about it till 1/1/08. They should have it fixed by then.
Notwithstanding the IRS' position in CCA 200608038 (2/24/2006), it is probably reasonable to apply the ruling of Poe v. Seaborn, 282 U.S. 101 (1930), to California registered domestic partners. The essence of the Poe holding is that, where for rational state policy concerns a state has determined that the beneficial ownership of a particular item is automatically vested in one or more identifiable persons other than the person who actually acquires that item and that such beneficial ownership arises immediately by operation of law at the time, and to the extent, that the actual acquirer first obtains ownership, and where that rule is mandatory rather than voluntary, then each of the persons in whom beneficial ownership is vested is treated as an "owner" of that item for federal tax purposes. The fact that Poe and its progeny dealt only with heterogeneous spouses should be irrelevant. While federal tax law looks to the substance and not the form of a transaction or relation to property, and will ignore merely formal differences imposed under state law, if state law dictates the substantive relationships, then federal law will respect those relationships unless Congress has legislated otherwise. Thus, for example, prior to the enactment of the grantor trust rules, the Supreme Court, in holding the transferor/trustee of a trust to be the "owner" of the transferred assets for federal tax purposes, ignored the state-law relationships because, as a matter of substance, the transferor/trustee still had control over the beneficial enjoyment of the property. On the other hand, if under state law the heirs of a decedent under a will become the beneficial owners of the bequeathed property as a matter of law upon the decedent's death, the heirs are treated as the beneficial owners as of the date of date notwithstanding that legal title is either still in the decedent's name or is in the estate representative's name. Viewed in this light, the essence of Poe is that where state law, for rational policy reasons, provides that person A receives, by operation of law, a beneficial interest in income earned by person B as of the instant person B obtains a vested beneficial interest in that income himself, then person A's interest is a substantial beneficial interest that will be given effect for federal tax purposes. The fact that the persons in question in Poe were spouses, i.e., husband and wife, is irrelevant, except to the extent that the argument can be made that there must be some sort of rational basis underlying the state's decision to give person A an automatic beneficial interest in any income earned by person B. The only conclusion that can be drawn from the IRS memo regarding the limitation of Poe to husband and wife spouses is that the decision was a political one, not one based on sound tax policy. Thus, to the extent that California's decision to give each registered domestic partner a community property interest in income earned by the other registered partner has a rational basis (which it almost certainly does, it is very difficult to win the argument that there was no rational basis for a considered legislative decision by a state government), that decision should be respected, and the beneficial interests created in registered domestic partners should be respected for federal tax purposes. That being said, there is a significant risk that any application of Poe v. Sanborn to registered domestic partners will be challenged by the IRS, and anyone taking that position should be prepared to go to court. From a strategic point of view, it would be useful to develop a number of test cases with taxpayers who are almost identical to the taxpayers in Poe except for the difference of gender.
I agree completely. I can't see any legal difference between that case and the current domestic partner situation in California, with the exception that California community property law now gives both spouses and domestic partners even more control over the property of the community than the Washington law did in Poe. So the case for income being taxed to both is even stronger now than it was then. Stu
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