Saving Seaborn: Ownership Not Marriage as the Basis of Family Taxation

One of the most famous Supreme Court tax cases celebrated its eightieth birthday last year. In Poe v. Seaborn, the Court reified two principles of the federal income tax: ownership determines tax liability and state law determines ownership. This Article affirms that family taxation continues to follow ownership, not marriage, despite the federal government’s position that the “ownership equals taxability” rule applies almost exclusively to heterosexual spouses. Verifying the vitality of this principle carries significant implications for all families, particularly nontraditional families. Under the aegis of Seaborn, the principle authorizes certain members of state-recognized relationships—marriages, domestic partnerships, civil unions—to file federal income taxes based on ownership interests under state law and to split combined income in half, an outcome largely at odds with current treatment. Indeed, Seaborn provides legally recognized samesex couples a way around the tax filing restrictions and disadvantages imposed on them by the Defense of Marriage Act, which does not consider them spouses under federal law. Seaborn empowers these families to take advantage of tax savings associated with income splitting. To prove that ownership of income and property, rather than marriage, determines family tax liability, this Article traces the “ownership equals taxability” principle from the late nineteenth century to after World War II; that is, from the decades leading up to ratification of the Sixteenth Amendment to the Supreme Court’s landmark decision in Seaborn and beyond. It is a story of the early federal income tax, of tax avoidance opportunities for families, of the nature of spouses’ legal interests as defined by state property law, and of early tax enforcement efforts by the Treasury Department and Congress. It is also a story of how the Supreme Court protected Congress’s taxing power and the federal purse by articulating an expansive definition of ownership for tax purposes, particularly in the context of the family

Saving Seaborn: Ownership Not Marriage as the Basis of Family Taxation

One of the most famous Supreme Court tax cases celebrated its eightieth birthday last year. In Poe v. Seaborn, the Court reified two principles of the federal income tax: ownership determines tax liability and state law determines ownership. This Article affirms that family taxation continues to follow ownership, not marriage, despite the federal government’s position that the “ownership equals taxability” rule applies almost exclusively to heterosexual spouses. Verifying the vitality of this principle carries significant implications for all families, particularly nontraditional families. Under the aegis of Seaborn, the principle authorizes certain members of state-recognized relationships—marriages, domestic partnerships, civil unions—to file federal income taxes based on ownership interests under state law and to split combined income in half, an outcome largely at odds with current treatment. Indeed, Seaborn provides legally recognized samesex couples a way around the tax filing restrictions and disadvantages imposed on them by the Defense of Marriage Act, which does not consider them spouses under federal law. Seaborn empowers these families to take advantage of tax savings associated with income splitting. To prove that ownership of income and property, rather than marriage, determines family tax liability, this Article traces the “ownership equals taxability” principle from the late nineteenth century to after World War II; that is, from the decades leading up to ratification of the Sixteenth Amendment to the Supreme Court’s landmark decision in Seaborn and beyond. It is a story of the early federal income tax, of tax avoidance opportunities for families, of the nature of spouses’ legal interests as defined by state property law, and of early tax enforcement efforts by the Treasury Department and Congress. It is also a story of how the Supreme Court protected Congress’s taxing power and the federal purse by articulating an expansive definition of ownership for tax purposes, particularly in the context of the family

State Responses to Federal Tax Reform: Charitable Tax Credits

This paper summarizes the current federal income tax treatment of charitable contributions where the gift entitles the donor to a state tax credit. Such credits are very common and are used by the states to encourage private donations to a wide range of activities, including natural resource preservation through conservation easements, private school tuition scholarship programs, financial aid for college-bound children from low-income households, shelters for victims of domestic violence, and numerous other state-supported programs. Under these programs, taxpayers receive tax credits for donations to governments, government-created funds, and nonprofits. A central federal income tax question raised by these donations is whether the donor must reduce the amount of the charitable contribution deduction claimed on her federal income tax return by the value of state tax benefits generated by the gift. Under current law, expressed through both court opinions and rulings from the Internal Revenue Service, the amount of the donor’s charitable contribution deduction is not reduced by the value of state tax benefits. The effect of this Full Deduction Rule is that a taxpayer can reduce her state tax liability by making a charitable contribution that is deductible on her federal income tax return. In a tax system where both charitable contributions and state/local taxes are deductible, the ability to reduce state tax liabilities via charitable contributions confers no particular federal tax advantage. However, in a tax system where charitable contributions are deductible but state/local taxes are not, it may be possible for states to provide their residents a means of preserving the effects of a state/local tax deduction, at least in part, by granting a charitable tax credit for federally deductible gifts, including gifts to the state or one of its political subdivisions. In light of recent federal legislation further limiting the deductibility of state and local taxes, states may expand their use of charitable tax credits in this manner, focusing new attention on the legal underpinnings of the Full Deduction Rule. The Full Deduction Rule has been applied to credits that completely offset the pre-tax cost of the contribution. In most cases, however, the state credits offset less than 100% of the cost. We believe that, at least in this latter and more typical set of cases, the Full Deduction Rule represents a correct and long-standing trans-substantive principle of federal tax law. According to judicial and administrative pronouncements issued over several decades, nonrefundable state tax credits are treated as a reduction or potential reduction of the credit recipient’s state tax liability rather than as a receipt of money, property, contribution to capital, or other item of gross income. The Full Deduction Rule is also supported by a host of policy considerations, including federal respect for state initiatives and allocation of tax liabilities, and near-insuperable administrative burdens posed by alternative rules. It is possible to devise alternatives to the Full Deduction Rule that would require donors to reduce the amount of their charitable contribution deductions by some or all of the federal, state, or local tax benefits generated by making a gift. Whether those alternatives could be accomplished administratively or would require legislation depends on the details of any such proposal. We believe that Congress is best situated to balance the many competing interests that changes to current law would necessarily implicate. We also caution Congress that a legislative override of the Full Deduction Rule would raise significant administrability concerns and would implicate important federalism values. Congress should tread carefully if it seeks to alter the Full Deduction Rule by statute

Caveat IRS: Problems with Abandoning the Full Deduction Rule

Several states have passed — and many more are considering — new tax credits that would reduce tax liability based on donations made by a taxpayer in support of various state, local or non-profit programs. In general, taxpayer contributions to qualifying organizations — including public charities and private foundations, as well as federal, state, local, and tribal governments — are eligible for the federal charitable contribution deduction under section 170. In a previous article, we explained how current law supports the view that qualifying charitable contributions are deductible under section 170, even when the donor derives some federal or state tax benefit by making the donation. We referred to this treatment as the “full deduction rule.” Some commentators have suggested that Treasury and the IRS could change existing law, whether through new regulations or by issuing a new interpretation of existing regulations, to limit the deductibility of taxpayer contributions when they trigger a state or local tax benefit to the donor. Many legal and administrative concerns are associated with those actions. In this report, we argue that even if the IRS has the legal authority to implement the changes absent new legislation, it should decline to do so

Brief of Interested Law Professors As \u3ci\u3eAmici Curiae\u3c/i\u3e Supporting Petitioner in \u3ci\u3eBrohl v. Direct Marketing Association\u3c/i\u3e

Amici curiae are 14 professors of law who have devoted much of their teaching and research to the area of state taxes and the role of state tax policy in our federal system. The names and affiliations (for identification purposes only) of amici are included in an addendum to this brief. The amici are concerned with the effect of this Court’s dormant Commerce Clause jurisprudence on the development of fair and efficient state tax systems. No decision of this Court has had more effect on state sales and use tax systems than Quill Corporation v. North Dakota. We believe the Tenth Circuit properly decided the case below. But if the Court decides to grant the Direct Marketing Association’s petition to review the issue of discrimination which it raises, we respectfully request that the Court also grant the conditional crosspetition filed by Executive Director Barbara J. Brohl of the Colorado Department of Revenue asking the Court to reconsider Quill. This brief sets forth the reasons for our support of that cross-petitio