Financial Roundup: Bankruptcy and Taxes and Benefits, Oh My!

There really is never a dull moment for same-sex couples trying to go about their financial lives just like everybody else. In some cases, that’s working out okay. In others, not so much.

First, bankruptcy. In a surprising move on Monday, June 13, 19 of the 24 judges in the Central District of California bankruptcy court Los Angeles signed on to a decision holding that the federal Defense of Marriage Act is unconstitutional. The opinion allows Gene Balas and Carlos Morales, who were legally married in California in 2008 , to file jointly for Chapter 13 bankruptcy protection to deal with their joint creditors after dealing with a prolonged period of unemployment and illness. This decision is significant because it gives added power to two existing decisions out of the Massachusetts federal court (Gill v. Office of Personnel Management and Commonwealth of Massachusetts v. U.S. Department of Public Health), and because of the number of judges that signed on. The case is only binding in the this court’s jurisdiction, but it will have impact well beyond that. For more about the bankruptcy aspects, see Nolo’s Bankruptcy Blog.

Next, taxes. If it’s surprising to find a passel of bankruptcy judges going to bat for a gay couple, it’s even more shocking to find the Internal Revenue Service apologizing to them. But that’s exactly what happened in California, where approximately 300 same-sex couple taxpayers who filed joint tax returns listing their status as married received letters from the IRS rejecting their returns because the return included “income or tax liability for more than one taxpayer, other than husband and wife.” Under California law, same-sex couples who are married or registered domestic partners must file as married, so these letters were entirely inappropriate, as the IRS acknowledged in its followup letters saying the original notices were sent in error. As Professor Pat Cain notes in her blog post on this subject, the problem isn’t really the IRS. It’s the Defense of Marriage Act. Yes, that one that the bankruptcy judges declared unconstitutional (see above), a belief shared by President Obama and his Justice Department. And me.

Last, benefits. Another unfair aspect of DOMA is unequal taxation of employee benefits. Thousands of gay and lesbian employees provide domestic partner or spousal health insurance coverage to a partner through their jobs. Many have done so for years, and each year, those employees have paid taxes on the value of those benefits, because the Internal Revenue Service, as an agency of the federal government, does not recognize same-sex marriages or marriage-equivalent relationships like domestic partnership or civil unions. Employers also take a hit in the form of additional payroll taxes—or face problems if they don’t know about the discriminatory rule. Guess what? None of this happens when opposite-sex spouses are in the same situation. Now, a bipartisan bill recently introduced in Congress would end that practice and treat health care benefits the same for same-sex and opposite-sex married couples.  The bill appears to be in part a result of pressure from businesses, which find the differential treatment inconsistent with their desire to attract the best employees by providing competitive benefits. Let’s hope it makes its way through the legislative process quickly and that this discriminatory practice ends soon.