Among the many inequalities yet to be resolved for California Registered Domestic Partners (RDPs) and same-sex “married” couples, is the IRS’s unwillingness to guide same-sex couples on tax issues. This problem has only deepened as more states legally recognize same-sex relationships.

In May 2010 the IRS Office of the Chief Counsel reconsidered its former interpretation of the effect of state community property laws on the income taxation of same-sex couples. In summary, the Chief Counsel Advice (CCA) has determined that, for tax years beginning after 2006, domestic partners (or legally married couples) registered in applicable states must report one-half of the other “partner’s” community property income, whether received as compensation from personal services (e.g., wages) or income from property (e.g., rental income).

While the CCA does not address the gift tax consequences of all property acquired during the registration, it is a step in the right direction. Property rights and support obligations are state law rules with federal tax consequences. Spousal community property right have had tax-favored status ever since the United States Supreme Court in 1930 confirmed that community income rights, if imposed by the state would be honored for federal tax purposes. As a result each spouse reported as income only half of the total community earnings, even if the earnings were attributable to the personal services of only one spouse. This ruling is what ultimately led us to the adoption of joint returns in 1948. The effect of the joint return was to treat all married couples the same, whether they lived in community property or non-community property states; a result that is yet to be fully realized by same-sex couples.

In January 2005, RDPs were finally given some rights and obligations equivalent to spouses. RDPs were also suddenly subject to the state’s community property regime. In the hopes of avoiding unintended consequences, California mailed notices designed to provide RDPs with advance warning of the change. RDPs, who were able to register statewide as early as 2000, were given the opportunity to decide whether they wanted to remain registered and, if they did, were given until June of 2005 to opt out of the community property system with no adverse consequences at the state level; meaning no tax.

I have always been concerned that the IRS would treat these newly acquired community property and community income rights as taxable gifts especially considering that the 2003 law provided that all property acquired during the registration would be retroactively treated as community property absent the opt out. Until now these concerns were met with silence from the IRS.

What does all this mean? It means that for tax years beginning after 2006 a California RDP must report one-half of the community property income on his or her federal income tax return. However, the CCA provides relief for a RDP that reported all of his or her income in accordance with previous law. For tax years beginning before June 1, 2010, RDPs may, but are not required to, amend their income tax returns to report in their income one-half of the community income.

There are, in my opinion, some issues with the new CCA. Most notably, the CCA does not address any gift, estate or property tax issues or any of the issues created by division of property at divorce, all of which should certainly have a more favorable outcome based the interpretation in the new CCA.

There is good news. The CCA allows California RDPs and “married” same-sex couples to potentially be taxed at lower effective tax rates than similarly situated heterosexual couples or similarly situated same-sex couples in other states. This is because RDPs can now legally shift one-half the income of the high earning partner to the low earning partner and, therefore, allow one-half the income to be taxed at lower marginal tax rates, thus, creating a lower, effective rate of tax between the couple. Baby steps.