RDPs Must Now Use Community Property Rules to File Federal Return
On May 28, 2010, the IRS released Chief Counsel Advice (CCA) 2010210501 which changes the federal tax treatment of California registered domestic partners’ (RDP) community income. The IRS concluded that a California RDP must report one-half of the community property income on the federal returns.
The federal advice is based on the California law changes, effective beginning January 1, 2007, that treats earned income of a registered domestic partnership as community property for state income tax purposes. Previously, the IRS did not recognize this community property treatment; however, the IRS has now decided to extend full community property treatment to registered domestic partners in California. In another Chief Counsel Advice memo, CCA 2010210492, the IRS also explained that it can consider the assets of a taxpayer's registered domestic partner when determining the reasonable collection potential of a taxpayer's offer in compromise under IRC Section 7122, since California law provides both partners have an equal interest and liability in the community property.
According to CCA 201021050, "Applying the principle that federal law respects state law property characterizations, the federal tax treatment of community property should apply to California registered domestic partners. Consequently, for tax years beginning after December 31, 2006, a California registered domestic partner must report one-half of the community income, whether received in the form of compensation for personal services or income from property, on his or her federal income tax return."
CCA 201021050 also clarifies that for tax years beginning before June 1, 2010, registered domestic partners may, but are not required to amend their returns to report income in accordance with CCA 201021050.
California provides guidance to RDPs in FTB 737, Tax Information for Registered Domestic Partners, including how to make RDP adjustments for differences between state and federal law. This publication will be updated by mid-December to take into account federal changes in recognition of California community property law.