IRS Tells You if You are Married and to Who! Yes, IRS has Rules For That!

An interesting case was recently decided. I blog about it today to warn those who marry or divorce in a foreign country about the US tax complications that can arise.  It’s an area fraught with pitfalls and can impact the couple in many ways, including of course, their US tax planning.  Let’s have a brief look at Estate of Semone Grossman, T.C. Memo. 2021-65, 5/27/21

Semone Grossmann was very wealthy and he had a complicated personal life.  In 1955, Semone married his first wife, Hilda, in New York.  About a decade later, Semone obtained a unilateral divorce in Mexico and remarried a woman named Katia in New Jersey.  Katia and Semone divorced within the following decade.  At about the same time, Hilda, the first wife, brought a lawsuit seeking a judgment that the Mexican divorce was invalid, and, therefore, that she and Semone were still married. Hilda won the case, but not the man.  The couple never reconciled and years later, Semone met Ziona and wished to marry her. Hilda cooperated and permitted Semone a “religious” divorce (known as a “get”) in an orthodox rabbinical court. Semone gathered various religious documentation, as well as a letter stating that he was free to marry Ziona and the couple used these documents in Israel where they were married by a rabbi. Semone and Ziona returned to New York after their wedding, raised a family together, and lived in New York for 27 years until Semone died in 2014.

Semone left the bulk of his US$87,000,000 estate to Ziona.  The US estate tax return filed by Semone’s executor claimed a marital deduction under Section 2056(a) of the Internal Revenue Code for this amount on grounds that Ziona was Semone’s “surviving spouse”. (For those wishing to follow the tax analysis, Internal Revenue Code Section 2001(a) imposes a tax on the transfer of the taxable estate of every US decedent.  Section 2056(a) provides that, “for purposes of the tax imposed by Section 2001, the value of the taxable estate shall…be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse.”).

The Internal Revenue Service (IRS) disallowed the deduction, on grounds that the marital deduction did not apply to the bequest to Ziona since she was not the “surviving spouse”.  IRS contended that Semone could not have been married to Ziona at the time of his death since he was still legally married to Hilda.  Big bucks were at stake – an estate tax deficiency of US$35.5 million along with an accuracy-related penalty of US$7.1 million were assessed against the estate.

The IRS argued that the Tax Court should rely on the laws of New York State to ascertain the status of the divorce between Semone and Hilda. The Estate took a different approach arguing that the Court should examine federal law to determine whether Semone and Ziona were legally married at the time of Semone’s death. The Estate claimed that it would also prevail under New York state law and the Court decided to analyze the facts of the case under New York law.  Under New York law, a foreign marriage is valid if the marriage was valid in the “place of celebration” (here, Israel).

As will be discussed later in this post, the IRS promulgated Treasury Regulations in 2016 detailing when a marriage (including a “foreign” marriage) is considered valid for federal tax purposes.  These Regulations could not be applied to the case since they were adopted two years after Semone’s passing.  As such, the Tax Court was faced with a more challenging analysis, which I have simplified here.  The court focused on the validity of Semone’s marriage to Ziona under New York’s “place of celebration” rule.  Generally, under the “place of celebration” rule, a marriage is recognized as valid if it was valid under the laws of the jurisdiction where the marriage took place.  The court examined Israel’s legal system under which marriage and divorce are within the province of “religious” courts.  Under Israel’s rules, Semone and Ziona would not have been granted a marriage certificate unless Semone could demonstrate that any prior marriage had been dissolved. The religious divorce (the “get”) is fully recognized under Israel’s religious law. The Israel marriage certificate constituted indisputable proof that the divorce between Semone and Hilda was valid in Israel and therefore that the marriage between Semone and Ziona was valid in Israel, the “place of celebration”.   As such, Ziona was the “surviving spouse” for purposes of the US estate tax marital deduction. A nice win for the Estate!

“Foreign” Marriages

Life gets confusing when you’re an American and you marry in a foreign country! What does it mean for US tax purposes to be “married”?  Does your marriage in a foreign country count for US tax purposes? What if you married in a foreign country but you have never registered your foreign marriage with any US State?

Never fear, the IRS in its infinite power and wisdom has issued Treasury Regulations to tell you if you are married and to whom!

So – been filing MFJ and find out you’re not “married”? Made your estate plan leaving the bulk of assets to your “spouse” and learn you’re not “married” to him/her?  Implemented a QDOT for your non-US spouse and now discover you are not considered “married” for tax purposes? What a mess.  Let’s examine what the IRS has to say.

IRS Treasury Regulations

In 2016 the IRS issued final regulations clarifying the definitions of “spouse,” “husband,” “wife,” and “husband and wife” for federal tax purposes. The final regulations now define “spouse,” “husband” and “wife” as any individual lawfully married to another individual, and “husband and wife” as any two individuals lawfully married to each other, regardless of the individuals’ sex.  This clarification came after the landmark US Supreme Court case Obergefell v. Hodges in 2015. There the Court struck down state prohibitions on same-sex marriages as violating the Equal Protection clause of the US Constitution.  The issue of foreign marriages was also addressed in these regulations and is found in a separate rule contained in Treasury Regulation Section 301.7701-18(b)(2).

To clarify how foreign marriages will be recognized for federal tax law purposes the special rule provides that two individuals entering into a relationship denominated as “marriage” under the laws of a foreign jurisdiction are married for federal tax purposes if the relationship would be recognized as marriage under the laws of at least one state, possession, or territory of the United States. This rule enables couples who are married outside the United States to determine marital status for federal tax purposes, regardless of where they are domiciled and regardless of whether they ever reside in the United States. While this rule requires couples to review the laws of the various US states, possessions, and territories to determine if they would be treated as “married”, it is sufficient if they would be treated as married in a single US jurisdiction.  There is no need to consider the laws of all of the 50 states, the territories, and possessions of the United States (thank goodness!). However, for the couple to have to determine that the laws of at least one of these would be satisfied is in and of itself, a significant burden.

The foreign marriage rule also incorporates the “place of celebration” as the reference point for determining whether the legal relationship is a marriage or a legal alternative to marriage. This rule recognizes only legal relationships denominated as “marriage” under foreign law as eligible to be treated as “marriage” for federal tax purposes. In other words, a couple intending to enter into a legal alternative to marriage will not be treated as “married” for US tax purposes.

Posted July 22, 2021

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