In late March, the Supreme Court will hear arguments in a pair of same-sex marriage cases that could have widespread federal tax impacts.  One case, Windsor v. U.S., tests the constitutionality of the Defense of Marriage Act (DOMA).  Some of the commonly-mentioned tax benefit discrepancies that could be affected if the Supreme Court strikes down DOMA include: (1) imputed income when one partner benefits under the other partner’s health care plan; (2) the unavailability of automatic COBRA continuation coverage; (3) the inability to receive automatic spousal benefits under a qualified plan; and (4) the denial of Social Security survivor benefits.  But as the social definition of family changes, and, more importantly, our understanding and acceptance of such definition, the reality is that there are many other tax inequalities that affect same-sex couples and their families. These are not as widely mentioned (and, in some cases, may not include a definition of “spouse” or “marriage” in the relevant section of the Internal Revenue Code (Code)), but carry equal import.  One such major tax inequality includes deduction of medical expenses incurred in surrogacy.   If the Supreme Court strikes down DOMA, will this tax inequality be addressed?  Or will it fall by the wayside? 

Like opposite-sex couples, many same-sex couples want to start a family of their own.  Because same-sex couples cannot physically create children together, many same-sex couples have turned to surrogacy as a way to conceive a child.  Surrogacy is not cheap and couples using a surrogacy clinic to conceive a child through gestational surrogacy can incur substantial costs.  Section 213 of the Code provides some relief from the substantial costs by allowing taxpayers to deduct medical expenses that exceed 10% of gross income. 

Despite the seemingly universal availability of Section 213, the reality is that generally opposite-sex couples may deduct surrogacy expenses, but same-sex male couples may not.   A Section 213 deductible expense is defined as an expense incurred for the diagnosis, cure or treatment of a disease, or for the purpose of affecting any structure or function of the body.  Expenses can be incurred by a taxpayer, his spouse or dependent - terms which cover opposite-sex spouses but would exclude same-sex spouses under DOMA.  In PLR 200318017, the IRS ruled that a married opposite sex couple could deduct expenses incurred in using gestational surrogacy because the wife was unable to conceive a child. The IRS ruled that such expenses were deemed deductible medical expenses and were incurred by the taxpayer’s spouse.  When a gay man later deducted his expenses incurred in using gestational surrogacy, the IRS disallowed them.  In Magdalin v. Comr, T.C. Memo. 2008-293, the Tax Court sided with the IRS and ruled that the taxpayer could not deduct any expenses incurred in conceiving a child through gestational surrogacy because the expenses did not involve the treatment of any medical condition or defect suffered by the taxpayer.   Because the taxpayer did not suffer from infertility, like the wife in PLR 200318017, the expenses were incurred in the absence of an underlying medical condition or defect and were considered nondeductible personal expenses.   

Is it a tenable argument these days that a same-sex couple cannot deduct expenses incurred in conceiving a child through gestational surrogacy because the medical assistance is due to nonmedical reasons?  Will the current challenge to Section 3 of DOMA affect the result in Magdalin if DOMA is overturned and the argument is made that the disparate tax treatment under the Code hinges solely on: (1) the inability to conceive a child attributable to the taxpayer’s sexual orientation; and (2) the fact that this surrogacy was not undertaken by an opposite-sex married couple?   For example, if DOMA is deemed unconstitutional, won’t the tax laws need to be rewritten in such a way as to treat same-sex couple dysfertility issues equal to opposite-sex couple infertility issues?  Or would DOMA being struck down not affect Section 213(d) at all?   

 --Shaun Terrill 

Federal Tax Law Editor (Compensation Planning)

For information on an upcoming webinar that addresses the impact of DOMA on the taxation of same-sex couples: 

DOMA and the Taxation of Same-Sex Couples: The Potential Impact of Windsor

Thursday, March 21, 2013, 12:30 PM - 2:00 PM ET  

click http://www.bna.com/doma-taxation-samesex-w17179872299