Tax Research Project Assignment

In United States v. Windsor (570 U.S.___, 133 S. Ct. 2675 (2013)), the United States Supreme Court held that Section 3 of the Defense of Marriage Act is unconstitutional because it violates the equal protection principles of the Constitution. As a result of this ruling, the IRS issued Revenue Ruling 2013-17, which recognizes same-sex marriages for Federal tax purposes if the individuals are lawfully married under statelaw. As a general rule, the IRS will recognize a marriage of same-sex individuals that was validly entered into in a state whose laws authorize the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages. (Rev. Rul 2013-17)

This ruling applies prospectively as of September 16, 2013. In addition, the ruling may be relied upon in filing amended tax returns for any open year.

Assume it is March 2014 and you are a senior associate at Ernest, Frank, and George, CPAs. Your clients are Andrew Bond and Charles Davis. They were lawfully married in Massachusetts in 2006. They reside in Orlando, FL a state with no individual income tax. They have provided you with their Federal tax returns for 2010, 2011, and 2012 (provided in a separate file), which were timely filed using the Single filing status.

They would like to know if they should amend their tax returns for these years using the Married Filing Joint status. Additionally, they want to know which filing status they should use for 2013, Married Filing Joint or Married Filing Separate.

Andrew and Charles have provided the following additional information:

• 2010

o Andrew worked full time as an engineer.
o Charles had an unpaid internship during the spring semester. He took graduate courses during the summer session and started working as the activities director in the fall.

• 2011

o Andrew worked full time.
o Charles worked full time.

• 2012

o Andrew worked during the first few months of the year, but then took a sabbatical to take care of his sick mother.
o Charles worked full time.
o Neither made any charitable contributions.

• 2013

o Andrew worked full time.
o Charles worked full time.
o Neither made any charitable contributions.

Your manager, Harry Idleman, has asked you to prepare an analysis of the tax situation for Andrew and Charles. Specifically:

• Should they amend their 2010 tax returns?
• Should they amend their 2011 tax returns?
• Should they amend their 2012 tax returns?
• What filing status should they use to file their 2013 tax returns?

To allow you to focus on the analysis, Harry asked a staff member to prepare mock Married Filing Joint tax returns for 2010 - 2012 (provided in a separate file). For 2013, the staff member prepared proforma tax returns using the Married Filing Joint and Married Filing Separate filing statuses.

Deliverable: Provide a memo to the file with your recommendations and supporting calculations regarding the decision to amend prior year returns and the appropriate filing status to use for the 2013 tax return.

Harry also asked you to prepare a memo documenting several topics illustrated by this case. Several deductions and credits were affected by the choice of filing status and AGI levels when the tax returns were combined. Please document the impact of filing status and AGI on phase-outs for each year, e.g. in 2010, Andrew's AGI is too high to claim the deduction for student loan interest when filing Single. The memo should also include your findings about the marriage tax penalty, when it is likely to exist, and how this case exemplifies this issue. Please provide a memo to the file documenting the impact of filing status and AGI on phase-outs and a brief discussion of the marriage tax penalty.

Deliverable: Memo to the file regarding the impact of filing status and AGI on phase-outs and the impact of the marriage tax penalty.

Additionally, Andrew and Charles would like to know if Andrew should itemize his deductions for 2013 if they file Married Filing Separate. They would also like to know if there are any tax or non-tax issues, other than refund status, they should consider before amending their tax returns. Please prepare a letter to the client regarding the results of your analysis as well as addressing these issues.

Deliverable: Client letter discussing which, if any, returns to amend, your filing status recommendation for 2013, if they should itemize their deductions for 2013, and any other issues they should consider before amending returns and selecting a filing status.