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Wednesday, March 05, 2014

Ind. Gov't. - An overview of the brouhaha caused by the deletion of a single provision in HB 1380

The Indiana Adjusted Gross Income Tax Act of 1963 is set out at Indiana Code Title 6, Article 3. The first Chapter, IC 6-3-1, contains the definitions that apply throughout the Article.

The definition of adjusted gross income in Sec. 3.5 explains that Indiana's adjusted gross income tax is tied to "adjusted gross income" (as defined in Section 62 of the Internal Revenue Code).

Sec. 11(a) of the definitions explains that:

The term "Internal Revenue Code" means the Internal Revenue Code of 1986 of the United States as amended and in effect on January 1, 2013.
A glance at the History Line at the end of Sec. 11 shows that the section has been amended nearly every year the General Assembly has been in session since it was enacted in 1963. The reason why was explained in this April 11, 2007 ILB post:
This section defines what the Indiana Code means when it references the federal "Internal Revenue Code." The federal law changes nearly every year.

Does a reference in Indiana law to the "Internal Revenue Code" incorporate all the latest changes made by Congress? Yes, but only because the Indiana law is changed each year to reflect the most recent version of the IRC.

What is that? Because the General Assembly cannot delegate its lawmaking authority to the federal government.

This year, language to update the references in IC 6-3-1-11 to "Jan. 1, 2014" was included as SECTION 8 in HB 1380, a bill covering a miscellany of tax and administrative issues, as can be gleaned from the digest to the Feb. 28th version of the bill. You can find mention of SECTION 8's content about a third of the way down p. 2 of the digest: "Updates references to the Internal Revenue Code."

On Monday, March 3, when the House bill was on second reading in the Senate, Senator Brandt Hershman, the bill's sponsor, successfully offered a motion to delete SECTION 8. It read: "Page 7, delete lines 12 through 42. Page 8, delete lines 1 through 34." Period. He added no new language to the bill.

As related in this ILB post yesterday, the ILB first learned about this motion striking SECTION 8 the next morning, through a brief, confusing and inaccurate news story that did not identify the bill and was headed "Indiana measure would ban same-sex marriage tax benefits."

Senator Hershman contacted the ILB several times during the day yesterday, helping me to understand his intent, including this statement:

We couple our tax code selectively to the federal IRC. If we did a blanket coupling, it would potentially require recognition and joint filing under state law.

We aren’t doing anything to the federal ability to file jointly, we’re just not creating a state right to do so through coupling to the federal code.

Indiana adjusted gross income (AGI) is derived from the AGI figure on your federal tax form. You copy that number, if you are married, from your joint tax form onto your Indiana tax form.

On August 29, 2013, following the recent Supreme Court decision in U.S. v. Windsor, the US Department of the Treasury issued a press release and Revenue Ruling 2013-17. The release began:

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

The ruling implements federal tax aspects of the June 26th Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.

So for the purposes of their federal tax return, Indiana same-sex couples, legally married in another state, will be treated as married for federal tax purposes.

What of the Indiana tax returns of Indiana same-sex couples legally married in another state? The Indiana Department of Revenue issued guidance this fall, providing that because Indiana does not recognize same-sex marriages, same-sex couples who file federal returns with a married filing status must each file their Indiana income tax returns with a filing status of single. To accomplish this, each same-sex spouse needs to fill out a "sample" federal form as if single, and apply the AGI derived to an individual Indiana tax return.

Senator Hershman's concern, as set out in this story this morning in the Indianapolis Star, reported by Barb Berggoetz, was:

... that [IDOR] opinion takes precedent, unless the legislature changes the law. However, he said if lawmakers don’t “decouple” state tax policy in HB 1380 from the broad federal tax changes, then the practice of joint filing for same-sex couples would be adopted here.

Since Indiana has an existing state law banning same-sex marriage, Hershman said, “we don’t want to do that because a tax bill is not the appropriate venue for a debate on same-sex marriage.”

Some, including myself, would differ with Sen. Hershman's answer, but the Senate on second reading accepted it.

A different approach: IC 6-3-1-11 governs what version of the Internal Revenue Code (a federal statute) is referenced in the Indiana adjusted gross income tax law. Currently it is the IRC as amended and in effect Jan. 1, 2013. Sen. Hershman's concerns seems to be that by upping that reference to Jan. 1, 2014, we would also be adopting DOR Revenue Ruling 2013-17. I do not believe that to be the case, but it would have been easy enough to add another exception to IC 6-3-1-11, rather than leaving the entire adjusted gross income tax law tied to the Jan. 1, 2013 version for another year. (There also appear to be several errors in the 2013 version of IC 6-3-1-11 that need to be corrected.)

Finally, yesterday the Senate voted on HB 1380 on final passage.
SECTION 8 had been excised the day before. The bill contained a laundry list of tax and administrative provisions. The vote on third reading, which was 41-6, had nothing to do with which version of the IRC is referenced in state tax law. But many in the press continued to make that absent provision of HB 1380 the story. For example, where is this provision in HB 1380?

Separately, the legislation would put a previously announced Indiana Department of Revenue rule into state law by requiring gay Hoosiers who are married in other states to file their Indiana income tax returns as individuals. While federal law permits joint returns for married gay and lesbian couples, Indiana still prohibits gay marriage and state lawmakers said the state tax code should reflect that prohibition. NWI Times

On the heels of recent demonstrations emotions were running high after an amendment was passed Monday spelling out that same sex couples in Indiana would not be able to file their state taxes jointly, even though they can now file federal taxes jointly. WISH-TV

Barb Berggoetz's story today in the Indianapolis Star gives a clearer picture, although I disagree with the lede:
The Indiana Senate on Tuesday deleted a state tax provision that would have inadvertently allowed same-sex couples to file joint tax returns in Indiana.
Summer Ballentine's story for the AP takes a different approach, looking at the impact of Indiana's not allowing legally married same-sex couples to file as married on their Indiana tax returns.

Posted by Marcia Oddi on March 5, 2014 12:25 PM
Posted to Indiana Government