Imagine inheriting a sizable estate from your deceased spouse, only to have the IRS claim that you and your spouse were never legally married and that you owe millions in estate taxes. That was the situation in a tax case recently decided by the United States Tax Court. In siding with the surviving spouse, the Tax Court clarified when and how the IRS can refuse to recognize the existence of a marriage.
Marital deductions and the importance of being a spouse
The marital deduction in federal estate tax law generally shields an unlimited amount of assets bequeathed to a surviving spouse from estate taxation. In cases of especially large estates, the marital deduction can amount to tens of millions in tax savings. It can also mean that the IRS will take a long look at the validity of the marriage between the deceased and inheriting spouse, to make sure that the marriage was real, and not a sham designed to avoid taxes.
On one hand, it makes sense that the IRS should examine the validity of a marriage in combating tax fraud. On the other hand, the IRS risks overreaching by challenging marriages that no one else ever dreamed of contesting.
Case in point: Estate of Grossman v. IRS
Semone Grossman and his wife Ziona, both U.S. citizens and residents, were married in a Jewish ceremony in Israel in 1986. Semone had been married previously. Before marrying Ziona, he obtained a divorce under rabbinical law from his first wife, also a U.S. citizen and resident. Semone and Ziona remained married until Semone died in 2014. The bulk of his $80+ million estates passed by will to Ziona.
Ziona claimed a marital deduction on the inherited estate. The IRS, however, refused to recognize Ziona’s marriage to Semone, arguing that Semone’s religious divorce from his first wife was invalid under the laws of their state of residence. That made the marriage to Ziona invalid, too, according to the IRS.
The Tax Court, however, disagreed. Criticizing the IRS for “ask[ing] the wrong question and get[ting] the wrong answer”, the court held that what mattered was not whether Semone’s divorce from his first wife was valid under state law, but instead whether the marriage to Ziona was valid under the laws of the “place of celebration” of the marriage— in this case, Israel. It was, and so under federal law Ziona was a surviving spouse entitled to claim a marital deduction.
Marriage validity under current tax regulations
In the years since Semone died, tax regulations have formalized the “place of celebration” test for determining a marriage’s validity, but with a twist. Today, a marriage is valid for purposes of the marital deduction from estate taxes if it is:
- Valid under the laws of the place of celebration; and
- Recognized under the laws of at least one U.S. state or territory, regardless of the domicile of the married couple.