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How to Take Paul Newman’s “The Sting” Out of Your Taxes

paul_newman0final.jpgWith the rise of the internet, cloud and smart phone economy, more and more people have the option of living in one state while working in another – remotely. The possibilities for reducing state income taxes through this scenario haven’t been lost on savvy hi-tech employees and business owners in California. By simply moving across state borders and working for a California business (or even running it) through the internet, they become nonresidents, potentially free of California’s high income tax rates, while still being able to participate in California’s thriving economy.

Of course this situation isn’t lost on California’s taxing authorities either. Because of that “remote workers” need to be careful and understand the tax rules for nonresidents working for California firms.

Generally if you work in California, whether you’re a resident or not, you have to pay income taxes on the wages you earn for those services. That’s due to the “source rule”: California taxes all income with a source in California. And for tax purposes, the source of income from services is the location where the services are performed. This is true even if you are a nonresident, even if the contract with the employer is made out-of-state, and even if the wages are paid outside of California.

You can imagine how important the source rule is for California’s taxing authority, the Franchise Tax Board, when it comes to actors and athletes. When LeBron James travels to California to play the Clips at Staples Center, California gets a cut of his pay for that night.

But what if the employee is a nonresident who doesn’t have to set foot in California to perform his services? Then the source rule works for the nonresident. Remember, the source of the services is the location where the work is actually performed. A nonresident programmer who monitors and upgrades satellite dish software for his Los Angeles-based media company, all while sitting comfortably in front of his computer in his Austin, Texas condo, doesn’t earn California source income and doesn’t have to pay California income taxes.

At the employer end, while California companies have to withhold state payroll taxes for resident employees wherever they perform their services, and for nonresident employees for services in-state, not so for nonresident employees who perform services outside of California. This is true, by the way, even if the employee is a nonresident corporate director (or an LLC manager or general partner) and is paid for his work directing the company – as long as he only participates remotely (though don’t confuse this with profit distributions to nonresident owners, which follow different rules I will address in a separate article).

So far so good. But what if a difficult glitch arises requiring the programmer to fly to Los Angeles to fix the system on site? Then everything changes. The source rule kicks in against the employee. In that case, just like LeBron James playing at Staples Center, or Paul Newman (who was a resident of Connecticut) making a movie in Hollywood, California taxes the income from those in-state services. What the FTB does then is to use an allocation formula based on “duty days” – the days the employee is present in California and working – in proportion to total work days.

The reason I mention Newman, by the way, is that he prevailed in a famous case against the FTB for his performance in “The Sting.” Newman was able to show that the duty days formula should be based on what his contract actually required for working in and out of California, rather than the FTB’s own calculation of duty days. Paul L. and Joanne W. Newman v. FTB (1989) 208 Cal. App. 3d 972. That’s why it’s very important to have a written employment contract that clearly states what obligations an employee has to work in California and what constitutes such work. Experience suggests that most nonresident remote employees at some time or other will have to travel to California to perform some services on site.

Note also that it’s easy for LeBron James to prove how many days he worked in California and how many days he worked outside of California. You just have to look up the NBA schedule. It’s not that easy for our programmer or other nonresident workers who perform services from their living room computers. Therefore, scrupulous record keeping and detailed employment contracts are a necessity.

So here are the caveats for nonresidents working remotely:

First, the entire favorable tax treatment of working remotely is based on the assumption that the employee is truly a legal nonresident. For employees who move from California to a lower tax state like Nevada or Texas, it’s important they follow residency rules and genuinely change their legal residency. If they don’t make the necessary changes to reduce or eliminate their California contacts, they may find themselves in a nasty residency tax audit.

Second, make sure to have a written employment contract that spells out the services to be performed out of state and in state, if any. In this way you are in control of the “duty days” allocation, not the FTB.

Finally, if any work is required on site (and it almost always will be at some point) keep good records of your work both in and out of state. This will allow you to make the most of the “duty days” formula allocation.

The information in these articles is not, nor is it intended to be, legal advice. In addition, the articles interpret California law and should not be construed to apply to any other state or jurisdiction.

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California residents who plan to move to another (by definition lower income tax) state, either to retire or for business purposes, often face the problem of how to handle their business interests situated in California. Mostly these interests are LLCs, the preferred entity for most modern business operations. The taxpayer often wants to hold onto the LLC interests and continue to get the income stream until some later date after the move. The question that arises is, what are the California income tax consequences of selling a California LLC interest after the taxpayer changes residency to another state?

I’m assuming the business owner has already weighed the risk of retaining his California business interests while disentangling himself from California by reducing his contacts here and establishing residency elsewhere. Obviously any continued contacts with California are red flags for California’s taxing authority, the Franchise Tax Board, which determines residency in part through a “contacts test,” evaluating which state the taxpayer has the most contacts with. Business interests are just the type of substantial contact that can weigh heavily in determining residency, and can trigger a costly residency audit. In addition, unless the circumstances are very unusual, the income allocated from the LLC to the taxpayer will be California source even after the taxpayer leaves the state. That means the former Californian will have to file nonresident tax returns with Sacramento (the Form 540NR), and the FTB will know about his global income. If the income is high, it again sends up a red flag that could lead to a residency audit.

But assuming that this decision has already been made, and the taxpayer decided to keep his California business interests despite the risks of an audit, the next issue is planning for the eventual sale of the interest as an out-of-state resident.

On its face, the rule is relatively simple. California generally taxes all income that has its source within the state. The fact that the taxpayer moved to another state doesn’t alter that result. With businesses, the state they operate in is called their “situs.” It follows that an LLC set up, located and operating in California has a California business situs, and its income is California source. But California LLC interests have special business situs rules when it comes to sales. Income for the sale of intangible interests (stocks, bonds, notes, and LLCs) is not considered derived from California sources unless the intangible property itself has a business situs here. Clearly LLCs that operate in California have a situs here for purpose of their income taxes. But the ownership interest itself takes on the residence status of the owner. Thus, an LLC interest owned by a nonresident is generally deemed a “non-California situs intangible interest” even if the business is set up, located and operates in California. So while the income from LLC operations in California paid to the nonresident is usually California source and is subject to California income taxes, the income from the sale of the LLC interest itself is not.

Unfortunately this rule gets more complex in practice.

Business owners often have more than just a passive relationship to LLCs they have equity in. Often they not only invest in the LLC, but use their interest to leverage other investments. And that often involves pledging the LLC interest as collateral for loans. And in many cases, a control group of investors own related LLCs, and the loans are used to keep the related operations afloat or pay their debts. This can lead to the nonresident unwittingly creating a business situs for his intangible ownership interest in a California LLC, which otherwise could be sold free of California taxation.

The regulations give the classic example of a nonresident who pledges intangible personal property in California as security to pay indebtedness or taxes related to a California business. This is the LLC owner who takes out a loan to pay the debts or otherwise capitalize a related LLC, and the LLC interest is pledged as collateral. In that case, the intangible property acquires a business situs in California. It is no longer “non-California situs intangible property.” When the interest is sold, California can tax the gain, even though the owner is a nonresident.

Nonresidents can also get into trouble if they buy and sell LLC interests in California (or place orders with brokers in this state to buy or sell such intangible property) so regularly, systematically, and continuously as to constitute doing business in California. In that case the sales themselves are deemed California source.

So while the rule seems simple when it comes to nonresidents selling their California LLC interests, they need to realize that the application often requires considerable analysis.

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Helped along by the depressed US housing market in the past few years, the Palm Springs, California, area has become a hot spot for Canadians to purchase vacation homes or rental property. Often the same property is used for both purposes: vacations for snow-weary owners, and rentals when they go back to Canada. With the year about to end, it’s a good time to go over the basic tax rules for Canadians who own or rent real property in California.

Assuming the Canadian owner doesn’t have a green card or hold other residency status, the tax implications of owning real estate in the US will depend on how the property is used and how often it’s used.

If the property is solely used as a vacation home – and never rented out during the year – there should be no US tax implications until the house is transferred, either by sale, retitling into a trust or business entity, or at the owner’s death. In our wireless connected world, Canadians who mix vacation with work while at the property need to be careful about running afoul of US federal and California state income tax rules, especially when it comes to the very aggressive California tax authorities and their rules about California source income. But that’s another topic.

Actually, “never” is an overstatement. An owner of property can rent out the property for 14 days or less without tax reporting requirements, if the home is used personally for more than 14 days, or more than 10% of the total days it is rented to others. The amount of the rental income doesn’t matter in this case, so long as the use limits are met.

On the other end of the spectrum is real property never used for personal use, but rather rented out to others. The Canadian owner must report the entire rental income received on a US nonresident Federal and California tax return. At the same time, most rental owners qualify to deduct rental-related expenses: depreciation, utilities, repairs, property management fees, and the like. Further, rental losses may qualify for deductions against other income, at least in part, and may carry over for use in subsequent years. The ability to take loss deductions for 100% rental property distinguishes it from “mixed-use” property, which is a trickier tax situation.

Again, “never” is an exaggeration. The actual rule is if the personal use of a vacation home doesn’t exceed 14 days in a tax year or 10 percent of the total number of days it is rented out at fair market value, whichever is greater, and the property is rented out for more than 14 days, then it qualifies as a rental property.

More than a few Canadians are somewhere in the middle. They use their US property as a vacation home, but also rent it out for more than 14 days when they aren’t in the US. The rule is that if the owner uses the property for personal use for more than 14 days a year or, if greater, 10 percent of the number of days it is rented to others at fair market value, the property is treated as a residence, not a business. This is an important tax distinction. The owner must report all rental income on US tax returns and the rental expenses are usually deductible. But the expenses have to be allocated between the personal and rental use. More important, rental expenses in this scenario can be deducted up to the level of rental income, but the owner can’t use losses against other income.

A couple caveats. While the US and California have a “14-day” threshold, Canada does not. Therefore even de-minimus rental income may have to be reported in Canada. Further, resort towns like Palm Springs, Palm Desert, Rancho Mirage, Indian Wells, have additional municipal rules that restrict or otherwise regulate renting out vacation homes, including the imposition of fees. Finally, there are hefty state and federal withholding requirements for rent paid to non-US residents (though with private renters where there is no management company, those rules are often ignored). With proper planning, the withholding can be waived. Otherwise, the owner will have to file for a refund if the actual amount of taxes due on rental income totals less than the withheld amount.

Finally, note that in all these situations, how title to the property is held matters for tax purposes. If, for instance, the property is vested in both names of a married couple, then both must file US federal and California returns. If only one of the spouses is on title, only that spouse must file the returns (assuming no other income requiring the other spouse to file US returns). If the property is held in a revocable trust, then the grantor of the trust (that is, the person who established it) must file the returns. This may have important tax implications that should be considered at the time the property is purchased and title taken.

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So the California Revocable Trust seems like a very practical ownership form for the Canadian (Great Britain or even the American from a state other than Cal) who wishes to see their heirs spared (and I do mean spared) the California court system, inlcluding the time and cost (probate). Is it true, however, that the contribution of appreciated property can lead to a payment of tax requirement?

Is There a Tax Required in Either Canada or the US Upon Contributing the US House to the California Revocable Trust?

Remember, there’s one of two times the trust will first own the property: either (a) at the inception of the house purchase (for example, Canadians Harriet and Thomas decide to purchase a La Qunita California home, they enter a 30 day escrow period- prior to the closing date, Harriet and Thomas simply inform their escrow agents that they plan to own the house as trustees of their California Revocable Trust- escrow complies, and as of Day 1 the Harriet and Thomas Trust owns the home); or (b) after the home has been owned for a while by Thomas and Harriet, the house is transferred to the trust-. Is there a tax in Canada (or the US) if the trust is deemed owner from Day 1? No, no tax in either country. But what about if Harriet and Thomas have owned the house for years, and then want to transfer it to their California Revocable Trust, does that cause a tax obligation in either Canada or the US? In the US, a transfer of a house owned by H & W to the H&W Revocable Family Trust is not a taxable transaction, so there is no US or California tax. But on their Canadian tax return, Harriet and Thomas have a different conclusion. When Harriet and Thomas transfer their La Quinta house they’ve owned for a few years to their new Cal. Revocable Trust, there very well may be a taxable event in Canada. The tax is based on the appreciation (if any) in the value of the house from when Harriet and Thomas originally bought it until today, the day of transfer to the trust. The appreciation is all speculative, of course, it’s not like there’s been a recent sale to prove there’s been an appreciation in the property. But presumably by reaching out to a local realtor, by checking in with their neighbor (or head of your homeowner’s association), or even by reviewing the recent state property tax bill, they can have a good idea whether the property has appreciated. If it has, they will likely pay a deemed disposition tax on their Canadian tax return, but no tax (or return) will be required in the US upon the transfer to the trust. But, see below for an exception to that rule…..

Is there an exception (to the requirement of having to pay tax in Canada on the appreciation in the property upon transfer of the US house to the California trust) which allows the Canadian to avoid having to pay tax in Canada?
The answer is yes, a big exception. If the settlor is at least 65 years there is a chance this California trust might qualify as an “alter ego trust” under Canadian law, which would mean there would be no tax upon transferring the appreciated house to the trust.

The bottom line, even in a highly appreciating local market, Canadians should consider using the US revocable trust as a viable method for to avoid probate (and not pay tax in either country upon contribution to the trust). As home values haven’t risen significantly in the Palm Springs area, this has been mostly a “non-issue.” for the last few years.

Call us at Sanger and Manes to discuss this technical area further- 760-320-7421.

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More on When We Use the Canadian Irrevocable Trust to Purchase US Property…

So we pick up where we left off last week: super-wealthy Canadians who own more than $5.34M in worldwide assets, and who loathe the idea of paying a US estate tax, should consider (1st and foremost) putting the US house into a Canadian Irrevocable Trust. You can do this with relative ease if the trust owns the house from the inception. But be careful for the scenario where the Canadians own the house individually at first, and then transfer (usually via a sale) the house to a Canadian Irrevocable Trust later. This is thought by some (but by no means all) practitioners to subject to the Canadians to the US gift tax (even though it’s a sale). I’ve yet to see any evidence of this, except for indirect case law from 50 plus years ago, so who knows. Nonetheless, Canadians transferring a US house to a Canadian Irrevocable Trust after owning it individually first (as opposed to when the trust buys the US property first) should remain mindful they are taking a risk, and that IRS may impose a gift tax on this transfer (sale). Call us at Sanger and Manes (760-320-7421) to discuss the Canadian Irrevocable Trust for California (and especially) Coachella Valley properties. This is a highly complex cross-border estate planning area, but Sanger & Manes can help.

For the vast majority of Canadians purchasing US real estate, the biggest concern is not the US estate tax, it’s the excessive cost and time required for a Canadian’s heirs to inherit their parents’ California real estate- i.e. the cost of probate (the California process whereby a California court orders the Canadian snowbird’s US house to be distributed to their designated beneficiary(ies)).

Remember, avoid California probate if at all possible!!!

Probate is the California process whereby a California court orders the Canadian snowbird’s US house to be distributed to their designated beneficiary(ies). Depending on how you own your California home, probate may be required after the death of one spouse, or the second spouse, or not required at after death of either spouse if a trust is utilized.

Probate is Expensive.

The estate of the Canadian Snowbird in probate will pay ordinary fees and likely extraordinary fees as well. Ordinary fees (which are statutory) are for the normal tasks of any probate. Every probate will include these fees. Ordinary fees cost approximately 3% to 4% of the property value in Cal (by statute), so a $500,000 house is looking at a minimum of around $16,000 in ordinary fees, plus other (potentially) significant costs and (extraordinary) fees (equaling possibly even up to $40,000 or even $50,000 total). Extraordinary fees are likely required in any international probate, because of the tax issues (and the requirement of the attorney to invoke various provisions of the US-Canada Tax Treaty). They will be charged by the attorneys at the attorneys’ normal hourly rates. Extraordinary fees are could be in the thousands of dollars in most US-Canada probates.

California Probate Takes Time

Probably no less than a year in the international context, and that time frame will likely grow longer as the years go on.

So What Vehicle Avoids The Significant Time Delay and Most of the Significant Costs of Probate? Answer: The US Revocable Trust (or a Canadian Revocable Trust hybrid)…

preferably a revocable trust which has been drafted and reviewed by California attorneys (to ensure its acceptable to bypass probate). With no probate required under California law because the real estate is in an acceptable (under the laws of California) trust, all California real estate will likely be distributed at the end of the four month California statutory waiting period. And the cost difference (versus going through a whole probate)? Significant; a fraction of the probate cost….

We’ll get into the dos and dont’s of the California Revocable Trust (including the Canadian tax consequences for Canadians entering inot a California Revocable Trust) in Part III of this series….

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Us, at Sanger & Manes, lecture on this topic regularly for Canadians in the Palm Springs area. We copy my lecture materials on the question of how the Canadian might consider owning the US home. First, let’s introduce a couple concepts worth considering before we choose the ownership form: the US estate tax and the dreaded California probate. Then we’ll get into evaluating various forms of home ownership.
What is the US Estate Tax? Can it Be Imposed on Canadians?

The US estate tax is a death tax imposed on Americans (on the value of all their assets worldwide) and possibly Canadians, but only if the Canadian owns US property at death (US property generally=US real estate or securities of US corporations). If so, the tax imposed is generally 30-40% of the value of the US property owned at death.

Does the current US/Canada Tax Treaty Offer Canadians Relief from the US Estate Tax?

YES (this very important). As per the US-Canada Tax Treaty, if the Canadian Snowbird does not own more than $5,340,000 in worldwide assets/dollars (an indexed amount, $5,340,000 is for 2014) then no matter the value of the US house, the Canadian Snowbird is not subject to the US estate tax!!! So most Canadian Snowbirds are not subject to the US estate tax- period!

California Probate- Avoid It !!!

What is California Probate?
Answer: Probate is the California process whereby a California court orders the Canadian snowbird’s US house to be distributed to their designated beneficiary(ies). Depending on how you own your California home, probate may be required after the death of one spouse, or the second spouse, or not required at after death of either spouse if a trust is utilized.

Probate is Expensive.
The estate of the Canadian Snowbird in probate will pay ordinary fees and likely extraordinary fees as well.

What are the Ordinary Fees and How Much Are They?

There are ordinary fees (which are statutory). Every probate will include these fees. Ordinary fees cost approximately 3% to 4% of the property value in Cal. These are the minimum fees that will be required in every case.

What are Extraordinary Fees and How Much Are They?

Extraordinary fees are likely required in any international probate, because of the tax issues (and the requirement of the attorney to invoke various provisions of the US-Canada Tax Treaty) involved. They will be charged by the attorneys normal hourly rates. Extraordinary fees are likely to be in the thousands of dollars in every US-Canada probate.

How long does California Probate Take?

Probably no less than a year in the international context .
Any other Negatives about Probate?

Yes, it makes your finances public record.

So I’m a Canadian with Big Bucks (well over $5.3 Million (measured in US dollars) in Worldwide Assets), and I want to buy a Nice La Quinta House, but I’ll be Darned if I’m Going to Pay the US any Estate Tax When I Die. how should I Own my New Swanky California Vacation House?


Pros: Many cross-practitioners believe when the Canadian Snowbird dies he or she does not own a US house for the purposes of the US estate tax (the Canadian Trust does). So $0 estate tax due upon death.

Pros to the Canadian Irrevocable Trust:

-As good as a Canadian corporation for estate tax protection, but no high corporate tax rate upon sale.

-Probably avoids US probate (but US counsel (e.g., Sanger & Manes) must review the Canadian Trust to ensure it contains the proper language to avoid us probate!!!).

Cons: Numerous:

-Little US estate tax concern if put into place prior to house purchase (but a large US gift/estate tax concern if trust put into place after original home purchase).

-It’s an irrevocable trust- no going back!

-Only H or W can be a connected to trust, the other is not. So if H&W get divorced (or if H or W dies) , the non-connected spouse must pay rent to use house.

-If trust is still in place after 21 years, the property must undergo a “deemed disposition” for Canadian tax purposes (i.e., the underlying property is deemed sold after 21 years, and any deemed gain is cap gain for Canadian tax purposes).

We can draft Canadian Irrevocable Trusts here at Sanger & Manes with the help of Canadian counsel. But really, the Canadian should probably only consider it only if he or she owns more than $5.3M in worldwide assets (plus a sizeable US asset like a house). It comes with several restrictions which the Canadian may regret later on.
More on the several other possible ownership structures in Part II…..

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In Revenue Ruling 2013-17, the IRS has now had the opportunity to delve further into the question of what now since the fall of the Defense of Marriage Act? The IRS proceeded to answer a series of questions, but the most question I found addressed in RR 2013-17 was the following: Whether, for Federal tax purposes, the terms “spouse,” “husband and wife,” “husband,” and “wife” include individuals (whether of the opposite sex or same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state and whether, for those same purposes, the term “marriage” includes such relationships.” In other words, since for years the biggest commitment same-sex couples could make was entering into a “registered domestic partnership”, does the IRS now consider registered domestic partners as being married couples for tax purposes? Or do those couples now have to go actually get married to be deemed married for federal tax law? Let’s take a look at that question, and a couple others brought up by the revenue ruling.

Issue One- Are same-sex couples Who Have Actually Married Considered Married for the IRS Purposes?

Well, we know the answer to this one already. If the same-sex couple is married in any state where same sex marriage is legal, no matter what state their domicile is, they are considered married for federal tax purposes (and that’s great for estate planning, where the unlimited spousal deduction is now available for same sex spouses).

Issue Two- Are a Same-Sex Couple Who Married in a State Which Permits Same-Sex Marriage Still Considered Married for Federal Purposes if They Live in a State Which Does Not Permit Same-Sex Couples?

Well, we know the answer to this one too. State of ceremony (where the marriage occurred) is all that matters, not the state of domicile. Get married in California, live in Oklahoma, all that matters for federal tax purposes is that you were married in California, and that California permits gay marriage.

So let’s get to the question which is breaking new ground…

Issue Three- Whether, for Federal tax purposes, the terms “spouse,” “husband and wife,” “husband,” and “wife” include individuals who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state>

So you couldn’t get married for a long time in California, and you chose to be viewed as a registered domestic partner. Marriage is now legal, but you haven’t gotten around to getting married in California yet. Can you, as a registered domestic partner, be considered married for federal tax purposes (which will get you, amongst other things, a spousal deduction on the death of the first spouse (to avoid the estate tax))? This time the IRS does not help. For federal tax purposes, the term marriage does not include registered domestic partners (or civil unions). So, if you want to be considered married for federal tax purposes (which usually, but now always, is a benefit financially to a couple), you have to go get married- registered domestic partners (even though that may have been all that was available for years), will not suffice for this purpose.

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Summer allows us a little break in our Palm Springs law office, and it also allows us to take a break from our blogs. But as Fall is now upon us (and it is gorgeous outside, trust me), it’s time to get back to business. We get a a lot of questions about the probate process here in California (something our Firm gets involved in regularly), and how it may differ when the deceased was not a US citizen/ resident.

Before We Describe the Probate Process, Remember, Your Estate Will Save Time and Money if You Put Your House in a Trust While You’re Living

California probate is a both time consuming (think 8 months to over a year to complete…) and costly (the family of a deceased will have to pay attorneys approximately 3% of the value of the property being probated in California…plus extra costs as well associated with the estate tax return of the estate and even potentially other costs). On the other hand, property placed into a valid trust (under California law) does not have to go through probate, which generally saves the estate thousands of dollars and speeds up the process by which the heirs receive the property considerably. Sanger and Manes drafts trusts for Canadians owning Palm Springs area real estate (and all of California property generally).

If the Canadian Decedent Did Not Use a Trust or WIll which Constiutes a Valid Trust or Will Under California Law, What Happens to the US Real Estate When the Canadian Dies?

Just like if an American dies owning US real estate, no trust means a probate is required. Probate means a court proceeding whereby the court must decide who owns the property now that the former owner has passed away. Typically (although not always), the decedent will have at least had a will (probably back in Canada). So we, as US attorneys, will attempt to have the Canadian will accepted by the US court. Will it be? Not necessarily. Each state in the United States provides for its own requirements which a valid will must contain. For example, one requirement under California law is that a valid will must be signed by two witnesses who were present to witness the execution of the document by the testator and who also witnessed each other sign the document. So what if a Canadian will had one only witness? Certainly that document could be ruled invalid by the California court, and the deceased could be viewed as dying without a will (or dying “intestate”).

What are Impications of Dying Intestate?

Under California law, if the Canadian decedent is viewed as dying intestate, either because he or she had no will or trust (or the will he or she had was not viewed as valid under California law), the decedent’s property in Cal will be transferred to his or her next living heirs at law, in equal measures. So if a husband died intestate, the property would all go to his wife. If his wife had predeceased him, it would go to his children in measures- all by the rules of intestate succession.

I always tell my Canadian clients if their desire is to leave their property to someone other than the children in equal measures (like to just one child of three who really enjoyed the US house, or to a brother instead of any of the children), then at least get a California will for the California property to ensure it goes where the deceased wanted it to go (you can have confidence the California will will be honored by the California court, unlike the Canadian will). Of course, I still prefer a trust above all else.

We’ll talk about the various steps in the probate process in Part II of this series.

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We’ve held off a little starting our same-sex tax blog, because until the IRS finally chimes in on the impact of the post-DOMA world, there really wasn’t much more to do other than speculate on the impact. But with the first pronouncement from the IRS since DOMA’s demise, we finally have some concrete rules from which we can advise our clients. On August 29th, the IRS issued Revenue Ruling 2013-72 which gives us the IRS’ perspective (the Federal perspective, not the state of California’s perspective) on what the fall of DOMA means. In this first part of this series, let’s take a look at the IRS’ rules on what constitutes a marriage:

Rev. Rul. 2013-72 Says That The IRS Will Recognize Your Same-Sex Marriage As Long as You Were Married in a State Which Recognized Same-Sex Marriage.

So what is the IRS saying here? They’re saying, as long as you are actually married in a state where same-sex marriage was legal at the time of the marriage (i.e., the state which issued you the marriage license, where the service was) then the IRS will view you as legally married for IRS (federal) purposes (the significance of this we will discuss later posts on this topic). If a same-sex couple was married in California, but lives in Oklahoma (the couple’s “domicile”), the IRS does view the Oklahoma couple as legally married for its purposes.

Will the IRS Recognize Your Same-Sex Marriage if You Were Registered Domestic Partners Prior to the Fall of DOMA?

Of course, many same-sex couples at this point could not have been married in a given state, because same-sex marriage (prior to 2013) has only been legal in a handful of states. But maybe a same-sex couple instead for many years have been registered domestic partners in a given state. However understandable this situation might be, it does not matter in the eyes of the IRS. If you want to be treated by the IRS as married for tax reasons (and again, we’ll digest why you might in short order), you’re going to have to now go get married. Registered Domestic Partners and Civil Union Partners are not deemed by the IRS to be spouses.

Lastly, if I Get Married in a State Which Permits Same-Sex Marriage, but Live in Another State (which does not Permit Same-Sex marriage), Where am I permitted to get divorced?

Of course with marriage, there must be an avenue for divorce. So the final issue to address in Part I is the issue of divorce. In Part 2, we’ll get into the advantages and disadvantages of being deemed a married couple in the eyes of the IRS. So what happens now if a same-sex couple gets married in California, but lives in Oklahoma, and then wants to get in divorce? Oklahoma isn’t going to honor a divorce, it didn’t honor the marriage. The IRS honored the marriage because it was performed in California. Well, as you might expect, the IRS will honor a divorce entered into back in California, the same state the marriage took place. All the couple must do is show that the state of domicile (Oklahoma) will not grant the divorce, and California becomes eligible as a divorce jurisdiction which will be honored by the IRS.

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This blog was written by Attorney Lorraine D”Alessio, who works Of Counsel for Sanger and Manes in Palm Springs, with a focus on immigration issues. She also heads the D’Alessio Law Group based in Los Angeles.

US Immigration for Same-Sex Spouses
On June 26, 2013, the Supreme Court of the United States struck down parts of the Defense of Marriage Act (DOMA), which defined marriage for federal law purposes as between a man and a woman only. President Obama directed federal departments to ensure the decision and its implication for federal benefits for same-sex legally married couples are implemented swiftly and smoothly. Secretary of Homeland Security Janet Napolitano released a statement that effective immediately the U.S. Citizenship and Immigration Services (USCIS) is to review immigration visa petitions filed on behalf of a same-sex spouse in the same manner as those filed on behalf of an opposite-sex spouse. Also, same-sex marriage cases previously denied by USCIS may be reopened.

Secretary Napolitano immediately issued the following Frequently Asked Questions:

Q1: I am a U.S. citizen or lawful permanent resident in a same-sex marriage to a foreign national. Can I now sponsor my spouse for a family-based immigrant visa?
A1: Yes, you can file the petition. You may file a Form I-130 (and any applicable accompanying application). Your eligibility to petition for your spouse, and your spouse’s admissibility as an immigrant at the immigration visa application or adjustment of status stage, will be determined according to applicable immigration law and will not be automatically denied as a result of the same-sex nature of your marriage.
Q2: My spouse and I were married in a U.S. state that recognizes same-sex marriage, but we live in a state that does not. Can I file an immigrant visa petition for my spouse?
A2: Yes, you can file the petition. In evaluating the petition, as a general matter, USCIS looks to the law of the place where the marriage took place when determining whether it is valid for immigration law purposes. That general rule is subject to some limited exceptions under which federal immigration agencies historically have considered the law of the state of residence in addition to the law of the state of celebration of the marriage. Whether those exceptions apply may depend on individual, fact-specific circumstances. If necessary, we may provide further guidance on this question going forward.

Generally, USCIS looks to the law of the place where the marriage takes place when determining whether it is valid for US immigration law purposes. At the present time, same-sex marriage is permitted in over a dozen countries, 12 US states and the District of Columbia.

According to media reports, USCIS has already approved one same-sex marriage immigration case. That couple was married in New York, a state that recognizes same-sex marriage, but resides in Florida where same-sex marriage is not recognized