by Shaun Knittel - SGN Staff Writer

The Internal Revenue Service (IRS) has ruled that same-sex couples must be treated the same as heterosexual couples under a feature of California tax law - the first time the agency has acknowledged Gay couples as a entity for tax purposes.

The Wall Street Journal reports on the change, which reverses a 2006 IRS ruling and may also affect Nevada and Washington state couples.

The IRS said that nearly 58,000 couples who are registered as domestic partners in California must combine their income and each report half of it on their separate tax returns.

According to the report, same-sex couples account for an estimated 95% of California's domestic partnerships; partnership status is also available to heterosexual couples in which one partner is over the age of 62.

Eric Rey, a resident of Berkeley, California, told the Journal, "For the first time ever, I'm able to file federal taxes that, in a small way, acknowledge what's going on in my relationship."

Rey and his partner requested the IRS ruling during the Bush administration and again this year. According to Rey, he and his partner were wed during the brief time when same-sex marriages were legal in California. The issue arises because the men are registered as domestic partners. Same-sex couples, even if they are legally married in their home states, may not file joint federal tax returns. The federal Defense of Marriage Act, passed in 1996, defines marriage as between one man and one woman and bars federal agencies from interpreting it otherwise.

California is one of nine states with community-property rules, which require married couples to treat all income as joint property for a variety of purposes. The Supreme Court has said that if married couples are filing taxes separately, they must combine their incomes together and then divide the sum equally.

According to California law, since 2005, registered domestic partners are required to honor the property rules.

Rey, who says he earns much more than his partner does, said that applying the property rule to federal taxes offers clear tax benefits by bringing them into a lower tax bracket. According to Rey, in 2007, if he applied the federal standard, it would have cut his federal tax liability in half and more than doubled his partner's tax bill - ultimately saving the couple about $7,000.

In 2005, Rey asked the IRS for clarification as to how they should file "their" taxes. He was told that California domestic partners could not apply the community property standard to federal taxes because the rules did not apply "outside the context of a husband and wife." The IRS added, "The relationship between registered domestic partners under the California Act is not marriage under California law."

In 2007, when Rey asked again, the agency decline to offer guidance either way.

When President Barack Obama was elected, Rey's tax attorney advised the couple to try for the ruling again. This time, the IRS said registered same-sex domestic partners must combine and then divide their income for property tax purposes - a direct contrast to previous rulings under the Bush administration.

According to an IRS spokesman in a memo issued last month, the shift is due to a 2007 change in state law. The change deals with the way California calculates income for state taxes. Nevada and Washington state are also community-property states that recognize domestic partnerships.

The new IRS ruling has some issues, however. Chiefly, it clashes with the Defense of Marriage Act, which prohibits federal agencies (such as the IRS) from recognizing same-sex couples.

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