In California, for State employees adding a domestic partner, the employee is subject to additional tax withholding on the differential premium/contribution as ti is deemed as taxable income. Is there any IRC reg., interpretation of reg. of ruling that would lend itself to allow the relief of this imputed tax liability either in and of itself or based on the enacting of State tax law relieving this imputed tax on the State level? We're trying to see whether of not there is a way, should it exist, to relieve this part of the imputed tax for State employees in this situation.

There are a number of private letter rulings from the IRS holding that the employee is subject to federal income tax on the value of the coverage provided to the domestic partner.

I would agree with Kirk in general. However, PLR 200108010 (November 17, 2000) states that, "Health coverage provided to a domestic partner who is a dependent of the employee within the meaning of section 152 of the [Internal Revenue] Code is not included in the employee's gross income and is not wages for employment tax purposes." In order to qualify as a dependent, (a) a domestic partner must derive more than one-half of his or her support from the employee, and (B) the relationship must not be in violation of local law. There is a more lengthy discussion of this issue available in Section III of the outline available at this link.

I agree with Carol. In my experience, the domestic partner generally does not qualify as a dependent.