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Infanti , A C --- "Bringing sexual orientation and gender identity into the tax classroom" [2010] LegEdDig 5; (2010) 18(1) Legal Education Digest 15

Bringing sexual orientation and gender identity into the tax classroom

A C Infanti

J Legal Educ, Vol 59, No. 1, 2009, pp3-34

Over the past few years, the Law School Admission Council (LSAC) has undertaken several empirical studies on the law school climate for lesbian, gay, bisexual, and transgender (LGBT) students. In a report that recently appeared in the Journal of Legal Education, several members of LSAC’s subcommittee on LGBT issues analysed the data produced by these studies. The subcommittee members reported that, despite improvement in the past decade, LGBT students ‘still encounter substantial discrimination on law school campuses and in law school classrooms’.

Narratives provide students with concrete situations that, in most cases, real people have confronted as they apply the tax laws to their lives. Set against the general background of the ‘neutral’ tax rules that we are studying, these concrete situations make it easier both for the students to see how differences in treatment play out and for me, as the teacher, to discuss the policy issues raised by differential treatment based on sexual orientation.

To help others interested in bringing sexual orientation and gender identity into their tax classes, I have identified several areas likely to be covered in tax courses in which a discussion of LGBT issues is relevant.

The general areas of the tax curriculum that I have identified for inclusion here are: fringe benefits, health insurance, attribution rules, medical expenses, property transfers, and income splitting.

Fringe benefits: Under § 61, gross income includes all income from whatever source derived, including compensation for the performance of personal services. If compensation is paid in property or services, then the fair market value of that property or those services must normally be included in gross income. Nevertheless, § 132 contains a series of exceptions to this general rule that allow employees to exclude certain fringe benefits from their gross income.

Section 132(a)(1) and (2) exclude from an employee’s gross income the value of any no-additional-cost service provided by an employer to the employee as well as the bargain element of certain employee discounts on property or services offered by the employer for sale to customers in the ordinary course of business. This exclusion applies equally to no-additional-cost services and discounts provided to the spouse and dependent children of an employee. For this purpose, as is generally the case for federal tax purposes, whether a different-sex couple is married – and, therefore, whether an individual qualifies as the ‘spouse’ of the taxpayer – is determined by reference to state (and not federal) law.

Once we have completed the problems assigned in the textbook, I tell my students that my partner is an airline employee. The airline for which he works offers domestic partner benefits, which makes me eligible for free travel on that airline (as well as discounted travel on other airlines under reciprocal agreements). Because this is the first time we encounter the intersection of sexual orientation and tax in the course, I then tell my students about the federal Defense of Marriage Act (DOMA), which provides:

In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus 2and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.

Thus, even though my partner and I were married in Canada several years ago, I cannot qualify as his ‘spouse’ for purposes of federal law, including federal tax law. This means that although my partner’s parents and any children that we might have will all be able to take advantage of this fringe benefit on a tax-free basis, I cannot.

In this respect, DOMA departs from the general rule (mentioned above) that the federal tax laws defer to state law on questions of determining a couple’s marital status. DOMA singles out certain marriages that are recognised under state law (ie, those entered into by same-sex couples) and denies them recognition for federal tax purposes.

This differential treatment raises serious equity concerns. The sole basis for treating these two taxpayers – who have received the same item of income from the same employer as compensation for their performance of personal services – is the sex of the respective taxpayer’s spouse.

Health Insurance: The tax treatment of employer-provided accident or health insurance coverage is related to the topic of fringe benefits, though it might just as well be covered separately in connection with a discussion of the exclusion under §§ 104 and 105 for amounts received by an employee through accident or health insurance plans for personal injuries or sickness. Again, as a starting point, § 61 includes in gross income all income from whatever source derived, including compensation for the performance of personal services.

Section 106(a) allows an employee to exclude from gross income the value of ‘employer-provided coverage under an accident or health plan’. By regulation, this exclusion is expanded to encompass the value of coverage provided to the spouse and dependents of the employee as well.

Unless my partner were to qualify as my ‘dependent’, which he does not, the excess of the fair market value of his health insurance coverage over the amount that I paid toward that coverage would be deemed additional compensation income to me. My married heterosexual co-workers who add their different-sex spouses to their health insurance coverage are not taxed on this amount.

Married different-sex spouses are treated for this and other tax purposes as a single economic unit – two individuals working together (whether inside or outside the home) toward the common goal of making a life together. In contrast, same-sex couples who qualify for the same tax treatment as married different-sex couples are not treated as co-venturers in this joint enterprise, but as a breadwinner and a ‘dependent’.

Attribution Rules: It is often said that our tax system is premised on the notion that all taxpayers are ‘self-interested, unaffiliated individuals – the atomistic rationalists of the classic economic model’. When a taxpayer is dealing with strangers, this assumption might be correct; however, when a taxpayer is dealing with family members, this assumption is either incorrect or will likely prove incorrect, both because there is an affiliation between the taxpayer and the family member and because family ties may overcome self-interest.

For this purpose, attribution rules in § 1361(c)-(1)(A) treat both husbands and wives and all members of a family as single shareholders. Furthermore, § 121(b)(2)(A)(i) allows one spouse’s ownership of property to be attributed to the other for purposes of determining whether the couple will be allowed one or two $250,000 exclusions from gross income for gain recognised on the sale of a principal residence.

While the legal relationship between husband and wife is always taken into account in the formulation and application of these attribution rules, the legal relationship between two same-sex partners (whether married, in a civil union, or in a domestic partnership) never is. This means that same-sex partners are treated as self-interested strangers for purposes of all of these rules that make adjustments to take into account family relationships.

Though I have been careful here to discuss how the Code’s attribution rules provide mixed results for both same-sex and different-sex couples, in the literature, commentators addressing the application of attribution rules to same-sex couples seem to focus disproportionately on the ability of same-sex couples to use their exclusion from these rules to their financial advantage. When these issues have arisen in class, I have noticed a similar focus in the thinking of students.

If students’ focus begins to gravitate toward same-sex couples’ ability to take advantage of this exclusion, it would be worth asking them to reflect on what is pulling them in this direction. Is their thinking subtly influenced by stereotypes about lesbians and gay men, and are they unwittingly feeding and reinforcing those very same stereotypes by allowing their thinking to be influenced by them?

Medical Expenses: Section 213 allows a taxpayer to deduct expenses paid for ‘medical care’, provided those expenses have not been compensated for by insurance or otherwise, but only to the extent that the allowable expenses exceed 7.5 percent of the taxpayer’s adjusted gross income. For this purpose, ‘medical care’ is defined in relevant part as an amount paid ‘for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.’ This definition is qualified by an exception for amounts paid for cosmetic surgery.

Rhiannon O’Donnabhain was born male, but ‘had experienced extreme discomfort with her anatomical sex and felt a deep sense of inappropriateness in the gender role of that sex’ since childhood. Over time, these feelings only grew stronger and, to combat them, O’Donnabhain entered the military, then worked in the male-dominated field of engineering, and finally married and had children.

After her marriage ended, O’Donnabhain’s therapist diagnosed her with gender identity disorder, ‘finding that [she] met the criteria set forth in the Diagnostic and Statistical Manual of Mental Disorders, Fourth Edition (DSM-IV), and as a transsexual, in accordance with the criteria for transsexualism in the International Classification of Diseases-10’. In both cases, the standard for treatment required individualised assessment, and the treatment could range from hormone therapy, to living in the new gender role, to surgery.

Given that her sex reassignment surgery was part of the medically indicated treatment for a diagnosed illness, O’Donnabhain deducted the costs of that treatment on her tax return under § 213. The local IRS office seemed willing to allow the deduction; however, after seeking advice from the Chief Counsel’s office, the IRS disallowed the deduction on the ground that O’Donnabhain’s sex reassignment surgery was ‘cosmetic’ within the meaning of § 213(d)(.9).

In other words, a procedure that merely improves upon an appearance that others do not find misshapen or defective is purely cosmetic and, therefore, nondeductible; however, a procedure that corrects an appearance that others do find misshapen or defective is not purely cosmetic and, therefore, is deductible.

Viewed from this perspective, O’Donnabhain’s perception of a bodily defect (ie, the disconnect that she experienced between the form of her body and her gender identity) and the significant psychological distress that defect has caused her are, quite simply, irrelevant.

At first glance, this might appear to be nothing more than a necessary objective/subjective distinction necessitated by administrative concerns in dealing with expenses that might entail mixed (i.e., medical and personal) motives. As applied to O’Donnabhain’s situation, this objective/subjective distinction masks the privileging of physical health over mental health by allowing a deduction for cosmetic surgery that addresses a physical issue (ie, breast reconstruction for a cancer patient) but not allowing a deduction for the same surgery when it addresses a mental health issue (i.e., O’Donnabhain’s diagnosed gender identity disorder). It also masks the privileging of a majority/hetero perspective over a minority/trans perspective by allowing the IRS, the courts, and society more generally to judge what a ‘normal’ body shape is/ought to be for O’Donnabhain rather than allowing her to make that determination for herself.

Property Transfers: Though the federal tax system is generally built around the notion that the individual is the proper taxable unit, there are a number of provisions in the Code that expand the unit to include a spouse (and, sometimes, dependents). These provisions treat the married different-sex couple (or ‘traditional’ family) as a single economic unit for tax purposes.

Section 1041 provides that no gain or loss is recognised upon the transfer of property from one spouse to the other. Sections 2056 and 2523 allow the taxpayer a deduction for estate and gift tax purposes for transfers made to a spouse or a surviving spouse. Taken together, these provisions allow for the transfer of property within the taxable unit (ie, from one married spouse to the other) without triggering income, gift, or estate taxes.

In the case of the income tax, the married different-sex couple is afforded a grace period following the dissolution of their relationship during which they will continue to be treated as a single economic unit despite their estrangement.

Simply put, these rules have absolutely no application to same-sex couples. Rather than being treated as a single economic unit, same-sex couples (and others in nontraditional family arrangements) are treated as legal strangers to each other for tax purposes.

Income Splitting: The ability of married different-sex couples to file a joint federal income tax return under § 6013 is another example of the treatment of such couples as a single economic unit. The joint return is designed to allow ‘a husband and wife’ to split their income between them for federal income tax purposes. As a result, ‘married couples ... have no incentive to engage in income-splitting devices to shift income from one spouse to the other because the joint return itself is an efficient income-splitting device’.

For some couples, the ability to split income provides a marriage bonus, meaning that they pay less tax as a married couple than they would if they were unmarried and each filed ‘single’ tax returns.

However flawed and criticised it might be on other grounds, the income-splitting privilege provided by the joint return contributes to rendering tax a neutral factor in decisions about whether and to what extent the couple will pool their finances. In other words, when filing a joint return, the couple is treated as if they split their income equally between them, regardless of whether they (1) actually do split their income, (2) only partially split their income, or (3) keep their finances completely separate.

Same-sex couples are, of course, ineligible to file a joint federal income tax return because they are not ‘a husband and wife’. Thus, even if they are permitted to file a joint return for state income tax purposes, a same-sex couple must file two separate ‘single’ returns for federal income tax purposes.

In contrast to married different-sex couples, same-sex couples must be cognizant of the tax ramifications of pooling their income. Where the two do not contribute to the pool in exactly equal amounts, the partner who contributes more to the pool has effectively made a transfer to the partner who contributes less. Without the income-splitting privilege and the exemption from income and gift tax for transfers between spouses afforded by §§ 1041 and 2523, the couple must determine the character – and tax consequences – of the amount transferred between them.

Through the application of DOMA to the tax laws, the federal government clearly attempts to banish same-sex relationships from sight by creating every incentive for same-sex couples to retreat to the invisibility of the closet (ie, to file returns and statements with the IRS that do not connect one partner with the other in any way) in an effort to avoid detection and punishment. In effect, the tax laws at once embody and perpetuate societal prejudice, discrimination, and hostility toward lesbians and gay men by giving such activity the imprimatur of the federal government.

As happens when broaching any ‘controversial’ issue in the classroom, bringing sexual orientation and gender identity into the teaching of tax will sometimes excite the students, sometimes generate lively and respectful discussions, and at other times just fall flat. Honestly, there is no way to eliminate the possibility of adverse results, and a few students will invariably feel disgruntled because they are not receptive to, or comfortable with, discussing sexual orientation or gender identity under any circumstances. In the process of trial and error that is teaching, I have learned to avoid being distracted by a few outliers and to focus instead on my general audience, which is composed of law students who remain open to perspectives different from their own and to persuasion based on logical argument.

In keeping with this idea of being attentive to one’s audience, I have merely provided the raw material here for bringing LGBT issues into the tax classroom. How a given teacher decided to use this raw material will depend on a number of factors, including the composition of the student body and the particular tax course being taught.

In this regard, it is also helpful to weave these discussions into the larger fabric of the course using them to make or reinforce general points – instead of treating them as token discussions.

In the end, any story that provides a concrete situation that students can understand and relate to will serve to raise the consciousness of heterosexual students about the impact of the tax laws on LGBT individuals. At the same time, telling these stories will improve the climate for LGBT students by affirming the value of LGBT perspectives on the law and validating the experience that LGBT students bring to the tax classroom.

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