Ted Seto, a tax professor at Loyola-LA, has written an interesting article that is posted on the Social Science Research Network, here. Many of the pieces written about gay marriage are focused on discrimination against gays and the claim that gays should be treated in the same way as heterosexuals, including being able to enjoy the legal benefits of state-sanctioned union that heterosexual couples enjoy. Professor Seto's article calls to our attention that discrimination against gays may sometimes actually work to their benefit, and the tax Code provides some examples.
The article looks at the effect of the Defense of Marriage Act (DOMA), the federal statute that recognizes only marriages between a man and a woman for all federal statutory purposes. It studies how that act and the tax Code interact to give special advantages to gay couples. The tax Code includes various provisions that treat persons differently based on their status as married or single, such as the section providing the rates at which income will be taxed. For all those purposes, the DOMA definition of marriage applies, and none of the provisions applying to married persons can be considered to apply to gay couples, even if they are living in a committed relationship and even if that committed relationship has been blessed by a state like Massachusetts that permits gay marriages.
DOMA applies, but, as a direct consequence, many provisions in the Code that guard against abusive transfers between related parties do not! For example, transfers between spouses are essentially disregarded for tax purposes, preventing an interspousal transfer of a loss asset from providing an opportunity for the transferring spouse to recognize a loss without actually transferring the asset outside the family unit. But that provision wouldn't apply to prevent a gay couple from engaging in the same gambit. In other words, Seto argues, by cutting gay couples out of marriage and the relationship-based provisions of the Code, DOMA effectively created a two-tier tax system--one for married couples and one for gay couples. On balance, he says, the married couples are the losers.
Seto's solution, as stated in the abstract for the article, will unsettle some, but it seems to follow logically from the coherent structure of the anti-abuse provisions of the Code that prevent individuals from using their close relationships with others to arbitrage the system.
"Ultimately, the paper concludes that the only way to ensure that gay couples will be taxed no more favorably than heterosexual married couples is to list gay marriage as one of the proxy relationships that automatically invokes pertinent anti-abuse rules - in other words, to treat gay marriage as marriage for federal income tax purposes. Even this by itself, however, will not be enough. A formal spousal relationship must be made available to gays, and it must be attractive enough to induce gay couples to undertake it voluntarily - just as heterosexual couples marry despite the tax costs. In the absence of an attractive formal status that then invokes related-party anti-abuse rules, well-advised gay couples are, and will continue to be, permitted to pay systematically lower federal income taxes than heterosexual married couples - a result unlikely to be acceptable to a majority of Americans in the long run."
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