ataxingmatter

Vote No on Proposition 8 (California)

[Edited 10/31/08 11:47am to correct link]

As readers of this blog know, my topic is "democratic egalitarianism"--all those issues of economics and democratic sustainability that are worthy of our consideration as we struggle to sustain our democracy in the face of a corporatist agenda (i.e., an agenda that privatizes and deregulates; that grants control over much of what matters to us in our daily lives to multinational corporations with no loyalty to our country or our people or the public good; that makes greed good, redistribution upwards meritorious, and redistribution to care for public needs and those who need  a safety net to protect them somehow morally questionable). 

Accordingly, I write not just about the economy and taxes, but about the importance of developing democratic institutions that acknowledge all groups, that respect each individual and provide opportunities for self-fulfillment to all.  California's recent recognition of gay marriage as a constitutional right under the state's constitution is one of those wonderful moments when one's faith in fellow citizens to finally get it right is renewed.  Gay marriage provides no threat to straight couples like my husband and me.  Our marriage is just as strong after Massachusetts' and California's recognition of gay marriage as it was before. Gay marriage does provide a benefit to gay couples--they are permitted to enjoy the legal blessing of their commitment in the same way that straight couples can, to know that their legal rights are understood and defined in the same way, so that others, such as their children, will also have clearly defined rights. 

Here's a story in the Orange County News that sets the record straight on Proposition 8:  a "no" vote is necessary to preserve the wonderful progress that California has made.  I've quoted an excerpt of the article, below.

Fifty years from now, we will surely look back, with shame, at society's mistreatment of people who are lesbian, gay, bisexual and transgendered ("LGBT"). It is an unfortunate feature of democracies that the majority can pass laws that disfavor minority groups. This country's history of legally sanctioned segregation, "separate but [supposedly] equal" education and bans on interracial marriage were products of democratic institutions not yet ready to fully integrate racial minorities into society.

This country, however, was not built on the premise that majority will should rule on all matters; on the contrary, the American legal system was fashioned specifically to protect against the tyranny of the majority. ... In recognizing that same-sex couples have a right to marry, the California Supreme Court took a step toward equality, recognizing that the state constitution guarantees equal protection to same sex couples.

Word Games: Bankruptcy Returns

As someone who trained as a linguist, I cannot resist commenting on a Seventh Circuit decision from late 2005, In Re: John Howard Payne, about a discharge of a federal income tax liability in bankruptcy.  The bankruptcy judge and district court below found that a debtor could discharge a federal income tax liability even though no return had been filed until after the IRS assessed the tax due.  Posner, writing for the appellate panel, concluded that the discharge could not be upheld.  The opinion rests on Posner's definition of a return for the specific provision at issue. 

The facts of the case are relatively simple.  Payne did not timely file his 1986 tax return. In 1990, the IRS assessed Payne for the tax due for 1986, possibly with the assistance of a tip from another taxpayer.  Payne finally filed a 1986 return in 1992 but did not pay the tax due.  Five years later, Payne filed for bankruptcy and successfully discharged his 1986 tax liability. 

The problem is that section 523(a)(1)(B)(i) of the Bankruptcy Code prohibits discharging federal income tax liabilities for which a return should have been, but was not, filed.   The government argued that a post-assessment return was not a "return" within that statute, and therefore Payne's 1986 tax liability could not be discharged.

Posner cites Zellerbach Paper Co, which states that a return must "evince an honest and genuine endeavor to satisfy the law" and concludes that a return doesn't fulfill the self-assessment function, and therefore is not a "return,"  when it is filed after the government has figured out the taxpayer's tax burden on its own.

This is a difficult conclusion, since a fraudulent tax return, which clearly doesn't fulfill the self-assessment function, is equally clearly a return under the Internal Revenue Code.  Posner gets around this obstacle by claiming that the word "return" in the fradulent return context has a different meaning than the word "return" in the cited Bankruptcy Code provision!  He says "there is no reason why the word 'return,' undefined in either the Bankruptcy Code or the Internal Revenue Code, should carry the same meaning regardless of context." 

To prove his point, Posner compares a return intentionally mailed to a wrong address (Arlington National Cemetery) and one in which a taxpayer claims a pet cat as his dependent mother. He asserts that the first is not a return, because it isn't intended to satisfy tax obligations, while the latter is, even though it isn't intended to satisfy tax obligations.  The reason--because it is necessary in the latter case to acknowledge the return as a return since it is the submission of the return that is intended to be punished by the fraudulent return statutes.  He then goes on to assert a similar distinction for bankruptcy. 

[Return] can mean a different thing in a bankruptcy case and in a fraudulent-return case.  In the latter setting, a dishonest return is classified as a return in order to discourage fraud; in the former case, a return that does not meet the 'honest and reasonable endeavor' standard is denied the status of a return in order to discourage people from using bankruptcy law to avoid having to satisfy one's tax liabilities.

(The implication is also that there is factual evidence that Payne was trying to use the filing of a return to avoid taxes.  But as Easterbrook points out, that was a factual question not argued by the Service.)

Once Posner distinguishes return and "return", he happily concludes that the discharge was inappropriate because no return had been filed.  The problem, which Easterbrook points out, is that returns and the filing of them are two separate concepts.  Congress fixed the Bankruptcy Code in this regard in the 2005 legislation, by prohibiting discharges in connection with untimely filed returns.  Thus, Easterbrook argues, the document Payne filed was a tax return; the Service didn't argue that the return was fraudulent, so the Bankruptcy Code provision refusing discharges of taxes with respect to which a taxpayer filed a fraudulent return was not at stake; and Payne filed the return more than 2 years before the bankruptcy case commenced, so the related taxes should have been eligible for discharge.

Posner's approach in this tax/bankruptcy case may provide ammunition to those aggressive interpreters of the Internal Revenue Code who invent sham tax shelters by manipulating the text of provisions to support transactions clearly outside the scope contemplated by drafters.  Now, they can just redefine a term at random, claiming that the word need not have a meaning that is the same as its meaning in other contexts.  Such an approach discounts the importance of structural coherence.  Judges should be cautious in deciding tax cases by ascribing such disparate meanings to simple terms.

New Ideas

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."