Bringing Equal Protection Out of the Tax Closet

Chapter 12
Bringing Equal Protection Out of the Tax Closet

Anthony C. Infanti

Constitutional arguments are notoriously difficult to win in tax cases. For example, courts considering equal protection challenges ordinarily defer to legislative classifications of taxpayers on the ground that tax legislation is “economic” legislation. Consequently, so long as the legislature refrains from blatantly classifying taxpayers on a suspect basis (for example, race or gender), the tax laws are thought to be nearly immune from attack on equal protection grounds.

This narrow focus on economics conveniently surfaces in both judicial and academic discussions of tax fairness. In both arenas, viewing taxpayers as no more than the sum of their financial transactions effectively screens out most difficult discussions of invidious discrimination in the tax laws. Though this economic lens may nicely sanitize discussions of tax fairness, it does not eliminate concerns about equal protection and fundamental fairness in the tax laws. Instead, it relegates them to the legal invisibility of the tax closet.

To bring equal protection out of the tax closet, we must recognize that, even absent blatant discrimination, the Internal Revenue Code can have a disparate impact on the basis of race, ethnicity, gender, sexual orientation, and disability. If any area of the law should be open to disparate impact analysis, it should be tax law. In tax, the idea that substance should control over form—that is, the notion that what really happens is more important than what appears to be happening—is pervasive, pervasive enough to perhaps shift equal protection analysis in other areas of the law, too.

This chapter proceeds in four sections. In the first section, I discuss the general constitutional restrictions on the power to tax and how they actually restrict the U.S. Congress hardly at all. In the second section, I discuss the application of the guarantee of equal protection of the laws to the federal tax laws. Through a series of examples, I show how this guarantee is enforced only in the most blatant cases of discrimination. In the third section, I explain how this legal schema—in tandem with academic discussions of tax fairness—relegates invidious discrimination perpetrated through the tax laws to the tax closet and explore both the nature of that closet and the rhetorical tapestry that is used to hide it from view. In the final section, I begin the task of unraveling this tapestry and removing the door to the tax closet so that we can shine a light upon—and make legally visible—the invidious discrimination that is present in the federal tax laws, as it is elsewhere in the U.S. legal system.

Restrictions on the Power to Tax

The “Power To lay and collect Taxes” is first in the list of Congress’s specifically enumerated powers.1 The priority given to the power to tax in the U.S. Constitution is no accident. After all, Alexander Hamilton observed in The Federalist that revenue is the lifeblood of government:

Money is with propriety considered as the vital principle of the body politic; as that which sustains its life and motion, and enables it to perform its most essential functions. A complete power therefore to procure a regular and adequate supply of it, as far as the resources of the community will permit, may be regarded as an indispensable ingredient in every constitution. From a deficiency in this particular, one of two evils must ensue; either the people must be subjected to continual plunder as a substitute for a more eligible mode of supplying the public wants, or the government must sink into a fatal atrophy, and in a short course of time perish.2

As Hamilton implies, the power to tax is a double-edged sword. Though a government must have “[a] complete power” to tax at its disposal, that power must be limited because it can only extend “as far as the resources of the community will permit.”3 In other words, at the same time that the power to tax is an indispensable foundation of government, the government’s abuse of the taxing power can lead to its own demise. Or, as Chief Justice John Marshall has put it, “the power to tax involves the power to destroy; … the power to destroy may defeat and render useless the power to create.”4

It is no wonder then that the Constitution contains several explicit restrictions on the power to tax. Congress is forbidden to impose export taxes,5 and it was limited to a tax or duty of no more than $10 on the importation of slaves.6 Congress must apportion direct taxes (with the exception of income taxes) by population,7 and it must impose all indirect taxes (that is, duties, imposts, and excises) uniformly throughout the country.8 In addition, all tax legislation must originate in the House of Representatives,9 ostensibly “to repose the power to set the legislative agenda in the branch of the legislature that would be most accountable to the people.”10

There are also numerous constitutional limitations that do not explicitly mention the power to tax, but that nonetheless restrict that power.11 These include, for example, the Fifth Amendment right against self-incrimination;12 the First Amendment prohibition against enacting laws “respecting an establishment of religion, or prohibiting the free exercise thereof”;13 and the Fifth Amendment right not to “be deprived of life, liberty, or property, without due process of law.”14 There are also a few constitutional limitations that are favored by tax protesters, but whose application to the power to tax has been met with skepticism in the federal courts (for example, the Thirteenth Amendment prohibition against involuntary servitude).15

The Fourteenth Amendment guarantee of equal protection of the laws, which is the subject of this book, applies only to the states and not to the federal government.16 Nevertheless, the U.S. Supreme Court has held, through the medium of the Fifth Amendment’s Due Process Clause, that the guarantee of equal protection of the law applies to the federal government as well as to the states.17 As discussed in the next section, the federal courts have occasionally struck down a taxing statute as a violation of the equal protection component of the Due Process Clause.18

Thus, thumbing through the Constitution, the power to tax seems to be hemmed in by restrictions designed to prevent the abuse of this vital power. Indeed, Boris Bittker characterized the federal income tax as “swim[ming] in a sea of constitutional limits.”19 But, as is so often the case, the law on the books differs from the law in action. Continuing his nautical metaphor, Bittker went on to explain that

these constitutional restraints seldom create any serious problems in the day-to-day application on the federal income tax. The tax is, in short, not like an oil tanker moving gingerly through the Straits of Hormuz, but instead resembles a freighter crossing the Atlantic, which occasionally spots an iceberg, but rarely has to make a serious change in its customary route.20

Equal Protection and Tax Law

Bittker’s nautical metaphor is especially apt in describing the application of the guarantee of equal protection of the laws to the federal tax system. Tracy Kaye and Stephen Mazza have observed that the Supreme Court’s “reluctance to second guess a legislature’s decision has led it to establish a high threshold in order to find a tax provision unconstitutional on equal protection grounds.”21 In support of their assertion, they quote an illuminating passage from the Supreme Court’s decision in Regan v. Taxation With Representation:

[I]n taxation, even more than in other fields, legislatures possess the greatest freedom in classification. … [T]he presumption of constitutionality can be overcome only by the most explicit demonstration that a classification is a hostile and oppressive discrimination against particular persons and classes. The burden is on the one attacking the legislative arrangement to negative every conceivable basis which might support it.22

Only the most blatantly discriminatory classifications will meet this standard. Or, as Leo Martinez has summarized the case law in this area, “It is clear that to be deemed harsh and oppressive, a legislature would have to border on the irrational.”23 Few aspects of the federal tax laws have openly demonstrated this level of irrationality. But that is not to say that invidious discrimination is not present in the federal tax laws:

The racial and gender bias in the Code, while clearly present, is too subtle to be explained by any explicit discriminatory purpose—it is in the choices that Congress makes as compared to the choices it might have made. The purpose may reflect a subtle or coded gender or racial bias. Although it is unthinkable that any committee report would offer an explicitly racist or sexist reason for its legislation, some of the arguments made in debates over tax legislation can be interpreted as discriminatory rhetoric aimed at particular groups. For example, the call for protection of the traditional family through the Code, made explicitly by some legislators, can be interpreted as an argument against workplace equality for women or intolerance for homosexuals.24

Indeed, critical tax scholars have done important work uncovering bias in the tax laws and demonstrating the ways in which the tax laws “reflect and even reify discrimination based on race, gender, sexual orientation, class, disability, or family structure.”25

In this section, I explore concrete examples of the extraordinary deference that courts afford to tax classifications. First, I explore equal protection challenges to obvious discrimination in the tax laws on the basis of race, gender, and sexual orientation. In most of these cases, the courts have upheld the challenges; however, in one case of overt gender discrimination, the courts rejected an equal protection challenge. Then, I explore equal protection challenges to less obvious discrimination in the tax laws. In all of these cases, the courts have rejected equal protection challenges to ostensibly neutral tax classifications.

Overt Racial Discrimination

In McGlotten v. Connally,26 an African-American who had been denied membership in the Benevolent and Protective Order of the Elks solely on the basis of his race brought a class action suit to enjoin the federal government “from granting tax benefits to fraternal and nonprofit organizations which exclude nonwhites from membership.” A three-judge U.S. District Court denied the federal government’s motion to dismiss the plaintiff’s constitutional claims. The court found that the government had become involved in racial discrimination by affording tax deductions for contributions to fraternal organizations and an exemption from tax for their passive investment income. To obtain these benefits, fraternal organizations must not only engage in charitable activities but also apply for and receive government approval.27 The court held that, “[b]y providing differential treatment to only selected organizations, the Government has indicated approval of the organizations and hence their discriminatory practice, and aided that discrimination by the provision of federal tax benefits.”28

Overt Sex Discrimination

In Moritz v. Commissioner, the taxpayer challenged the constitutionality of then § 214 of the Internal Revenue Code (IRC).29 At the time, § 214 allowed taxpayers a deduction for expenses paid to care for a dependent, “but only if such care [was] for the purpose of enabling the taxpayer to be gainfully employed.”30 (Prior to the enactment of § 214 in 1954, the courts had classified dependent care expenses as nondeductible personal expenses.31) On its face, § 214 limited this deduction by reference to the sex and marital status of the taxpayer. The only taxpayers eligible to claim the deduction were “a woman or widower, or … a husband whose wife is incapacitated or institutionalized.”32 For this purpose, a “widower” was defined to include “an unmarried individual who is legally separated from his spouse under a decree of divorce or of separate maintenance.”33 Thus, a woman (whatever her marital status) was entitled to claim the deduction for dependent care expenses, but a man could claim a deduction for such expenses only if he had, at some time, been married.

As originally drafted by the House of Representatives, § 214 afforded a deduction only for child-care expenses paid by “a working widow, widower, or divorced person, or a working mother whose husband is incapacitated.”34 The deduction was to be added in recognition “that a widow or widower with young children must incur these expenses in order to earn a livelihood and that they, therefore, are comparable to an employee’s business expenses.”35 The Senate liberalized proposed § 214 by extending the deduction “to a working woman or a widower for expenses paid for care of any dependent who is mentally or physically incapable of caring for himself.”36 The following passage explains the rationale for the Senate’s expansion of the coverage of this deduction:

Your committee’s action in extending the deduction recognizes that similar financial problems may be incurred by taxpayers who, if they are to be gainfully employed, must provide care for physically or mentally incapacitated dependents other than their children. Moreover, it is recognized that in many low-income families, the earnings of the mother are essential for the maintenance of minimum living standards, even where the father is also employed, and that in such situations the requirement for providing child care may be just as pressing as in the case of a widowed or divorced mother.37

The House of Representatives agreed to this liberalization of the proposed deduction.38

A decade later, Congress further liberalized § 214 by including husbands whose wives are incapacitated or institutionalized to the list of those eligible to claim the deduction.39 The rationale for this extension was that a family in which the wife is incapable of caring for herself would be just as likely to incur dependent-care expenses as a family in which the husband is incapable of caring for himself.40

The unwritten assumption underpinning all of these decisions regarding the class of taxpayers who would be eligible to claim the deduction for dependent-care expenses was that a woman’s presumptive place was working in the home as caregiver. In contrast, a man’s presumptive place was in the paid workforce, freed of any worries about caregiving responsibilities. Thus, the only individuals who could claim that their dependent-care expenses were related to gainful employment were women whose families were too poor to permit them to fulfill their caregiving responsibilities; women who were on their own (that is, divorced or widowed) and could not count on a man to “provide” for them; and men whose wives were unable to fulfill their caregiving responsibilities due to death, divorce, illness, or incapacitation.

The taxpayer in Moritz was a single man who had never married. Though he did not fit the stereotypes underpinning § 214—as a single man he should be carefree, not a caregiver—the taxpayer did incur expenses for the care of his elderly mother.41 The taxpayer employed a caregiver for his mother so that he could work for a publishing company in a job that required extensive travel throughout the United States.42 The taxpayer claimed a $600 deduction for amounts paid to his mother’s caregiver in 1968. On audit, the Internal Revenue Service (IRS) denied the deduction.43

The U.S. Tax Court upheld the IRS’s decision to deny the deduction, rejecting any constitutional objection on the ground that “deductions are within the grace of Congress. If Congress sees fit to establish classes of persons who shall or shall not benefit from a deduction, there is no offense to the Constitution, if all members of one class are treated alike.”44 On appeal, the U.S. Court of Appeals for the Tenth Circuit took a different view and found this differential treatment to be based primarily on sex. Relying upon Reed v. Reed,45 the Tenth Circuit sought to determine whether the classification in § 214 bore “a fair and substantial relation to the object of the legislation dealing with the amelioration of burdens on the taxpayer.”46 The court found that it did not; the classification in § 214 “did not make the challenged distinction as part of a scheme dealing with the varying burdens of dependents’ care borne of taxpayers, but instead made a special discrimination premised on sex alone, which cannot stand.”47 Rather than striking down § 214, the court chose to ignore the classification and allow the taxpayer to claim the deduction.48

In one case, however, overt gender discrimination avoided scrutiny in a way that seems to have effectively sanctioned that discrimination. In Totes-Isotoner Corp. v. United States,49 an importer of gloves challenged the imposition of a higher tariff on men’s gloves than on women’s. Notwithstanding seemingly obvious gender discrimination, the U.S. Court of Appeals for the Federal Circuit concluded—with no real explanation—that the classification was not facially discriminatory.50 Then, in considering whether the tariff provisions had a disparate impact on male glove users, the court stated that “[i]t is well established that disparate impact standing alone does not establish a violation of equal protection,” though it can “support […] a finding of purposeful discrimination.”51 The court next proceeded to heighten the pleading requirements in equal protection cases implicating the tax laws:

[A]lthough disparate impact can be relevant to the determination of a purpose to discriminate, we think that in the area of taxation and tariffs, something more than disparate impact is required to establish a purpose to discriminate for the purposes of pleading an equal protection violation. As the Supreme Court noted in San Antonio Independent School District v. Rodriguez, “[n]o scheme of taxation, whether the tax is imposed on property, income, or purchases of goods and services, has yet been devised which is free of all discriminatory impact.”52

Applying this heightened standard, the court dismissed the challenge because the plaintiff had not met “its burden to allege facts sufficient to infer a governmental purpose to discriminate.”53

In a subsequent case, the U.S. Court of International Trade followed the Totes-Isotoner decision and required others challenging these tariff classifications to “allege sufficient additional facts to make plausible their claim that Congress intended to discriminate between male and female users.”54 Ultimately, the Court of International Trade found that “[t]here simply [was] nothing in the Amended Complaints that can connect the tariff provisions and congressional action in a way to suggest with plausibility the existence of a governmental intent to discriminate.”55 Unsurprisingly, the Federal Circuit easily affirmed this decision on appeal.56 It appears that the Federal Circuit has set the bar for pleading an equal protection challenge in this area so (inexplicably)57 high that this type of discrimination—which likewise surfaces in a number of other areas in the tariff schedule58—has been effectively sanctioned by the courts.

Overt Sexual Orientation Discrimination

Taxpayers challenged the constitutionality of the federal Defense of Marriage Act (DOMA) as it applied to the federal tax laws. Section three of DOMA provided:

In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and 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.59

This provision denied legal recognition to marriages, civil unions, and domestic partnerships entered into by same-sex couples for purposes of federal law, including federal tax laws. (The Internal Revenue Service otherwise defers to the states in defining marriage, and had even indicated a willingness to treat different-sex couples’ civil unions and domestic partnerships that are the legal equivalent of marriage under state law as marriages for federal tax purposes.)60 DOMA thus denied same-sex couples in legally recognized relationships (however denominated) the federal tax benefits (and spared the tax detriments) that are associated with marriage.

In Gill v. Office of Personnel Management,61 a group of same-sex couples brought an equal protection challenge to the application of DOMA to deny them certain benefits of federal law. Among the benefits DOMA denied these couples were tax benefits associated with flexible spending arrangements and the ability to file joint U.S. federal income tax returns.62 Applying the deferential rational basis test, the U.S. District Court in Gill was “convinced that ‘there exists no fairly conceivable set of facts that could ground a rational relationship’ between DOMA and a legitimate government objective. DOMA, therefore, violates core constitutional principles of equal protection.”63 In essence, the court found that all of the rationales for enacting DOMA—both those offered at the time of enactment and those offered in the context of litigation—were entirely implausible and that the only plausible explanation was that DOMA was borne of “irrational prejudice” and “animus” toward same-sex couples.64

On appeal, the U.S. Court of Appeals for the First Circuit was diffident, asserting that DOMA would actually survive the rational basis test because “Congress could rationally have believed that DOMA would reduce costs, even if newer studies of the actual economic effects of DOMA suggest that it may in fact raise costs for the federal government.”65 Ultimately, however, the First Circuit decided that “the extreme deference accorded to ordinary economic legislation” was inappropriate, and it instead applied a more searching form of rational basis scrutiny, as has been done in other cases where a classification targets a “historically disadvantaged or unpopular” group.66 Disavowing any reliance upon antigay animus as a basis for its decision,67 the First Circuit held that DOMA could not pass muster under this more searching form of rational basis scrutiny, stating that “[s]everal of the reasons given [in support of DOMA] do not match the statute and several others are diminished by specific holdings in Supreme Court decisions more or less directly on point.”68

In Pedersen v. Office of Personnel Management,69 another group of same-sex couples filed a similar challenge to section three of DOMA. Though the U.S. District Court concluded that sexual orientation classifications should be subject to heightened scrutiny, it ultimately concluded that section three of DOMA cannot survive even rational basis review.70 Like the U.S. District Court in Gill, the Pedersen court found “that no conceivable rational basis exists for the provision. The provision therefore violates the equal protection principles incorporated in the Fifth Amendment to the United States Constitution.”71

In Dragovich v. U.S. Department of the Treasury,72 a group of California public employees challenged the constitutionality of DOMA and IRC § 7702B(f) because these provisions prevented them from enrolling their same-sex spouses and registered domestic partners in California’s long-term care plan, which is afforded favorable treatment under federal tax law. The U.S. District Court in Dragovich found that neither DOMA nor § 7702B(f) bore any rational relationship to a legitimate government interest; to the contrary, the court found that both statutes were motivated by actual or apparent antigay animus.73 Accordingly, the U.S. District Court held that both statutes violated the plaintiffs’ equal protection rights.74

Similarly, in Windsor v. United States,75

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