Originally Published in October, 2011
[It is a well-worn criticism of DOMA that it alienates same-sex couples from thousands of rights and privileges granted to heterosexual couples on account of marriage status. Most people probably aren’t familiar with the actual legal nuts & bolts of how this can occur. Here is one example. — LTMC]
Title 26 of the United States Code holds all of our nation’s tax provisions. §119 and §132 govern the exclusion of Meals, Lodging, and Fringe Benefits from gross income for tax purposes. §132 provides a list of fringe benefits which are excludable from gross income, in part or in whole, under qualifying circumstances.
One of these Fringe Benefits are “No Additional Cost” (NAC) benefits. NAC benefits are services provided for free to employees which are comprised of the employer’s unused “excess capacity.” Examples of excess capacity include vacant hotel rooms and unoccupied airline seats. Employers often offer these unused services to their employees free of charge, since they aren’t being used anyway, and it costs the employer nothing to allow their employees access to unused portions of their excess service capacity. These resources can be provided tax-free as a fringe benefit to employees, so long as they are not received in lieu of a profitable customer (the Tax Court refers to this as “forgone revenue”).
§119 was amended in 1978 to include Meals and Lodging provided to Spouses and Dependents of an employee. §132(h)(2)(A) includes similar language with respect to fringe benefits received by the employee, their spouse, or dependent children. Keep in mind that the language of § 132(h)(2)(A) merely changes the definition of “employee” in § 132(a) to include spouses and dependent children. It does not actually change the wording of the paragraph which grants the exclusion itself. This is important for reasons that will become clear in a moment.
To explain how this might work, imagine you work for an airline. The airline allows employees and their immediate family members to fly for free on any flight with vacant seating. under § 119 and § 132(h)(2)(A), the definition of employee, for purposes of taxable income, includes your spouse and your dependent children. So your husband/wife and kids can fly without tax liability for what otherwise might be considered salary-in-kind, and those benefits will not be viewed as taxable income by the federal government.
Not so with same-sex couples. Since DOMA explicitly forbids the federal government from recognizing same-sex couples as married for any purpose, the amended language of § 119 and § 132(h)(2)(A) does not apply to same-sex couples for purposes of tax liability. Even those who have been legally married in one of the six states which issue marriage licenses to same-sex couples will not be considered legally married by the federal government, and hence, not by the IRS.
To illustrate the effect of this provision, consider the following 2 families:
1. Bob and Joanne are married in New York. Bob has 10-19 years of experience as an airline pilot, and makes $100,000/year as a pilot for the airline. Joanne decides to stay at home and raise their 2 children. They file a joint tax return. Bob’s employer allows pilots and their immediate family members to fly in unreserved seats for free. Joanne has family in Hawaii whom she likes to visit once a year. Joanne takes this trip in October with their 2 children on unreserved seats. The fair market value of a round trip ticket to Hawaii from New York is roughly $900 per person. If Bob and Joanne had to include the value of these seats in their gross income, Bob, who is in the 28% tax bracket, would be treated as having 102,700 in income instead of 100,000. Thus, Bob and Joanne’s tax liability on that additional $2,700 would be $756 when they file their joint return. Thankfully, § 132(h)(2)(A) allows them to exclude the value of these round-trip tickets from their gross income. Bob and Joanne are thus shielded from have to pay $756 additional dollars in taxes because of § 132(h)(2)(A).
2. Bob and Joseph are married in New York. Bob has 10-19 years of experience as an airline pilot, and makes $100,000/year as a pilot for the airline. Joseph decides to stay at home and raise their 2 adopted children. Bob and Joseph file a joint tax return in New York, but Bob must file with the federal government as “single/head of household” because of DOMA. Bob’s employer allows pilots and their immediate family members to fly in unreserved seats for free. Joseph has family in Hawaii whom he likes to visit once a year. Joseph takes this trip in October with their 2 adopted children on unreserved seats. The fair market value of a round trip ticket to Hawaii from New York is roughly $900 per person. Because Bob makes $100,000/year, he is in the 28% tax bracket. If Bob and Joseph include the value of these unreserved airline tickets as income, they will have to pay taxes on $102,700 in income instead of $100,000. § 132(h)(2)(A) would normally allow Bob to exclude the value of these round-trip tickets to his spouse and 2 children from his gross income. But since DOMA does not allow the federal government to recognize Bob and Joseph’s marriage, §132(h)(2)(A) does not apply to Joseph. Bob and Joseph therefore may only exclude the value of their children’s tickets from gross income. As a result, they must pay an additional $252 dollars to the IRS come tax time (i.e 28% of the value of Joseph’s ticket), which they otherwise would not have to if the federal government recognized their marriage for purposes of § 132(h)(2)(A).
Two couples in identical circumstances. But one couple pays $252 dollars more in taxes every year because they are a gay couple. And only because they are a gay couple.
This example demonstrates two things: A) civil unions are inadequate for the purpose of achieving legal equality for same-sex couples, since civil unions are not mentioned in most of the federal tax code. It refers to spouses and married couples, not “partners.” B) DOMA is both a social and financial burden on gay couples. This is not just social inequity. It’s not just discrimination in the metaphysical, emotional sense. Legal discrimination of same-sex couples on account of DOMA has real economic consequences for gay couples. And the above story is yet one more example.