Inequitable administration: documenting family for tax purposes.
Family can bring us joy, and it can bring us grief It can also bring us tax benefits and tax detriments. Often, as a means of ensuring compliance with Internal Revenue Code provisions that turn on a family relationship, taxpayers are required to document their relationship with a family member. Most visibly, taxpayers are denied an additional personal exemption for a child or other dependent unless they furnish the individual's name, Social Security number, and relationship to the taxpayer.
In this article, I undertake the first systematic examination of these documentation requirements. Given the privileging of the "traditional" family throughout the Code, one might expect to see that same privileging mirrored in the administrative structure that underpins the Code's family tax provisions. Indeed, on their very face, the information-reporting rules that apply to jointly owned income-producing property do just that.
Once the inquiry is expanded to cover other family tax provisions, however, it quickly becomes clear that the administrative structure underpinning the family tax provisions has also been strongly influenced by endemic privilegings along a variety of other axes of subordination--from class to race to gender to sexual orientation. To address and remedy these defects in the administrative structure underpinning the family tax provisions, this article advocates an approach to documenting family for tax purposes that does" not invidiously discriminate among taxpayers.
Family is important to each of us--no matter whether it is the family that we are born into, the family that we choose, or the family that chooses us. Family also plays an important role in determining the size of our tax bills. For instance, having a child may render a taxpayer eligible for the child tax credit, an additional personal exemption, and tax relief for childcare costs incurred to enable her to be gainfully employed. (1) In addition to these benefits, the expenses of adopting a child may be creditable against the taxpayer's tax bill. (2) Taking in a family member or friend might also permit the taxpayer to claim an additional personal exemption and to deduct medical or other expenses paid on that person's behalf. (3) Where the ownership of an interest in a corporation or partnership is relevant to determining tax liability, the taxpayer's ownership is often aggregated with that of her family members--sometimes to the taxpayer's benefit and at other times to her detriment. (4) Similarly, families are sometimes treated as a larger economic unit for tax purposes, with the individual members presumed to be indifferent to the allocation of legal ownership of assets among them. (5) Moreover, the decision to remain single or to couple (whether within or without marriage) opens a veritable Pandora's box of tax consequences. (6)
When taking family into account for all of these purposes, the Internal Revenue Code (Code) clearly privileges the so-called traditional family over all others. Lesbian and gay families fit uncomfortably, if at all, into the normative structure of the Code. (7) Married women who work outside the home may be penalized for this decision. (8) And other nontraditional families (9) often fall through the cracks. (10) For example, in Leonard v. Commissioner, the Tax Court held that a taxpayer who supported a disabled friend and the friend's grandchildren --all of whom lived with her--was eligible to claim an additional personal exemption for each of the children but was ineligible to claim the child-care credit, the child tax credit, the additional child tax credit, or the earned income credit because those same children were not "qualifying" children. (11)
In this Article, I break new ground by undertaking the first systematic examination of the administrative structure that underpins the Code's family tax provisions. (12) In this examination, I focus on the presence or absence of requirements to identify and document a taxpayer's family members. Though, as a working hypothesis, one might expect these identification and documentation requirements simply to mirror the Code's ubiquitous privileging of the "traditional" family, (13) the picture is actually rendered far more complex by the influence of privilegings along a number of interconnected axes of subordination.
Such an intricate web of interconnected subordination is precisely what we would expect to see when the dominant group in society obtains and maintains its status as such at least in part through control of the flow of ideas--what Antonio Gramsci referred to as "hegemony." As Douglas Litowitz has noted, "Gramsci's work on hegemony provides a useful starting point for legal scholars who understand that domination is often subtle, invisible, and consensual." (14) Though i have provided a fuller description of Gramsci's conceptualization of hegemony elsewhere, (15) this short recapitulation of the concept nicely highlights its relevance here:
By hegemony Gramsci meant the permeation throughout civil society--including a whole range of structures and activities like trade unions, schools, the churches, and the family --of an entire system of values, attitudes, beliefs, morality, etc. that is in one way or another supportive of the established order and the class interests that dominate it. Hegemony in this sense might be defined as an "organizing principle", or world-view (or combination of such world-views), that is diffused by agencies of ideological control and socialization into every area of daily life. To the extent that this prevailing consciousness is internalized by the broad masses, it becomes part of "common sense"; as all ruling elites seek to perpetuate their power, wealth, and status, they necessarily attempt to popularize their own philosophy, culture, morality, etc. and render them unchallengeable, part of the natural order of things. (16)
It should come as no surprise, then, that the interconnecting lines of subordination in the administrative structure underpinning the family tax provisions are not the result of deliberate action by Congress or the Internal Revenue Service (IRS). They are instead the product of "endemic" privilegings--that is, privilegings that have become so normal, so ingrained in our nature, such a part of our "world-view" that they manifest themselves without conscious thought.
Our unearthing of the endemic privilegings embedded in the identification and documentation requirements in the Code's family tax provisions will proceed in three parts. In Part I, we begin our analysis with an examination of the information-reporting requirements that attach to jointly owned income-producing property. This examination reveals the expected influence of the privileging of heterosexuality and different-sex marriage upon the administrative structure underpinning the family tax provisions in the Code. It also begins to complicate the expected picture by demonstrating how this privileging of the "traditional" family concomitantly reinforces privilegings along other axes of subordination.
The next two parts of the article work in tandem, as their import only truly emerges when we juxtapose them and compare and contrast the provisions discussed in each of them. In Part II, we will examine the deductions, credits, and exclusions that are provided (or, conversely, denied) to a taxpayer with respect to her family members. From the taxpayer's perspective, these are perhaps the most salient family tax provisions in the Code. From any perspective, they are also the provisions that do the most to convey a sense of randomness in the administrative structure underpinning the family tax provisions and lend support for the notion that the privilegings embedded in that administrative structure are a manifestation of Gramscian hegemony. Nonetheless, these provisions, like the information-reporting rules described in Part I, clearly establish a baseline of identification and documentation of family members.
In Part III, we will examine the rules that attribute ownership of property between family members--from the conventional rules attributing the ownership of stock among family members, to business and investment incentives that disregard transactions among family members either to prevent abuse or to facilitate the delivery of tax incentives, to the "kiddie" tax that prevents parents from assigning investment income to their minor children, and so on. The dearth of identification and documentation requirements in the numerous and varied provisions covered in Part III stands in stark contrast to the general baseline of identification and documentation that we will have encountered in Part II (and, for that matter, even in Part I) of this Article.
In this contrast, we will detect the influence of endemic privilegings along a number of axes of subordination. It will become clear that the wealthy are subjected to less stringent reporting requirements than low- or middle-income taxpayers when it comes to identifying and documenting family members. We will explore how this class-based privileging implicates and intersects privilegings along other axes of subordination, including race, ethnicity, gender, sexual orientation, and marital status.
Throughout the Article, it will become apparent that, even though Congress and the IRS have not taken a deliberative approach when imposing identification and documentation requirements, endemic privilegings along multiple axes of subordination have subtly influenced the decision whether or not to employ identification and documentation requirements as a tool for enforcing the Code's family tax provisions. To redress this unconscious discrimination, the concluding section of this article will advocate a more uniform and deliberative approach to documenting family for tax purposes--and one that does not invidiously discriminate among taxpayers. I suggest that the baseline of requiring identification and documentation of family members be applied to all of the Code's family tax provisions in the name of increasing both tax compliance and the evenhanded enforcement of the tax laws. In keeping with these twin goals, exceptions from the identification and documentation requirements should be carved out only where there are valid, articulable, and nondiscriminatory reasons for departing from the common baseline of reporting family relationships.
I. Information-Reporting Rules
In this Part, we begin our examination of the identification and documentation requirements in the Code's family tax provisions by looking at the information-reporting rules that apply to jointly held income-producing property. More particularly, we will consider the Form 1099 information-reporting requirements that apply to jointly owned interest, dividend, and royalty payments. These information-reporting requirements are designed to "provide a strong incentive to taxpayers to include payments in their personal tax returns and thus avoid noncompliance issues with the IRS. Payments not reportable on Forms 1099 tend to be ignored by taxpayers and thus escape taxation." (17)
As we will see, these information-reporting rules have two distinctly different faces. The public face of these rules is embodied in the IRS's general instructions for the various iterations of the Form 1099. These instructions paint a very neat (and very heteronormative) picture of the information-reporting requirements. The private face of these rules--the one encountered by those who go behind the IRS's published instructions to look at the underlying sections of the Code and Treasury regulations--is not nearly so neat. An examination of the Code and Treasury regulations reveals dissonances both between the coverage of the different information-reporting provisions as well as contradictions between the Code and Treasury regulations, on one hand, and the IRS's general instructions for the Form 1099, on the other. These dissonances will help to highlight the expected privileging of the "traditional" family in the administrative structure underpinning the Code's family tax provisions as well as begin to reveal how that privileging at the same time connects with and reinforces privilegings along other axes of subordination.
A. The Public Face of the Information-Reporting Rules
Certain payments of interest, dividends, and royalties are required to be reported to taxpayers--with a copy of the report furnished to the IRS--on Form 1099-INT, Form 1099-DIV, and Form 1099-MISC, respectively. These information-reporting rules are designed to increase taxpayer compliance in reporting these items of income. (18) Yet, they raise interesting questions for those who jointly receive payments of these items of income. (19)
Anyone who holds a bank account jointly with a spouse, domestic partner, family member, or friend knows that the bank completes and submits only one Form 1099-INT with respect to each account, using the taxpayer identification number of just one account holder. (20) But how can the account holder who receives the Form 1099-INT be sure that the IRS does not attempt to tax her on more interest (or, for that matter, dividend or royalty) income than she is actually entitled to?
The solution to this problem is found in the general instructions for Form 1099, which explain the reporting obligations that apply to the joint account holder who receives the Form 1099. These instructions adopt a default position that requires taxpayers to identify and document the sharing of jointly owned interest, dividend, and royalty income:
Generally, if you receive a Form 1099 for amounts that actually belong to another person, you are considered a nominee recipient. You must file a Form 1099 with the IRS (the same type of Form 1099 you received) for each of the other owners showing the amounts allocable to each. You must also furnish a Form 1099 to each of the other owners. File the new Form 1099 with Form 1096 with the Internal Revenue Service Center for your area. On each new Form 1099, list yourself as the "payer" and the other owner as the "recipient." On Form 1096, list yourself as the "filer." A husband or wife is not required to file a nominee return to show amounts owned by the other. (21)
This imposes a burden on the joint owner who receives the Form 1099 (the first joint owner) to then complete another Form 1099 for the other joint owner (the second joint owner). The first joint owner must provide the Form 1099 to the second joint owner and submit a copy to the IRS along with the transmittal Form 1096. But the first joint owner cannot simply download an additional Form 1099 and a Form 1096 from the IRS's web site, complete them, and furnish them to the second joint owner and the IRS. Rather, the forms must be ordered from the IRS, received by regular mail, and then completed and furnished to the second joint owner and the IRS. (22) When the first joint owner does not learn of this reporting obligation until late in the filing season, the possibility of failing to timely file (and of incurring penalties) is significant. (23)
In addition, the first joint owner is required to backup withhold at a flat rate of 28% (and pay any withheld tax over to the IRS) if the second joint owner does not furnish the first joint owner with a Form W-9 that (1) includes the second joint owner's taxpayer identification number, (2) certifies under penalties of perjury that this taxpayer identification number is correct, and (3) further certifies that the second joint owner is not subject to withholding due to notified payee underreporting. (24) The first joint owner must then retain the relevant records and forms "so long as the contents thereof may become material in the administration of any internal revenue law." (25)
Interestingly, as the italicized final sentence of the block quote above indicates, these additional reporting and withholding burdens are not imposed on married different-sex couples. Why are married different-sex couples singled out for relief from these burdens? A natural response to this question might be that imposing the information-reporting and backup-withholding requirements is unnecessary when the spouses file a joint return, because all of the interest (or dividends or royalties) will be reported on the return that the spouses file together. But the exception in the instructions is not confined to married couples filing jointly. By its terms, it applies equally to married couples filing separately--who will be filing not one, but two returns. In that situation, why isn't the spouse who receives the Form 1099 treated like every other joint owner and required to report to the IRS the share of the income that belongs to (and should be taxed to) another taxpayer? The fact that married different-sex spouses who file separately must provide each other's names and Social Security numbers on their tax returns is not a sufficient answer to this question. (26) The taxpayer's spouse is not the only person who might jointly hold title to interest-, dividend-, or royalty-producing property with the taxpayer. The number of married different-sex taxpayers choosing to file separate returns is comparatively low but, with more than 2.7 million such returns filed in 2008, far from insignificant. (27) Why not impose the same reporting burden on them as is imposed on others, rather than shifting the burden onto the IRS only for this one particular, "special" group?
The general instructions thus provide support for the working hypothesis articulated in the introduction to this Article. The administrative structure underpinning the reporting of jointly owned interest, dividend, and royalty income evidences a clear privileging of the "traditional" family. Without any apparent justification, the IRS has carved out an exception for all married different-sex spouses from an identification and documentation requirement intended to increase compliance. Yet, the evidence of this privileging becomes even clearer once we look behind the public face of these information-reporting rules and scrutinize the Treasury regulations underlying them.
B. The Private Face of the Information-Reporting Rules
The regulations governing information reporting with respect to interest, dividends, and royalties are not entirely consistent with the picture painted by the general instructions for Form 1099. Only the interest-reporting regulations are consistent with those instructions. The royalty-reporting regulations may be interpreted to embrace a similar consistency with the instructions; however, the dividend-reporting regulations are clearly inconsistent with the instructions--but are far less burdensome on taxpayers.
1. Section 6049: Interest Reporting
The information-reporting rules regarding interest payments do appear to correspond with the description in the general instructions for Form 1099. Section 6049 requires those who pay $10 or more in interest, those who receive and disburse payments of $10 or more of interest as a nominee, as well as those who act as middlemen to file an information return. (28) The regulations confirm the obligation of those acting as middlemen to report interest payments. (29) For this purpose, the regulations provide:
A person shall be considered to be a middleman as to any portion of an interest payment made to such person which portion is actually owned by another person, whether or not the other person's name is also shown on the information return filed with respect to such interest payment, except that a husband or wife will not be considered as acting in the capacity of a middleman with respect to his or her spouse. (30)
This broad definition of "middleman" comports with the general instructions for Form 1099.
2. Section 6050N: Royalty Reporting
Arguably, the rules regarding the reporting of royalty payments also correspond with that description. Like the interest-reporting rules, [section] 6050N requires those who pay $10 or more in royalties as well as those who receive and disburse payments of $10 or more of royalties as a nominee to file an information return. (31) However, in contrast to [section] 6049, no mention is made of middlemen in the text of [section] 6050N. Nevertheless, the regulations under [section] 6050N, though rather sparse, do incorporate by reference the definition of "payor" from the interest-reporting regulations. (32) That definition, in turn, specifically references and incorporates the definition of "middleman" in the interest-reporting regulations quoted above. Though the placement of this incorporation by reference in the royalty regulations seems to be aimed specifically at an exemption from reporting for certain foreign-related items, it does apply to "this section," which would seem to mean the entirety of Treasury Regulation [section] 1.6050N-1 and not just the exemption for certain foreign-related items. Accordingly, it is possible to read the regulations under [section] 6050N as likewise comporting with the general instructions for Form 1099.
3. Section 6042: Dividend Reporting
However, the rules regarding the reporting of dividend payments cannot be read so charitably. Like the interest and royalty reporting rules, [section] 6042 requires those who pay $10 or more in dividends as well as those who receive and disburse payments of $10 or more of dividends as a nominee to file an information return. (33) And, as was the case with [section] 6050N and in contrast to [section] 6049, no mention is made of middlemen in the text of [section] 6042. The regulations under [section] 6042 do seem to fill this gap in the definition of "nominee":
For purposes of this section, a person who receives a dividend shall be considered to have received it as a nominee if he is not the actual owner of such dividend and if he was required under [section] 1.6109-1 to furnish his identifying number to the payer of the dividend (or would have been so required if the total of such dividends for the year had been $10 or more), and such number was (or would have been) required to be included on an information return filed by the payer with respect to the dividend. (34)
This regulation goes on, however, to depart significantly from the scope of the definition of "middleman" in the regulations under [section] 6049 and, concomitantly, from the scope of nominee/ middleman reporting mandated by the general instructions for Form 1099:
[A] person shall not be considered to be a nominee as to any portion of a dividend which is actually owned by another person whose name is also shown on the information return filed by the payer or nominee with respect to such dividend. Thus, in the case of stock jointly owned by a husband and wife, the husband will not be considered as receiving any portion of a dividend on that stock as a nominee for his wife if his wife's name is included on the information return filed by the payer with respect to the dividend. (35)
Though this regulation uses a married couple to illustrate this exception, the exception, by its own terms, applies to any joint owners of stock whose names both appear on the Form 1099-DIV issued by the payer of the dividend. (36) Yet, despite this broadly worded exception in the regulations under [section] 6042, the general instructions for Form 1099 do not appear to absolve the recipient of a Form 1099-DIV from having to furnish a Form 1099 to a joint owner (with a copy to the IRS transmitted with Form 1096), unless the stock happens to be jointly held by a husband and wife.
The regulations under [section][section] 6042, 6049, and 6050N thus paint a far less neat and coordinated picture than do the general instructions for Form 1099. Through the general instructions for Form 1099, the IRS has deliberately created a uniform rule for nominee/middleman reporting where none exists in the corresponding regulations. Simplification through harmonization may be a laudable goal; however, one cannot help but observe that the blanket exception for husbands and wives in the general instructions for Form 1099 is completely unmoored from the text of the statute. Sections 6042, 6049, and 6050N all speak generally of nominees or middlemen--none of these sections makes specific mention of spouses, married couples, husbands, or wives. (37) The relevant legislative history provides no support for an exception for spouses either. (38) Furthermore, as discussed earlier, there is no obvious rationale for the IRS's unexplained choice to narrow this exception to cover only different-sex married couples. (39)
C. Endemic Privilegings
In the past, all of the relevant regulations had embraced the dividend-reporting regulations' broad exception to information reporting, which absolves the recipient of the Form 1099 from reporting so long as the payer also identifies the other joint owner(s) on that form. (40) Then, for no apparent reason and with no explanation, (41) the federal government narrowed this exception from information reporting for interest (and, derivatively, royalty) payments so that it now covers only married different-sex couples. It also issued instructions explaining the relevant tax forms that disregard the relevant regulations and narrow the exception from information reporting for dividends so that it, too, covers only different-sex spouses. No matter how inexplicable these changes may be, one thing can be said of them--they did not come about by chance, but through purposeful (though, it appears, not deliberate) action. Without any publicly explained rationale for them, these changes may seem unthinking; however, they bear the mark of having been influenced by the endemic privileging of marriage. They seem to serve no purpose other than to further entrench the privileged position that marriage occupies in our federal tax laws. (42)
To understand this point, let us first consider the effects of, and then a readily available alternative to, the general instructions' nominee/middleman reporting rules. If taxpayers are aware of these rules, they find themselves saddled with onerous compliance and recordkeeping burdens, not to mention potential penalties if they happen to learn of the rules too late in the filing season. (43) And if the initial payer included the names of all of the joint owners on the initial Form 1099, these burdens will have been imposed for naught--the information reported by the taxpayer on the additional Form 1099 will merely duplicate information that the IRS already has--and the IRS will find itself bombarded with more information than it should reasonably have to process. But if the misinformation circulating on the Internet about reporting interest from joint bank accounts is any indication, (44) taxpayers are more likely to be unaware of these rules. In that case, they will either overpay their taxes-that is, if the first joint owner reports and pays tax on all of the interest income, even the portion that belongs to the second joint owner (45)--or risk an audit because the income reported on their tax returns does not match the information reported to the 1RS on Form 1099.
A more efficient alternative to the potentially costly and burdensome approach of the general instructions would be to apply a modified version of the broad exception that ostensibly exists in the dividend-reporting rules to all joint owners and absolve them from filing Forms 1099 and 1096 without regard to their marital status or relationship to each other. To ensure compliance in the reporting of interest, dividend, and royalty income, the IRS could require (rather than merely permit) the payer to include (1) each owner's name and taxpayer identification number on the Form 1099 and (2) each owner's ownership percentage (as reported to the payer at the time the account was opened or the property was purchased or licensed). Remarkably, in lieu of embracing such a simple and straightforward rule, which is both more efficient and more neutral with regard to the formation of personal relationships, (46) the IRS has opted for a rule that singles out "traditional" marriage for special treatment and, as explained below, exacerbates subordination along lines of class, race, ethnicity, gender, sexual orientation, and marital status.
Most obviously, the general instructions' spousal exception from nominee/middleman reporting contributes to the bizarre web of incentives and disincentives that can influence different-sex couples when they decide whether to marry, whether to have the secondary earner in the couple enter the workforce, and whether to have the secondary earner work part or full time. Professor Edward McCaffery identifies five principal factors in the tax laws that influence these decisions:
(1) the aggregation of spousal tax rates under the income tax [i.e., the "marriage penalty"]; (2) the disaggregation of spousal rates, with an asymmetric allocation of benefits, under the social security system; (3) the failure to tax imputed income from self-supplied labor; (4) the present treatment of mixed business personal expenses, particularly child care; and (5) the treatment of fringe benefits. (47)
Of course, the nominee/middleman reporting rules play only a supporting role in creating this web of incentives and disincentives. Nevertheless, being spared an information-reporting burden that constitutes little more than a trap for the unwary either adds to the benefits or reduces the detriments of marriage from a tax perspective.
Professor McCaffery explains that this complex web of incentives and disincentives has a disproportionately negative impact on women as well as effects that vary along class lines:
Perhaps even more importantly, the situation of upper-income families--indeed, the whole range of treatment by class--introduces highly unfortunate discontinuities. Among the lower classes, the tax laws discourage formal family structures. This might retard economic improvement to the middle class. At the middle income levels, the laws encourage women to work full time or stay at home. Either such women fail to develop valuable job market skills, or they find themselves pushing against the upper income levels. But as soon as they do, they face even greater incentives to stay home. Secondary earners in general, and married mothers in particular, are thus pushed in different directions as they cross income levels. The whole pattern is reflected in a social structure that finds poor women alone, middle class women in a bind, and upper class women disempowered. (48)
There is also a racial dimension to the web of tax incentives and disincentives associated with the privileging of marriage in our tax laws. Professor Dorothy Brown has explained that Professor McCaffery's analysis may be more relevant to white different-sex couples than it is to African-American different-sex couples. She points out that the African-American experience might differ because African-American different-sex couples are (1) more likely than white couples to experience a marriage penalty (and a resulting disincentive to marry) because their incomes are more likely to be equal and (2) more likely to have the man (rather than the woman) be the secondary earner in the couple. (49) Mylinh Uy has expanded on Professor Brown's analysis by explaining how the experience of Asian-American different-sex couples may be closer to that of African-American different-sex couples than to it is to white different-sex couples. (50)
From the perspective of same-sex couples, the nominee/ middleman reporting rules are simply another facet of the overt and covert discrimination that is perpetrated against them throughout the Code. (51) Because the federal Defense of Marriage Act requires the IRS to treat all same-sex couples as tax "singles," (52) same-sex couples are ineligible for the spousal exception from nominee/middleman reporting--even if they are treated as married (and, therefore, as spouses) under the laws of their state of residence. From a marital status perspective, individuals who are uncoupled (and, therefore, truly single)--whether they happen to be gay or straight, living alone or acting as head of a household--find themselves in this same predicament if they share ownership of income-producing property with another. (53)
To round out these many intersections, consider that, even though information reporting is a relatively effective means of ensuring compliance, a withholding tax on investment income would be an even more effective compliance tool. (54) Despite other countries' successful imposition of withholding taxes on investment income, (55) for more than sixty years the financial services industry has managed to foil repeated attempts to impose a withholding tax on investment income in the United States. (56) Professor Lily Kahng asserts that the federal government's use of a more stringent tax enforcement measure (i.e., a withholding tax) against those with income from wages and a less stringent enforcement measure (i.e., information reporting) against those with investment income is inherently unfair and magnifies the preferences accorded to investment income under the Code. (57)
This inequality in enforcement has a clear impact along class lines. For taxable years 2007 and 2008, approximately 97% of all returns filed by individuals reported an adjusted gross income of less than $200,000. (58) In both years, these returns reported 80% of total salaries and wages. (59) The remaining 3% of returns--for individuals with adjusted gross incomes of at least $200,000--reported the other 20% of total salaries and wages but a far higher share of total taxable interest (47% in 2007 and 42% in 2008), total tax-exempt interest (66% in 2007 and 57% in 2008), total ordinary dividends (60% in 2007 and 57% in 2008), total qualified dividends (65% in 2007 and 61% in 2008), and total net royalty income (62% in 2007 and 66% in 2008). (60) Thus, the privileging of so-called traditional marriage in the information-reporting rules is built upon the foundation of a class-based privileging that imposes a less effective and less intrusive method of enforcement on items of income that are disproportionately associated with the wealthiest of taxpayers. This class-based privileging can have its own disparate impacts along lines of race, ethnicity, gender, sexual orientation, and marital status due to, among other things, wage discrimination on these bases that detrimentally affects the ability to accumulate wealth. (61)
In the next two parts of this Article, the complex, intertwined endemic privilegings along multiple axes of subordination that we have uncovered in the information reporting rules will become even further reified. First, we will consider the identification and documentation requirements in the deductions, exclusions, and credits that provide (or deny) tax benefits based on family status. Then, we will consider the dearth of identification and documentation requirements in the rules that attribute property ownership from one family member to another. When taken together, these rules will highlight other ways in which endemic privilegings permeate the administrative structure underpinning the family tax provisions in the Code.
II. Deductions, Credits, and Exclusions
A number of income tax provisions afford (or, conversely, deny) taxpayers benefits with respect to their family members. Many of the benefits take the form of a deduction or credit for income transferred to, or on behalf of, a family member. (Or, in the case of benefits denied with respect to family members, take the form of a deduction or credit for income transferred to, or on behalf of, an unrelated individual.) In other cases, a taxpayer can exclude the value of a benefit provided by her employer directly to a family member or can exclude other income that is used for the family member's benefit. To obtain the deduction, credit, or exclusion, the taxpayer is usually required--either explicitly or implicitly--to comply with identification or documentation requirements. For instance, in the case of family-based tax benefits, the taxpayer may be required to specifically identify the family member, provide the family member's taxpayer identification number, and/or describe her relationship with the family member as a prerequisite to claiming the benefit.
The baseline with respect to these deductions, credits, and exclusions is thus the same as that encountered in the information-reporting rules discussed in Part I, namely one of identification and documentation. The discussion in this Part of the baseline of identification and documentation is divided into two sections. The first section addresses the baseline of identification and documentation of relatives and other family members. The second section addresses the baseline of identification and documentation of spouses and former spouses.
A. Documenting Relatives and Other Family Members
1. Dependents and the Additional Personal Exemption
Perhaps the most far-reaching of the Code's requirements that a taxpayer identify and document her family members was enacted as part of the Tax Reform Act of 1986. In that Act, Congress established the requirement that a taxpayer must furnish each dependent's taxpayer identification number in order to be entitled to claim a deduction for an additional personal exemption with respect to the dependent. (62) For this purpose, a "dependent" is currently defined to include certain of the taxpayer's children (including stepchildren, adopted children, and certain foster children) and their descendants, certain relatives (including in-laws, stepparents, and stepsiblings), and certain other household members who are neither related nor married to the taxpayer. (63) Initially, the documentation requirement only applied to dependents five years and older. (64) Congress gradually lowered this age limit and then eliminated it in 1994. (65) At present, a taxpayer is asked on the Form 1040 to identify each dependent by name, to supply each dependent's Social Security number, and to identify the relationship between her and the dependent. (66)
This requirement to identify and document dependents was intended to curb potential tax abuses:
Congress believed that it is important to ensure the validity of claims for dependents on tax returns. Some taxpayers claim dependents that the taxpayers are not entitled to claim. For example, following a divorce, both parents may continue to claim the children as dependents, even though only one of the parents is legally entitled to claim the children as dependents. Congress chose to increase compliance in this area by requiring that a taxpayer include on the taxpayer's tax return the taxpayer identification number (TIN) of any dependent claimed on that tax return who is at least 5 years old. (67)
This documentation requirement decreased the number of false and erroneous claims for additional personal exemptions with respect to dependents. When eliminating the age threshold that had applied to the documentation requirement, Congress noted that "[t]he requirement that TINs be provided with respect to each dependent claimed on a tax return has significantly reduced the improper claiming of dependents. Requiring that TINs be supplied regardless of the age of the dependent will further reduce the improper claiming of dependents." (68)
Indeed, "[a]fter Congress enacted the requirement that dependents' Social Security numbers must be entered on a tax return, a couple of million dependents disappeared." (69) This is not an exaggeration. For taxable year 1986, individual taxpayers claimed more than 77 million exemptions for dependents. (70) For taxable year 1987, the first year in which the new identification and documentation requirement was in effect, (71) individual taxpayers claimed 71.8 million--that is, more than 5 million fewer--exemptions for dependents. (72) Furthermore, in the eyes of the Tax Court, the reduction in improper claims of additional personal exemptions for dependents constituted a compelling government interest that justified the rejection of a taxpayer's First Amendment challenge to the identification and documentation requirement, which is currently codified at [section] 151(e). (73)
2. Overlap with Other Tax Deductions and Credits for Dependents
Technically, this identification and documentation requirement applies only for purposes of claiming the additional personal exemption for a dependent. In practice, however, it is not nearly so constrained. The requirement's reach is far broader because the group of "dependents" with respect to whom a personal exemption can be claimed under [section] 151 largely overlaps --and, in some cases, is coextensive with--the group of "dependents" who give rise to (or are denied) tax benefits under other deduction and credit provisions in the Code. (74) In effect, [section] 151(e) establishes a baseline of identification and documentation of family members for all of these provisions by imposing a de facto identification and documentation requirement with respect to many, if not all, tax dependents.
Among the provisions that allow a deduction for expenses incurred with respect to a taxpayer's dependents are [section] 162 (health insurance coverage for self-employed individuals), [section] 213 (medical care), [section] 217 (moving expenses), [section] 220 (Archer medical savings accounts), [section] 221 (educational loan interest), [section] 222 (qualified tuition and related expenses), and [section] 223 (health savings accounts). (75) Among the provisions that allow a credit for expenses incurred with respect to a taxpayer's dependents are [section] 21 (dependent care credit), [section] 24 (child tax credit), [section] 25A (American opportunity, hope, and lifetime learning credits), [section] 32 (earned income credit), and [section] 35 (health insurance credit).76 As mentioned above, the overlap between the "dependents" covered by these deduction and credit provisions and the identification and documentation requirement imposed for purposes of the personal exemption varies.
These variations create the potential for gaps in coverage of the de facto identification and documentation requirement imposed by [section] 151(e). As we will see, these gaps are sometimes filled, at other times left unfilled, and at yet other times are overfilled. Far from negating the existence of a baseline of identification and documentation, these gaps highlight the existence of that baseline--after all, these gaps are identifiable only when a tax deduction or credit provision is compared to the baseline established in [section] 151(e). Legislative and administrative reaction (or, in many cases, failure to react) to these gaps--especially when taken together with the unexplained spousal exemption to the information-reporting rules described in Part I above--lends the administrative structure underpinning the family tax provisions a haphazard and uncoordinated feel. As we will further explore in Part III below, congressional and administrative heedlessness only provides further support for the notion that endemic privilegings along multiple axes of subordination--including class, race, ethnicity, gender, sexual orientation, and marital status--have subtly influenced decisions to include or omit identification and documentation requirements in connection with enforcement of the family tax provisions.
a. Examples of Overlaps in Coverage
Now let us turn to some concrete examples that illustrate these overlaps and gaps in coverage of the de facto documentation requirement imposed by [section] 151 (e). The American opportunity, hope, and lifetime learning credits and the tuition deduction use precisely the same definition of "dependent" as [section] 151, which means that any dependent whose expenses are creditable or deductible under these provisions is subject to the identification and documentation requirement in [section] 151(e). (77) Taxpayers are unlikely to claim the benefit of these educational incentives but fail to claim the additional personal exemption. The personal exemption is the most salient of all the benefits associated with dependents, as the number of a taxpayer's exemptions is determined on line 6 of the Form 1040--immediately after checking one's filing status and before entering the first item of income on the return. (78) In fact, the instructions to the Form 1040 admonish taxpayers that:
You must enter each dependent's social security number (SSN). Be sure the name and SSN entered agree with the dependent's social security card. Otherwise, at the time we process your return, we may disallow the exemption claimed for the dependent and reduce or disallow any other tax benefits (such as the child tax credit) based on that dependent. (79)
Furthermore, Form 8863, which is used to claim the American opportunity, hope, and lifetime learning credits, and Form 8917, which is used to claim the tuition deduction, require the taxpayer to list the name and taxpayer identification number of the student with respect to whom the credit is claimed--and the form specifically asks for the name and identification number "as shown on page 1 of your tax return." (80)
In other cases, the definition of "dependent" employed for purposes of [section] 151 overlaps, but is not coextensive with, the definition of "dependent" used in other deduction and credit provisions in the Code. For example, [section] 213 allows a deduction for medical expenses incurred with respect to a taxpayer's "dependents." Though the group of dependents covered by [section] 213 includes those for whom a personal exemption can be claimed, it is expanded by statute to encompass certain individuals who fail to meet selected elements of the basic definition of "dependent" (viz., the cap on gross income and the no joint return requirement). (81) This leaves a gap in identification and documentation of dependents because [section] 213 does not require the taxpayer to identify and document dependents with respect to whom a deduction is taken but to whom [section] 151(e) does not apply. (82) This underdocumentation of dependents opens the door to potential taxpayer error and abuse of the medical expense deduction because the only check on the propriety of a claimed deduction will come in the highly unlikely event that the IRS audits the taxpayer. (83)
In contrast, [section] 24 employs a more limited definition of dependent for purposes of the child tax credit. It lowers the age cap by allowing the child tax credit to be taken only with respect to a qualifying child under the age of seventeen, and it disallows the credit with respect to qualifying noncitizen children who are residents of Canada and Mexico. (84) Accordingly, even though all dependents covered by [section] 24 are also covered by the identification and documentation requirement of [section] 151 (e), not all dependents identified on the taxpayer's return as eligible for an additional personal exemption will support a claim for the child tax credit. This creates a potential gap in the opposite direction of [section] 213; that is, it gives rise to the possibility of misleading overdocumentation. This opens the door to potential errors and abuse in claims for the child tax credit. A taxpayer who does not carefully walk through the instructions in three different places (85) might mistakenly believe or assume that a child properly documented for purposes of claiming the additional personal exemption also qualifies for the child tax credit. Again, the only check on the propriety of a claimed deduction will come in the highly unlikely event that the IRS audits the taxpayer. (86)
b. Gaps Filled, Unfilled, and Overfilled
This potential for under- and overdocumentation of dependents highlights the need for specific corrective measures that deter false or erroneous claims by taxpayers and foster compliance with the terms of the relevant Code provisions. Yet, a review of these provisions reveals a haphazard, uncoordinated approach to filling these potential gaps. On one hand, the independent identification and documentation requirements in the dependent care credit and the earned income credit ensure that the use of a concomitantly narrower and broader definition of "dependent" in these provisions will not give rise to either an under- or overdocumentation problem. (87) In addition, the IRS has itself taken steps to cure the possibility of overdocumentation with regard to the child tax credit by requiring taxpayers to check a box next to those dependents for whom the taxpayer may claim an additional personal exemption and who render the taxpayer eligible to claim the child tax credit. ([section][section]) On the other hand, [section] 24 contains an independent documentation requirement --even though that requirement is duplicative of the documentation requirement in [section] 151(e), which applies to each and every dependent for whom a child tax credit may be claimed. (89) The same is true of the American opportunity, hope, and lifetime learning credits and the tuition deduction, which, as described above, employ definitions of "dependent" that are coextensive with that employed by [section] 151(e), yet contain their own independent documentation requirements. (90) The other deduction and credit provisions employ definitions of "dependent" that depart from that employed in [section] 151, thereby creating potential gaps in the coverage of its de facto documentation requirement; however, none of those provisions contains an independent documentation requirement that would fill that gap. (91)
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|Title Annotation:||Introduction through II. Deductions, Credits, and Exclusions A. Documenting Relatives and Other Family Members 2. Overlap with Other Tax Deductions and Credits for Dependents, p. 329-361|
|Author:||Infanti, Anthony C.|
|Publication:||Columbia Journal of Gender and Law|
|Date:||Jan 1, 2012|
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