Enforcing Conventional Morality ThroughTaxation?: Determining the Excludabilityof Employer-Provided Domestic PartnerHealth Benefits Under Sections 105(b)and 106 of the Internal Revenue Code

Lindsay Brooke King* I. Introduction In the last decade, municipal and private employers have begun to extend employer-provided spousal benefits to employees' domestic partners.' Historically, employers have provided certain benefits to employees' spouses,2 but generally have denied benefit coverage to unmarried employees' domestic partners. This employment practice undermined certain laws and policies prohibiting discrimination in the workplace.3 Because benefits packages comprised a large portion of employee compensation,4 employees with domestic partners received considerably less in compensation than their married colleagues performing identical work. Although unmarried heterosexual employees, as well as gay and lesbian employees, received similarly diminished compensation packages, heterosexual employees had the option to marry their domestic partners, whereas gay and lesbian employees did not.5 Employers feared that extension of benefits, particularly health benefits, to cover domestic partners would result in prohibitively large costs6 Nonetheless, certain employers gradually extended health benefits, as well as other benefits, to domestic partners and discovered that such fears were unfounded.7 Since 1985, when Berkeley, California, became the first city to extend health benefits to employees' domestic partners, several cities and private employers have followed suit.8 One of the major advantages flowing from employer-provided health benefits is the beneficial federal tax treatment resulting to both employers and employees.9 Specifically, the Internal Revenue Code of 1986, as amended (IRC or Code), allows the recipient employee to exclude the cost of employer-provided health coverage from compensation subject to income and employment tax.'o Although married employees also may exclude employer-provided coverage for their spouses," unmarried employees may exclude coverage for their domestic partners only if those partners qualify as dependents of the employee.'2 State law determines marital status and may affect dependent status as well.'3 Although several states recognize common-law marriages, no state recognizes same-sex marriages. 14 Furthermore, a person cannot qualify as a dependent of a taxpayer if that person's relationship with the taxpayer "is in violation of local law" within the meaning of IRC 152(b)(5).15 This Note explores the meaning of "a relationship . . . in violation of local law"'6 for purposes of determining dependent status under federal income tax law. Part II surveys the evolving employer practice of extending health benefits to employees' domestic partners.'7 Part III discusses the tax treatment of employer-provided health benefits under the Code, as interpreted in private letter rulings issued by the Internal Revenue Service (IRS or Service).'8 Part IV reviews how the courts and the IRS have applied to heterosexual relationships the local law exception to the definition of dependent.'9 Lastly, Part V argues that absent state enforcement of statutes prohibiting unmarried cohabitation, domestic partner health benefits should be excludable from an employee's gross income under Code 105(b) and 106.' II. Extension of Employee Benefits Through Domestic Partnership Provisions2' As American families and the American work force have grown increasingly diverse,' employers have adjusted their policies in response to the changes. Employer policies extending certain benefits to employees' domestic partners developed as a response to the needs and requests of same-sex couples23Gay and lesbian couples have sought means through which to provide for stability in their relationships comparable to the stability provided to heterosexual couples under state marriage laws24Marriage triggers a number of rights and privileges, including the extension of certain employer-provided benefits to the spouse of an employee.' These benefits generally are unavailable to partners of unmarried employees regardless of the sex of the partners or the degree of commitment in the couples' relationships. …