Introduction
Under Article 93, Section XXIII, subsection a) of the Income Tax Law[1], no tax is payable on income derived from gifts between spouses, regardless of the amount.
For civil law purposes, spouses are persons who have legally entered into marriage. As the provision under analysis shows, the law recognizes a “preferential treatment” for income tax[2] only for a “traditional family” model.
As for concubinage, generally under the civil legislation of the states, it is a de facto relationship between two persons who, without being married and without legal impediments to marry, live together and share a common life for a minimum determined period or, where the other requirements are met, have children in common. This de facto relationship generates rights and obligations similar (if not identical) to those of persons united in marriage. However, for income tax purposes, any gift between concubines is taxable, unless the general exemption for donations under subsection c) of Section XXIII of Article 93 applies.
It is worth recalling that individuals resident in Mexico are obligated to pay income tax on income they obtain under Title IV of the Income Tax Law. When a gift is received, the taxpayer obtains income from the acquisition of property, and the corresponding income tax must be determined and paid under Chapters V and XI of that Title.
Amparo for underinclusiveness and discrimination
Approximately two years ago, a taxpayer, an individual resident in Mexico, challenged the constitutionality of Article 93, Section XXIII, subsection a) of the Income Tax Law through an indirect amparo proceeding, because she had received a property as a gift from her concubine and had to pay the corresponding income tax. In her challenge, she argued, among other matters, that the provision violated the principles of state protection of the family, tax equity, equality, and non-discrimination.
The District Judge granted the amparo and removed the provision from the claimant’s legal sphere. In essence, the judge held that concubines may be equated with spouses because the civil-law provisions on marriage also apply to concubinage. Therefore, concubines should not be denied the same rights and obligations, including tax benefits. The judge stated that the challenged provision is unconstitutional because it is “underinclusive,” granting tax benefits only to spouses and excluding concubines without an objective or reasonable justification.
The President of the Republic filed a review appeal, and the matter eventually reached the (now defunct) Second Chamber of the Supreme Court, with Justice Alberto Pérez Dayán assigned as rapporteur.
The draft ruling was listed for the session of February 14, 2024, at which the granting of the amparo to the claimant was proposed. However, before the session took place, the authority withdrew its review appeal, preventing the draft from being voted on and, probably, preventing the creation of a binding precedent in favor of taxpayers. The withdrawal meant that the favorable judgment of the District Judge became final.
The Supreme Court draft
The draft ruling proposed to classify the President’s arguments as inoperative and unfounded. Most of the reasoning in the draft is the kind usually found in Supreme Court judgments analyzing tax matters and has no doctrinal relevance, except for one point that particularly caught my attention: the analysis of the constitutionality of a tax provision under strict scrutiny because it is linked to a suspect classification under Article 1 of the Constitution, namely, individuals’ marital status.
For several years, Supreme Court case law has consistently held that when reviewing the constitutional validity of a tax provision, the intensity of scrutiny is flexible, deferential, or not strict. This is because, according to the Court, the legislature has a very broad configurability over the substantive and procedural tax system, so that, in order not to undermine its political freedom, the constitutional judge’s scope for interference is more limited.
The Supreme Court usually relies on the principle of proportionality[3] and weighs whether the legislative measure under review violates tax principles, whose protective scope has become increasingly restricted.
In the Court’s words, deferential scrutiny is limited to verifying that the provision pursues an objective and constitutionally valid purpose; determining whether the chosen means is suitable, requiring a minimum level of suitability and a minimum proportional correspondence between the chosen means and the pursued end that justifies the legislative intervention. The choice of means to achieve that purpose does not require the legislature to justify, among the available means, which one satisfies all degrees (quantitative, qualitative, and probabilistic) or levels of intensity (effectiveness, speed, completeness, and certainty).[4]
By contrast, strict scrutiny must be used when the provision uses or is linked to any of the suspect classifications set forth in Article 1 of the Constitution (for example, religion, sexual preference, or marital status). This type of scrutiny implies the following:
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It must be assessed whether the distinction based on a suspect classification responds to a compelling purpose from a constitutional perspective. Unlike ordinary scrutiny, it is not enough that the purpose be constitutionally acceptable; it must pursue an objective of constitutional relevance, i.e., protect a constitutional mandate;
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It must be analyzed whether the legislative distinction is narrowly tailored to the compelling constitutional purpose. The measure must be entirely directed toward achieving the purpose, and it is not sufficient that it be potentially connected with those objectives; and
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The legislative distinction must be the least restrictive means possible to effectively achieve the compelling purpose from a constitutional standpoint.[5]
In the specific case, to analyze the constitutionality of Article 93, Section XXIII, subsection a) of the Income Tax Law, Justice Pérez Dayán proposed to consider isolated thesis 1a. CLXXIX/2016 (10a.), in which the First Chamber held that equality or distinctions in conditions between spouses and concubines belong to the category of marital status, so that provisions establishing them must be subject to strict scrutiny to determine their constitutionality.
The draft stated that neither the merely fiscal benefit of the exemption nor the principle of generality governing tax matters can, by themselves, justify the constitutionality of an exemption established by the legislature based on a suspect classification such as marital status, specifically, the status of spouses.
Thus, the draft confirmed the District Judge’s judgment and granted constitutional protection, finding that the different treatment between spouses and concubines for purposes of the income tax exemption violates the principles of equality and non-discrimination.
Conclusion
As noted at the outset, the draft was not discussed by the (now defunct) Second Chamber of the Supreme Court because the authority withdrew its appeal. We do not know with certainty how the remaining justices would have voted or whether a favorable binding precedent for taxpayers would have been created.
In my opinion, the District Judge’s judgment and the draft’s reasoning have very solid argumentative foundations, so it should not be ruled out that other taxpayers may again challenge the constitutional validity of this provision in the future. Of course, those will be different times, and we do not know how justices and judges elected by popular vote will approach these matters.
Notes
[1] Hereinafter, the Income Tax Law.
[2] Hereinafter, income tax.
[3] We refer to the principle of legal proportionality, not tax proportionality.
[4] Case law 2a./J. 11/2018 (10a.).
[5] Case law P./J. 10/2016 (10a.).
The author holds a Master’s degree in Tax Law and is a partner in the tax practice of Matus Ruiz & Romero Apis.