Microsoft's Stephen Toulouse has explained the reasoning behind the banning of GamerTag "thegayergamer" on his blog. The company deemed it was in breech of terms and conditions, basically.
"[a member may not] Create a Gamertag or use text in other profile fields that may offend other members. This includes comments that look, sound like, stand for, hint at, abbreviate, or insinuate any of the following: profane words/phrases, sexually explicit language, sexual innuendo, hate speech (including but not limited to racial, ethnic, or religious slurs), illegal drugs/controlled substances, or illegal activities.
Full thing through the link.