I'd have to agree with MS on this - he's done it to annoy other people and so deserves to have it removed, whether or not it should be offensive is a different matter, but since it was clearly going to rile people it's good they took action and stuck to it.
The only thing I can add to this conversation really, is that MS have recently changed their name policy. In the past, people would get friends to submit multiple "bad gamertag" reports on them, and when it hit a limit, MS just send a message telling the person to change it; for free (making it a cheap work-around instead of paying to get the gamertag changed.
However, they now look at the gamertag manually after it gets any complaints at all; and if they deem it to be safe - it doesn't get changed (no matter how many complaints). But, if they deem it to be a breach of the TOS they now make you pay for a change instead.
Generally I have to congratulate the Xbox-Police; they do a better job of keeping xbox live clean than any other similar service does.
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