Category: Individual; Deductions & Credits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com I refer to your memo of March 7, 1997. The taxpayer paid various expenses in connection with an adoption. The child was placed with the taxpayer as a new born in December of 1996. The adoption will become final in 1997. The issues you raised and my responses are as follows. Q1) Can the child be claimed as a dependent in 1996? A1) The child can be claimed as dependent in 1996 provided the adoption agency is an authorized agency. See discussion below. Q2) Can medical expense related to care of the mother, delivery of the child, post natal care of the child, and pre-delivery meals and lodging for the mother be deducted as a medical expense. A2) Meals and lodging for the mother and pre-natal care are not deductible. Similarly, meals and lodging paid for another mother in 1996 (the taxpayer elected not to adopt the child in question) are not deductible. Post-natal care of the child is deductible provided the child really is a dependent and the expenses are paid after the child is placed in the taxpayer's home. Deductibility of delivery expenses is doubtful. See below. Q3) What expenses count in 1997 in connection with the adoption credit? A4) Qualified adoption expenses are reasonable and necessary adoption fees, court costs, attorney fees, and other expenses which are directly related to and have the principal purpose of the taxpayer's legal adoption of an eligible child. No credit is allowed for expenses for which an income tax deduction or credit is otherwise allowed. Accordingly, the taxpayer cannot claim the credit and a medical deduction for the same expenses. Discussion Under Sections 152(a) and 152(b)(2), a child who is a member of the taxpayer's household can be a dependent (before finalization of the adoption) if the child was placed in the household by an authorized placement agency for legal adoption by the taxpayer. Regulation Section 1.152-2(c)(2) provides that an authorized placement agency is any agency which is authorized by a State, the District of Columbia, a possession of the United States, a foreign country, or a political subdivision of any of the foregoing to place children for adoption. The regulation further provides that a taxpayer who claims as a dependent a child placed with him for adoption shall attach to his income tax return a statement setting forth the name of the child for whom the dependency deduction is claimed, the name and address of the authorized placement agency, and the date the formal application was filed with the agency. Reg. Section 1.213-1(e)(3) provides that a medical deduction for a dependent is allowed if the relationship as a dependent existed either at the time the medical services were rendered or at the time such services were paid for. It is clear that medical expenses for the mother are not deductible. The mother in this case is neither the taxpayer nor a dependent of the taxpayer. I assume that the mother was not living with and being supported by your client (such that the mother might be a dependent of your client.) Medical expenses that obviously relate to the mother (such as prenatal care) would clearly be nondeductible. It is clear that medical expenses rendered directly to the adopted child (or the child placed-in-the-home-pending adoption) are deductible. Revenue Ruling 60-225, 1960-2 CB 105. It seems to me the medical expenses in question would logically fall into four categories: A) prenatal care for the mother and developing fetus; B) delivery expenses; C) post-natal care of the child; and D) post-natal care of the mother. It seems clear that prenatal and post-natal care of the mother are not deductible unless she is the taxpayer's dependent. It seems clear that post-natal care of the child is deductible provided it was paid for after the child was placed in the taxpayer's home. It is extremely clear that pre-natal and post-natal meals and lodging for the mother are not deductible as a medical expense. The rather sticky question is what about the expenses of the delivery? Are they expenses of the mother or the child? I can only find two cases about delivery expenses. The taxpayers lost both of them. It is interesting to note that the taxpayers lost because of failure of proof, not because the courts held as a matter of law that delivery expenses are attributable to the mother, not the child. In both cases, the courts simply said the taxpayer failed to prove that delivery expenses are attributable to the child, not the mother. See B.L. Kilpatrick, 68 TC 469, Dec. 34,493; and G.L. Hornish, 37 TCM 919, Dec. 35,203(M), TC Memo. 1978-213. This is to say if your client could bear the factual burden of proving that delivery expense are attributable to the child from the standpoint of Section 213, he could deduct the delivery expenses. Having said that, however, I wonder if it would ever be possible for the taxpayer to meet his burden of proof in such a matter. At best, I think your client would have an uphill factual battle to fight that two other taxpayers in the same circumstances have failed to win. There is a practical problem with the dependency exemption for the 1996 return in that the child's social security number must be included on the parent's return for 1996, but the parents cannot obtain a social security number prior to finalization of the adoption. The IRS said in a recent press release that such taxpayers should write "U.S. Adoption Pending" in the exemption space on the return. In addition, the documentation from the adoption agency showing placement of the child in the taxpayer's home should be attached to the return. Information Release IR-97-6. Re: Adoption Credit, IRC Section 23 I assume the circumstances in question do not involve a surrogate mother. Such expenses are not eligible for the credit in the event that the arrangement is in violation of state or federal law. According to the Conference Committee Report surrounding enactment of this provision, the credit is allowed only with respect to expenses incurred in 1997 and later years. I think the choice of the word incurred (which is normally used in the context of accrual basis taxpayers) is significant: I think this would exclude expenses paid in 1997 by a cash basis taxpayer related to adoption activities the occurred before 1997. Although not entirely clear, it seems to me that medical expenses not related directly to the child and other peripheral expenses (i.e., the mother's medical and living expenses) should qualify for the credit. However, in this case, it appears that the expenses were probably incurred in 1996. Note that the adoption credit is phased-out for taxpayers with adjusted gross incomes between $75,000 and $115,000. The amount of credit is reduced (but not below zero) by a fraction, the numerator which is AGI in excess of $75,000 and the denominator of which is $40,000. Accordingly, if the AGI of your taxpayer exceeds $115,000, no credit is allowed. |
