Executive
Summary
Mother paid medical expenses directly to provider,
and also paid daughter’s real estate taxes. IRS denied deduction to
daughter
since the daughter did not pay the expenses. Tax Court ruled that based
upon
substance over form, the mother had in fact made a gift to the
daughter, and
the daughter was the payor of the expenses. Hence, the daughter is
entitled to
the deduction.
Facts
In 2006, Judith Lang incurred $27,776 of deductible medical
expenses (assumed to be net of the 7½% of AGI limitation), and had
$6,840 of
real estate taxes. Her mother, Frances
Field, paid $24,559 directly to Judith’s medical providers and paid
$5,508
directly to the city to pay for Judith’s real estate tax. Mrs. Field
had no
obligation to make these payments. Nor did she claim an income tax
deduction
for these payments.
In
order to claim a deduction for medical expenses, the expense must
be for the taxpayer, spouse or dependent. Since Judith was not a
dependent of
Mrs. Field, Mrs. Field could not legally claim a deduction. In order to
claim a
deduction for real estate taxes, one must be legally obligated to make
the
payment. Mrs. Field was not. The second
requirement for each of these expenses is that the taxpayer actually
make the
payment. It is this second requirement
that was the subject of the case.
The
IRS argued that Judith did not make the payment, and therefore she
could not take the deduction. Judith countered that based upon
substance over
form, she received a gift from mom, and she was the actual payor of the
expenses.
The
Court sided with Judith, stating that Mrs. Field did make a gift
to Judith and Judith gets credit for making the payment. The Court
noted that
Mrs. Field’s payments directly to the medical providers meant that,
under the
gift tax rules, these payments were not taxable gifts. But the Court
said that
the gift tax rules do not control for income tax treatment.
Hence,
Judith is entitled to the deduction.
Comment
If the IRS position was allowed to stand, then no one would
be entitled to a deduction in this case; mom because it wasn’t her
obligation,
and daughter because she didn’t pay it. The Court seemed to look at
this as a
situation where SOMEONE should get the deduction, and wisely (in my
opinion)
decided in favor of Judith.
It
should be noted that since the medical payments did not constitute
a gift, and the real estate tax payment did not exceed the annual
exclusion,
there was no gift tax issue. I would suggest that it would not be a bad
idea in
situations such as this, or similar ones such as a grandparent paying
college
tuition and can the parent claim a deduction or credit, that the actual
payor
file a gift tax return to document that they’ve made a gift to the
person
obligated to make the payment, so that that person can claim the
deduction/credit.
Hope
this helps you help others.
Cite
Judith
F. Lang v. Commissioner, TC Memo. 2010-286, December 30, 2010.
