1 5 2 T.C. No . 1 5

UNITED STATES TAX COURT

MARY K. FEIGH AND EDW ARD M . FEIGH, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 2 0 1 63 -1 7
. Fi l edM ay 1 5 , 2 0 1 9
.

P-Wrecei v ed a M ed i cai dwai v er p aym en tp u rs uan tt o a St at e M ed i cai d wai v er p ro gram fo r t h e care o f Ps ’ d i s ab l edadu ltch i l dren
. Pu rs uan tt o No t i ce 2 0 1 4 -7 , 2 01 4 -4 I.R.B. 4 4 5, wh i ch cl as s i fi es s u ch p aym en t s as d i ffi cu l t y

o f care fo s t er care p aym en t s n o ti ncl u d i b l e i n g ro s s i n co m e u n d er I.R.C. s ec. 1 3 1 , Ps ex cl u d edth e p aym en tfro m g ro s s i n co m e. Ps al s o cl ai m edan earn edi n co m e t ax cred i t an d t h e refu n d ab l e p o rt i o n o f a ch i l dt ax cred i t
. As rel ev an th ere, t he cred it s are cal cu l at edwi t h res pect t o “ earn edi n co m e” as d efi n edi n I.R.C. s ec. 3 2 . R arg u es thatP-W ’ s M ed i cai dwai ver p aym en td o es n o t qu al ify as “ earn edi n co m e” b ecau s e i twas ex cl u d edfro m g ro s s i n co m e p urs u an t t o No t i ce 2 0 1 4 -7 , s upra. Ps co un t er t h ata n o t i ce can n o trecl as s i fy

o t h erwi s e “ earn edi n co m e” as u n earn edt o rem o v e a b en efi tp ro v i d edb y

Co n g res s th ro u g h th e I.R.C. Hel d : P-W ’ s M ed i cai dwai v er p aym en t d oes n o tfal l u nd er t h e p l ai n t ex to f I.R.C. s ec. 1 3 1
.- 2
- Hel d , fu rt h er, No ti ce 2 0 1 4 -7 , s up ra, can n o trecl as s i fy P-W ’ s M ed i cai d wai v er p aym en tt o rem o v e a s t atu to ry t ax b en efi t.

Cal eb B. Sm i t h, fo r p et i ti o n ers . J o h n Sch m i t t d i el an dTi m o t hy M . Peel , fo r res p o n d en t
. OPINION GOEKE, Ju d g e: Res p on d en ti s s u eda n ot i ce o f d efi ci en cy o n J u n e 2 6 , 2 0 1 7 , d et erm i n i n g an i n co m e t ax d efi ci en cy o f $ 3,9 7 2 fo r p et i t i o n ers ’ 2 01 5 t ax y ear. Pet i t io n ers t i m el y

fi l eda p et i t i o n wi th th i s Co u rtt o ch al l en g e res p o n d en t ’ s d et erm i n at i o n s as s etfo rt h i n h i s n o t i ce o f d efi ci en cy . Back gro u n d Th i s m at t er was s ub m i t t edfu l l y s t i p ul at edb y

th e p art i es p u rs u an tt o Ru l e 1 2 2
. 1 Atth e t i m e t h e p et i t i o n was fi l ed , p et i t i o ners res id edi n M i n n es o t a. Pet i t i o ners t i m el y

fi l eda Fo rm

1 0 4 0 , U.S. In d iv i du al In co m e Tax Retu rn , fo r t h e 2 0 1 5 t ax y ear. Pet i t i o n er M ary K. Fei g h was i s s u ed a Fo rm W -2 , W ag e
an d Tax St at em en t , fro m

“ M AINSL SERVICES M N” wh i ch refl ect ed$ 7,3 5 3 i n

1 Un l es s o t h erwi s e i nd i cat ed , al l s ect i o n referen ces are t o th e In t ern al Rev en u e Co de (Co d e) as am en d edan di n effect atal l rel ev an tt im es , an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.- 3
-

wag es , t i p s , an do t h er co m p en s at i o n. Th i s am o u n t qu al i fi es as a M ed i cai dwai v er p aym en t fo r t h e care o f p et it i o n ers ’ rel at edd i s ab l edadu l t ch i l dren du ri n g th e 2 0 1 5 t ax y ear, an d p et i ti o n ers rep o rt edth i s p aym en to n thei r 2 0 1 5 t ax retu rn . 2 Pet i t io n ers h adn o o t her Fo rm W -2 i n co m e fo r 2 0 1 5 an d rep o rt edn o o t her s u ch i n co m e o n th ei r 2 0 1 5 t ax return . Th e p art i es h av e s t ip ul at edth atM ed i cai dwai v er p aym en ts are t reat edas d i ffi cu l t y o f care p aym en t s p u rs u an tt o In t ern al Rev en u e Serv i ce (IRS) No t i ce 2 0 1 4 -7 , 2 0 1 4 -4 I.R.B. 4 4 5, an dth atth ey are ex cl u d ab l e fro m

g ro s s i nco m e u n d er
s ect i on 1 3 1 , wh i ch ex cl u d es cert ai n fo st er care p aym en ts fro m t h e g ro s s i n co m e o f a fo s t er care p ro v i d er. 3 Al th ou g h p et i t i o n ers rep o rt edth ei r M ed icai dwai v er p aym en t as wag es o n th ei r 2 0 1 5 t ax retu rn , th ey ex cl u d edth e p aym en t fro m th ei r cal cu l at io n o f g ro s s i n co m e fo r 2 0 1 5 p u rs u an tt o th e i n s t ru ct io ns i n cl ud edwi t h Fo rm 1 0 4 0
. Fo r 2 0 1 5 p et it i o n ers cl ai m edan earn edi n co m e t ax cred it(EITC) o f $ 3 ,3 1 9
an d an ad d it i on al ch i l dt ax cred i t(ACTC) o f $ 6 53 , wh i ch rep res en tedth e

2 As u s edi n th is Op in i o n , a M ed i cai dwai v er p aym en ti s a p aym en trecei v ed b y an i n d i v i du al care p ro v i d er as p arto f a St at e’ s M ed icai dHo m e an d Co m m u n i t y -Bas ed Serv ices W ai v er Pro g ram u n d er s ec. 1 91 5 (c) o f t h e So ci al Secu ri t y Act , 4 2 U.S.C. s ec. 1 3 9 6 n(c) (2 0 12 ).
3 W e are n o tb o u n db y

th e p art i es ’ s t ip u lat i o n as t o m at t ers o f l aw. Green e v . Co m m i s s i o n er, 8 5 T.C. 1 02 4 , 1 0 2 6 n .3 (1 98 5 ).- 4
-

refu nd ab l e p o rt i o n o f p et i t i o n ers ’ ch i l d t ax cred i t . As s etfo rth i n h i s n o t i ce o f d efi ci en cy , res po n d en td i sal lo w edp et i t i o n ers ’ cl ai m ed EITC an d ACTC. To qu al i fy fo r an EITC o r an ACTC p et i t i on ers m u s td em o n s t rat e th atth ey h ad

“ earn edi n co m e” fo r 2 0 1 5 as t h att erm i s d efi n edi n s ect io n 3 2(c)(2 )(A). Res po n d en targ u es th atp et it i o n ers ’ M ed i cai dwai v er p aym en twas p ro p erl y
ex cl u d edfro m

g ro s s i n co m e an dd oes n ot qu al i fy as “ earn edi n co m e” fo r t h e p u rp os e o f d et erm i n i ng EITC an dACTC el i g ib i l i t y . Th erefo re, res p on d en targ u es , p et i t i o n ers are n oten ti t l edt o an EITC o r an ACTC fo r 2 0 15
. Th e s o l e i s su e fo r o u r co n s i d erat i o n i s wh et h er M ed i cai dwai v er p aym en t s , wh i ch are t reat edas d i ffi cu lt y o f care p aym en t s t h atare ex cl u d ab l e fro m g ro s s i n co m e p u rs u an t t o No t i ce 2 0 1 4 -7 , s upra, n ev ert h el es s qu al i fy as “ earn ed i n co m e” fo r d et erm in i ng el i g i b i l i t y t o recei v e an EITC o r an ACTC.

Di s cu ss i o n Th i s cas e i nv o l v es a n o v el qu es t i o n : wh ether i n co m e t h ata t ax p ay er h as
ex cl u d edfro m

g ro s s i n co m e p urs u an tt o No t ice 2 01 4 -7 , s up ra, i s co n si d ered
earn edi n co m e fo r t h e p u rp o s es o f cal cu lat i n g EITC an dACTC el i g ib i l i t y . As a g en eral ru l e, the Co m m i s s i on er’ s d et erm i nat i o n s i n a n o t i ce o f d efi ci en cy

are p res u m edco rrect , an dth e t ax p ay er h as t he b u rd en o f p ro v i ng th at t h ey are erro n eo u s . Ru le 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 11 , 1 15 (1 9 3 3 ).- 5
-

Cred i t s are m at ters o f l eg i s lat i v e g race, an da t ax p ay er b ears the b u rd en o f p ro v i ng h e i s en t i t l edt o t h e cred i t s cl ai m ed . INDOPCO, In c. v . Co m m is s i o n er, 5 0 3 U.S. 7 9 , 8 4 (1 9 9 2 ); Seg el v . Co m m is s i o n er, 8 9 T.C. 8 1 6 , 8 4 2 (1 9 8 7 ). Sect io n 3 2 (a)(1 ) al l o ws an i n co m e t ax cred i tfo r el i g i bl e i n d i v i du al s wh i ch i s co m p ut edas a p ercen t ag e o f t h e t ax p ay er’ s “ earn edi n co m e”. “ Earn ed i nco m e” i s d efi nedu n der s ect i o n 3 2 (c)(2 )(A)(i ) as “ wag es , s al ari es , t i ps , an do t h er
em pl o y ee co m

p en s at io n , b u to n l y i f s uch am o u nt s are i n cl ud i b l e i n g ro s s i n co m e fo r t h e t ax ab l e y ear”. (Em p h as i s ad ded .) Sect i o n 2 4 (a) al l o ws a cred itag ai n s tt ax wi t h res p ect t o each qu al i fy i n g ch i l do f t h e t ax p ay er fo r wh i ch t h e t ax p ay er i s al l o wed a d ep en d en cy

ex em p t i o n d edu ct i on u n d er s ect i o n 1 5 1 . As rel ev an th ere-- wh ere p et i t i o n ers h adn o t ax l i ab i l it y i m p o s ed --s ect i o n 2 4 (d ) al l o ws fo r a refu nd ab l e p o rt i o n o f t h is ch i l dt ax cred i tb as edi n p arto n th e t ax p ay er’ s earn ed i n co m e as d efi nedu n d er s ect i o n 3 2
. Fo r 2 0 1 5 p et it i o n ers rep o rt edFo rm W -2 i nco m e th atth e p art i es s ti p u l at e qu al i fi es as a M ed i cai dwai v er p aym en t . Th e p art i es ag ree t h atp et i t i o n ers ’ o t h er fo rm s o f i n co m e rep o rt edo n thei r 2 0 1 5 t ax retu rn d o n o t qu al i fy as “ earn ed i n co m e” u nd er s ect i o n 3 2
. Th u s , t o qu al i fy fo r th e cred i t s ati s s u e, p et i t i o n ers
m u stes t ab l i s h t h atth e i n co m e t h ey recei v ed as a M ed i cai dwai v er p aym en t qu al i fi es as s ect i o n 3 2 “ earn edi n co m e”.- 6
-

On J an u ary

3 , 2 0 1 4 , th e IRS an n ou n cedi t s p o s it i on i n No t i ce 2 0 1 4 -7 , 2 0 1 4
- 4 I.R.B. at 4 4 6 , th atcert ai n qu al i fi edM ed icai dwai v er p aym en t s s u ch as t h e o n e p et i t i o n ers recei v edi n 2 0 1 5 wi l l b e t reat edas d i ffi cu l t y o f care p aym en ts th atare
ex cl u d ab l e fro m g ro s s i n co m e u n d er s ect i o n 1 3 1 , “ an dth i s treat m en t wi ll ap p l y wh et h er t h e care p ro v i der i s rel at edo r u n rel at edt o th e el i g i b l e i n d i v idu al .” Res po n d en tb el i ev es t h at b ecau s e t h es e p aym en t s are n o w ex cl u d ab l e fro m g ro s s i n co m e u n d er s ect i o n 1 3 1 b y v i rtu e o f No t i ce 2 0 1 4 -7 , s upra, t h ey are n o t

“ i n cl u d ib l e” i n g ro s s i n co m e an d , th erefo re, fai l t o m eetth e s tatu to ry d efi n i t i o n o f

“ earn edi n co m e” i n s ect io n 3 2
. Pet i t i o n ers co u n t er t h atth ere i s n o s t atu t o ry , reg u l at o ry , o r ju di ci al au t h ori t y th at cl as si fi es M ed i cai d wai v er p aym en t s as n o t i n cl u d i b l e i n g ro s s i n co m e u nd er s ect i o n 1 3 1 ; rat h er, th e s o l e au t h o ri ty fo r t h i s cl as s ifi cat i o n i s No t i ce 2 0 1 4-7 , s up ra. Pet i t i o ners ’ arg um en ti s th atth e IRS
can n ot , th ro u g h a s ub reg u l at o ry n o t i ce, recl as s i fy

th ei r o t h erwi s e “ earn ed i n co m e”
as u n earn edfo r p u rp os es o f d et erm i n i n g t ax cred i tel i g i b i l it y . W e m u s td eci d e wh atd eferen ce, i f an y , we o we t o th e i n t erp ret at i o n o f th e Co d e ad v an ced b y No t ice 2 01 4 -7 , s up ra. Sect io n 1 3 1 (a) p ro v i d es : “ Gro s s i n co m e s h al l n oti ncl u d e am o u n ts recei v ed b y a fo s t er care p ro v i d er du ri ng th e t ax ab l e y ear as qu al ifi edfo s ter care p aym en t s.” Sect i on 1 31 (b ) fu rth er d efi nes a qu al ifi edfo s ter care p aym en t i n- 7
-

rel ev an t p artas a p aym en t wh i ch i s “ m ad e p u rs u an tt o a fo s t er care p ro g ram o f a St at e o r p o li t ical s ub di v i s io n ” an dwh i ch i s “ a d i ffi cu l t y o f care p aym en t
. ” In No t ice 2 01 4 -7 , 2 0 1 4 -4 I.R.B. at4 4 6 , th e IRS an n o u nced th e fo l l o wi n g g u i d an ce: To ach i ev e co n s i s t en tfed eral t ax treat m en to f M ed i cai dwai v er p aym en t s * * * as o f J an u ary 3 , 2 01 4 , th e Serv i ce wi l l treat qu al ifi ed M ed i cai d wai v er p aym en t s as d i ffi cu l t y o f care p aym en t s u n d er § 1 3 1 (c) t h at are ex cl u d ab l e u n d er § 1 3 1 , an dth is t reat m en twi l l ap p l y wh eth er t h e care p ro v i d er i s rel at edo r u n rel at edt o t h e el i g ib l e i n d i vi du al . * * * In an n o u nci n g thi s g u i d an ce t he IRS ex p lai n edth ati two u l d n o l o n g er ap p l y Pro g ram M an ag er Tech n i cal Adv i ce 2 0 1 0-0 0 7, wh i ch co n cl ud edth at“ a b i o l o g i cal p aren to f a d i s ab l edch i l d m ay n o tex cl u de p aym en ts u nd er § 1 3 1 b ecau s e t h e
o rd i n ary m ean in g o f fo s t er care ex cl u d es care b y a b i o l o g i cal p aren t .” No t i ce 2 0 1 4 -7 , 2 0 1 4 -4 I.R.B. at4 4 5 . Th ey al s o an n o u n cedth atth ey wo u l dn o l o n g er ap p ly o u r p ri o r h o l di ng s t h at s ug g es t ed“ t hata careg i v er o f a b i o l o g i cal rel at i v e recei v i ng qu al i fi edM ed i cai dwai v er p aym en t s m ay n o tqual i fy

as a fo s t er care p ro v id er u n d er § 1 3 1
. ” 4 Id . at4 4 6 . No t i ce 2 0 1 4 -7 , s up ra, co ncl u d es that

4 Th e IRS an n o u n cedi two u l dn o l o n g er ap p l y o u r h o l d i n gs fro m

Ban n o n v . Co m m i s s i o n er, 9 9 T.C. 5 9 (1 9 9 2 ), Al ex an d er v . Co m m i s s i o n er, T.C. Su m

m ary Op i ni o n 2 0 1 1 -4 8 , o r Harp er v . Co m m i s s io n er, T.C. Su m

m ary Op i n i o n 2 0 11 -5 6
. In Ban n o n , we d i dn o tad d res s s ec. 1 3 1 b u th el d t hatp aym en t s recei v edb y a t ax p ay er fo r p ro v id i n g n o n m ed i cal care t o h er d i s ab l ed adu l td au gh t er were n o t (co n ti n u ed ...)- 8
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“ t reat m en to f qu al i fi edM ed i cai dwai v er p aym en t s as ‘ d iffi cu l t y o f care p aym en t s ’ i s co n s i s t en twi t h th e d efi ni t i o n u n d er § 1 31 (c).” Ho wev er, t h es e p aym en t s cl earl y d o n o t m eetthe p lai n s t atut ory d efi ni t io n fo u ndi n the Co d e. Sect io n 1 3 1 (c)(1 )(A) d efi n es “ d i ffi cu l t y o f care p aym en t s” as , i n ter al i a,

“ co m p en sat i on fo r p ro v i d i n g th e ad d i t i o n al care o f a qu al i fi edfo s t er i n d i v idu al ”. A “ qual ifi edfo s t er i n d i v i du al ” i s “ an y i n d i v i du al wh o i s l i v i ng i n a fo s t er fam i l y h o m e” an dwh o was p l aced th ere b y an ag en cy

o f t h e St at e o r a qu al i fi edfo s t er care p l acem en tag en cy . Sec. 1 3 1 (b )(2 ). Wh i l e “ [s ] ect io n 1 31 d o es n o tex p l i ci t l y ad d res s wh et h er p aym en t s u n d er M ed i cai dwai ver p ro g ram s are q u al i fi edfo s t er care p aym en t s ”, the IRS reas o n edth at“ M ed i cai dwai v er p ro g ram s an d s tat e fo s t er care p ro g ram s * * * s h are s i m i l ar o v ers i g h tan d p u rp o s es .” No t i ce 2 0 1 4 -7 , 2 0 1 4 -4 I.R.B. at4 46 . As an i n i t i al m at t er, t h e p lai n t ex to f s ect io n 1 31 ren d ers i t i n ap p l i cab l e t o th e care o f b i o l o g i cal adu l tch i l dren . In fact , i n No ti ce 2 0 1 4 -7 , s up ra, t h e IRS ack n o w l ed g edth ati th as “ hi s t o ri cal l y * * * ch al l en gedth e

4 (...co n t in u ed ) n o n t ax ab l e wel fare b en efi t s . InAl ex an d er, we h el dth atp aym en t s u n d er W as h i n g t o n St at e’ s M ed i cai dPers o nal Care p ro g ram fo r t h e i n -h o m e care o f t h e t ax p ay er’ s b i ol o g i cal p aren ts d i dn o tm eetth e s t atu t ory req u i rem en t s t o b e co n si d ered fo s ter care p aym en ts u n d er s ec. 1 3 1 b ecau s e t h e t ax p ay er’ s p aren t s were n o t “ p l aced ” i n th e h o m e an dth e t ax p ay ers d i dn o to p erat e a “ fo s ter fam i l y h o m e”. In Harp er, we ag ai n d i dn o t ad dres s s ec. 1 3 1 b u t, ci t i n g Ban n on , h el dthat p aym en t s recei v edb y

a t ax p ay er fo r p ro v i d i ng care t o h er d i s ab ledadu l ts o n d i d n o tqu al i fy

as n on t ax ab l e wel fare b en efi t s .- 9
-

ex cl u d ab i l i t y

o f p aym en t s t o i n d i v i du al care p ro vi d ers cari n g fo r rel at ed i n d i v i du al s i n th e p ro v i d er’ s h om e”, an di t s o wn t ech n ical ad v i ce p rev i o us l y
co n cl u d ed t h at t h e o rd i n ary m ean i n g o f fo s t er care ex cl u d es care b y a b i ol o g i cal p aren t . Nev ert h el es s , No ti ce 2 0 1 4 -7 , s up ra, co ncl u d edth atqu al i fi ed M ed i cai d wai v er p aym en t s wo u l db e t reat edas d i ffi cu l t y o f care p aym en t s “ wh et h er t h e care p ro v id er i s rel at edo r u n rel at edt o th e el i gi b l e i n d i v i dual .” Ad d it i on al l y , a p l ai n read i n g o f t h e s ect io n 1 31 req u i rem en tth atth e care reci pi en t b e “ p laced ” i n a “ fo s t er fam i l y h o m e” ren d ers i ti nap pl icab l e h ere wh ere p et i t i o n ers are cari n g fo r t h ei r rel at edadu ltch i ld ren i n th ei r o wn h om e. 5 See s ec. 1 3 1 (b ) an d(c). Wh i l e “ p l aced ” i s n otd efi n ed u n d er s ect i o n 1 3 1 , No t i ce 2 0 1 4 -7 , s up ra, co n cl u d es th at “ an el i gi bl e i n d i v i du al recei v i n g care i n th e h o m e o f t h e i n d i v i du al care p ro vi d er u n der t h e M ed i cai dwai v er p ro g ram wi l l b e t reat edas

‘ pl aced ’ * * * fo r p urp os es o f § 1 3 1 .” Ho wev er, i t p ro v i d es n o co m p el li n g rat i o nal e fo r t hi s co n cl u si o n wh en th e “ qu al i fi edfo s t er i nd i v i du al ” rem ai n s i n h is

5 Al t h o ug h we are n o t b o u n db y St at e l aw, M i n n es o t a St at e l aw d efi n es “ fo st er care” as “ 2 4 h o ur s ub s ti tu t e care fo r ch i l dren p laced away fro m thei r p aren t s ”. M i n n . St at . An n . s ec. 2 6 0 C.0 0 7 s ub d iv . 1 8 (W es t2 0 1 5 ). In ad d i t i o n , fo r a ch i l dt o rem ai n i n fo st er care p as th i s 1 8 th b i rt h d ay th e ch il dm

u s tn o tb e ab l e t o “ s afel y retu rn h om e”. M i nn . St at . An n . s ec. 2 6 0 C.4 5 1 s ub d i v . 3 (1 ) (W es t 2 0 1 5 ). Ci t i n g th e d efi n it i o n o f “ fo s t er care”, t h e M in n es o t a Co u rto f Ap peal s h as co n cl u d ed : “ Becau s e ap p el l an t[fat h er] was l iv i ng wi t h h i s m o th er, s h e was n o t ab l e t o p ro vi d e fo st er care fo r h i s ch i l dren .” In re W el fare o f Ch il dren o f T.N., No . A1 2 -1 0 9 9 , 2 0 1 2 W L 5 89 6 8 9 5 , at* 7 (M i n n. Ct
. Ap p . No v. 2 6 , 2 0 1 2 ).- 1 0 -

o wn h o m e. In s t ead , No t i ce 2 0 1 4 -7 , s up ra, ci t es o u r d eci s i o n i n M i co res cuv . Co m m i s s i o n er, T.C. M em o . 1 9 9 8 -3 9 8 , 1 9 98 W L 7 7 9 7 0 5, t o s up p o rti t s
co n cl u s i o n . In M i co res cu v . Co m

m i s s i o n er, 1 9 9 8 W L 7 7 9 7 0 5 , at * 5 , we l o o k edt o th e p l ai n m ean i n g o f t h e v erb “ t o p l ace” i n o rd er t o d et erm i n e wh et h er q ual i fi edfo s t er i n d i v i du al s were p l aced i n th ei r fo s t er fam il y h o m es b y

th e St at e o r b y

a t h i rd

p art y o rg an i zat i o n ; h o wev er, t h ere was n o d i s p u t e th atthe i n d i v i du al s h adb een p l aced . Inreach i n g o u r h o ld in g th atth e th i rd -p art y o rg an i zat io n h adp l aced th e i n d i v i du al s we ex p lai n ed t h atth ey d i d s u ch th i n g s as “ as s is t i n l o cat i ng adu l t fo s t er h o m es , p ro v i d e t ran s po rt at i o n t o v i ew t h e h o m es , p ro vi d e ad v i ce as t o wh i ch h o m e m i g h t b e b es t fo r t h e i n d i v i du al , an d n eg o t i at e wi t h th e fo s t er h o m e a p ri ce t o b e p ai d fo r t h e care o f t h e i n d i v idual .” Id . No ti ce-2 0 14 -7 , s up ra, s u g g es t s t h at“ St at es p erfo rm

s i m i l ar act i v i t i es wi t h res p ectt o i n di v i du al s p art i ci p at i n g i n M ed i cai dwai v er p ro gram s .” Ho wev er, n o n e o f t h es e t h i n gs can reas o n ab l y b e
s ai dt o h av e b een d on e i n t h i s cas e, wh ere t h e i n d i v i dual s recei v i ng care rem ai n ed i n thei r o wn h o m e. Pet i ti o n ers ’ M ed i cai dwai v er p aym en td o es n o t fal l u n d er t h e p l ai n t ex to f s ect i on 1 3 1 ; th u s, we m u stex am i n e t h e ab i l i t y

o f No t i ce 2 0 1 4 -7 , s up ra, t o cl as s i fy

th e i nco m e as s u ch
.- 1 1 -

Cen t ral t o th i s d i s p u te i s wh ati s m ean ti n s ect i o n 3 2 b y th e p h ras e

“ i n cl u d ib l e i n g ro s s i nco m e”. Th i s Co u rth as p rev i o u sl y o p i n edo n th e m ean i n g o f

“ i n cl u d ib l e” v ers u s “ in cl u d ed ,” an dwe h av e h el d t h atth es e wo rd s are n o t fu n ct i o n al l y

th e s am e. See Ven tu re Fu n d i n g , Lt d. v . Co m m is s io n er, 1 1 0 T.C. 2 3 6 , 2 4 0 -2 4 2 (1 9 9 8 ), aff’ dwi t h ou tp ub l i s h edo p i ni o n , 1 98 F.3 d 2 48 (6 t h Ci r. 1 9 9 9 );
s ee al so Tes co Dri v eawayCo . v . Co m m i s s i o ner, T.C. M em o. 2 0 01 -2 9 4 , s l i p o p . at 1 6 (n ot i n g th at“ i n cl u d i b l e” refers t o “ th e d at e t h at t he i nco m e s h o u ldh av e b een rep o rt ed ” wh i l e “ i n cl ud ed ” m ean s “ t h e d at e t h at t h e reci pi en t rep o rt edth e i n co m e”). Wh il e “ i n cl u d ed ” refers t o th e act u al treat m en t o f i n co m e, “ i n cl u d i b l e” refers t o a req u i redtreat m en to f i n co m e, wh et h er o r n o tth e i n co m e was actu al l y s o t reat ed
. Ven tu re Fu n d i n g , Lt d
. v . Co m m is s i o n er, 1 10 T.C. at2 4 0 -2 4 1 ; i d . at2 5 0 (Co lv i n , J ., co n cu rri n g ) (“ Th e ‘ ed ’ en di n g refers t o s o m et h i n g d o n e i n fact * * *
. Th e ‘ i b l e’ (o r ‘ ab l e’ ) en d i n g refers t o s o m et h i n g l eg al l y req u i red [.] ”); s ee al s o Ei ch en berg er v . ESPN, In c., 8 7 6 F.3 d9 7 9 , 9 8 4 (9 t h Ci r. 2 0 1 7 ) (“ [T] h e s u ffi x

‘ ab l e’ m ean s ‘ cap ab le o f.’ ”). Th u s , an i tem o f i n co m e i s “ i n cl u d i b l e” i n g ro s s i n co m e i f i ti s req u i redt o b e i n cl u d edas i n co m e i rres p ect i v e o f wh ether t h e i t em
was act u al l y

i n cl u d edi n th e t ax p ay er’ s g ro ss i nco m e. Becau s e p et i t i o n ers ’ M ed i cai dwai v er p aym en t i s “ in cl u d i b l e” i n t hei r g ro s s i n co m e b u tfo r No t i ce 2 0 1 4 -7 , s up ra, t h e qu es t i o n fo r u s b eco m es wh et h er a n o t i ce can effect i v el y u s u rp- 1 2 -

Co n g res s ’ au t h o ri t y

i n g ran t i n g t ax cred i t s b y d en y i n g p et i t i o n ers a cred i tth ey
wo u l dh av e b een en t it l edt o i n t h e ab s en ce o f t h e n o t i ce. To res o l v e t h i s qu es t i o n , we m u s tex am i n e wh ats ub st an t i v e effect a n o t i ce
can h av e wh ere i tp ro v i des g u i d an ce as t o th e t reat m en to f cert ai n i n co m e u n d er t h e Co d e. As we h av e n o ted , IRS n o t i ces --as m ere s t at em en t s o f t h e Co m m i s s i o n er’ s p o s it i on --l ackth e fo rce o f l aw. Ph il l ip s Pet ro l eu m Co . v . Co m m i s s i o n er, 1 0 1 T.C. 7 8 , 9 9 n .1 7 (1 9 9 3), aff’ d, 7 0 F.3 d1 2 82 (1 0 t h Ci r. 1 9 9 5 ). Th u s, t hey

can o n ly p ro vi de i n si g h ti n t o the Co m m i s s io n er’ s i n t erp ret at i o n o f t h e l aw; they can n oteffect s ub st an t i v e ch an g es i n th e l aw. Nev ert h el es s, we m u s t
co n si d er wh eth er th i s IRS n o t i ce m ay b e en ti t l edt o s om e d eferen ce u n d er t h e
s t an d ard s o u t l i n edi n Sk i d m o re v . Swi ft& Co ., 3 2 3 U.S. 1 3 4 (1 9 4 4 ). W e h av e p rev i ou s l y

affo rd edSk i d m o re d eferen ce t o a s eri es o f rev en u e
ru l i n gs refl ect in g “ a ‘ b od y of ex p eri en ce an di n fo rm edju d g m en t ’ th atthe IRS h as d ev el o p ed o v er fo u r d ecad es .” W eb b er v . Co m m i s s io n er, 1 4 4 T.C. 3 2 4 , 3 58 (2 0 1 5) (q u o ti n g Sk id m o re, 3 23 U.S. at1 4 0 ). Of co u rs e, ev en i n th atco n t ex twe ack n owl ed gedth at“ [w] e are n o tb o u n d b y rev en u e ru l i n g s ; u n d er Sk i d m o re, th e wei g h t we affo rdth em

d ep en d s up o n thei r p ers u as i v en es s an dthe co n si st en cy o f t h e Co m m i s s i o n er’ s p os i ti o n o v er t i m e.” W eb b er v . Co m m i s s i o n er, 1 4 4 T.C. at 3 5 2 -3 5 3 . In t he co n t ex to f M ed i cai dwai v er p aym en t s t he IRS o p t edt o i s su e a- 1 3 -

n o t i ce rat h er t h an a rev en ue ru l i n g ; h o wev er, ev en i n th i s fo rm th e “ ag en cy ’ s i n t erp ret at io n m ay

m eri ts o m e d eferen ce * * * g i v enthe ‘ sp eci al i zedex p eri en ce
an d b ro ad er i n v es t i g at io n s an di n fo rm at i o n’ av ai l ab l e t o t h e ag en cy ”. Un i t ed St at es v . M eadCo rp ., 5 3 3 U.S. 2 1 8 , 2 3 4 (2 0 0 1 ) (q u o t i n g Sk i d m ore, 3 2 3 U.S. at 1 3 9 ). To d et erm i n e wh at d eferen ce, i f an y , i s o wed t o an IRS n o t i ce we m u s tl o o k at“ t h e t h o ro u g h n es s ev i d en ti n i t s co n s i d erat i o n , th e v al i d i t y o f i t s reas o n i n g , i t s
co n si s t en cy

wi t h earl i er an dl at er p ro n o u n cem en t s , an dal l th o s e fact o rs wh i ch g i v e i t p o wer t o p ers u ad e, i f l ack in g p o wer t o co n t ro l.” Sk id m o re, 3 2 3 U.S. at 1 4 0 . W e h av e al read y

d i s co un t edth e t h o ro u g h n es s an dp ers u as i v en es s o f t h e
reas on i n g i n No ti ce 2 0 1 4 -7 , s up ra, an dco n cl u d edth atp et i t i o n ers ’ M ed icai d wai v er p aym en td o es n o tfi tth e p l ai n s t atu t ory d efi n i t i on o f a qu al ifi ed fo s t er care p aym en t i n s ect io n 1 3 1. Ad d i t i o n al l y , the n o t i ce ack n owl ed g es i t i s a rev ers al o f t h e IRS’ h i s t o ri cal p ract i ce o f ch al l en g i n g the ex cl u d ab i l i t y o f t h es e p aym en t s an d t h u s d o es n o trep res en t“ t he ag en cy ’ s l o n g s t an d i n g t reat m en t ” o f M ed i cai d wai ver p aym en t s. See M o reh o u s e v . Co m m i s s i on er, 7 6 9 F.3 d6 1 6 , 6 2 1 (8 t h Ci r. 2 0 1 4 ),
rev ’ g an drem an d i n g 1 4 0 T.C. 3 5 0 (2 0 1 3 ). Inthe l i g h t o f t h es e fact o rs , we d et erm i n e t h atth e n o t ice i s en t i t l ed l i t t le, i f an y , d eferen ce.- 1 4 -

Th e IRS can n o trem o v e a s t atu t o ry b en efi tp ro v i d edb y

Co n g res s. 6 Co m m i s s i o n er v . Sch l ei er, 5 1 5 U.S. 3 2 3 , 3 3 6 n .8 (1 9 9 5 ) (“ ‘ [I] n t erp ret i v e ru l i n g s d o n o t h av e t h e fo rce an deffect o f reg ul at i on s ’ * * * an d t hey m ay n ot b e u s edt o
o v ertu rn th e p l ai n l an g u ag e o f a s t atu t e.” (q u o t i ng Dav i s v . Un i t edSt at es , 4 9 5 U.S. 4 7 2 , 4 8 4 (1 9 9 0))); Co rb al is v . Co m m i s s io n er, 1 4 2 T.C. 4 6 , 5 4 (2 01 4 ) (“ A p ro cedural p ro n o un cem en tcan n o tres t ri cto r rev i s e * * * [a Co d e s ect i o n] . * * * Th e wo rd i n g an d co n t ex to f t h e s t atu te * * * co n t ro l .” (Ci tat i o n s o m i tt ed
. )); s ee al s o M eadCo rp ., 5 33 U.S. at2 2 8 (“ Th e fai r m eas ure o f d eferen ce t o an ag en cy ad m i n is t eri n g i t s o wn s t atu t e h as b een u nd ers t o o dt o v ary wi t h ci rcu m s tan ces , an d
co u rt s h av e l oo k ed t o th e d eg ree o f t h e ag en cy ’ s care, i t s co n s i st en cy , fo rm al i t y , an d rel at i v e ex p ert n es s, an dt o th e p ers u as i v en es s o f t he ag en cy ’ s p o s i t i o n .”). Th ati s ex act l y wh atres p o n den ts eek s t o d o h ere. Th e EITC an d t h e ACTC are act s o f l eg i s l at i v e g race p ro v i d edb y Co n g res s . W e kn o wth e fam il i ar ru l e t h atd edu ct i o n s an d cred i t s “ d ep en dupo n l eg is l at i v e g race an dare al lo wedo nl y t o th e ex t en tau t h ori zedb y s t atu t e.” Es tat e o f Gu en zel
v . Co m m i s s i o n er, 2 5 8 F.2 d2 4 8 , 2 5 6 (8 th Ci r. 1 9 5 8 ) (ci t i n g Dep u ty v . DuPo n t ,

6 Ou r h o ld i n g ad d res s es th e p o wer o f t h e IRS, t h ro ug h a n o t i ce, t o d eem i n co m e o t h erwi se i n cl u d i b l e as n o ti n cl u d i b le fo r p u rp o s es o f cal cu l at i n g a b en efi t b es t o wedb y

Co n gres s . W e d o n o treach t h e rel at edi s s u e o f wh et h er t h e IRS m ay p ro p erl y cl as s i fy i n co m e as n o ti n cl u d i b le t hro u g h a reg u l at i o n .- 1 5 -

3 0 8 U.S. 4 8 8 , 4 9 3 (1 9 4 0 )), aff’ g 2 8 T.C. 5 9 (1 9 5 7 ). Ho wev er, t h e IRS i s n o tfree t o ci rcu m s cri be t h e cred i t s t h atth e l eg i s l atu re h as ch os en t o au t h o ri ze t h ro u g h
s t atu te; th ati s a p o wer o n l y Co n g res s h as . Th erefo re, t o th e ex t en t res p o n den t
s eek s t o u s e No ti ce 2 0 14 -7 , s up ra, t o d ep ri v e p et i t i o ners o f a b en efi t b es t o wedb y Co n g res s , we h o l dh e m ay n o td o s o . Res p o n d en tfu rth er arg u es th atth ere i s n o s tatu to ry p ro v i s io n d em o n s t rat i n g
co n gres si o n al i n t en tt o al l o w p et i t i o n ers a d o ub l e t ax b en efi t . Res p on d en t
s u g g es t s th ati f Co n g res s i n t en d edt o p ro v i d e a d o ubl e b en efi th ere, i two u l dh av e d o n e s o ex pl i ci t ly

as i t d i di n s ect i on 3 2 (c)(2 )(B)(v i ) wh ere i tal l o wedt ax p ay ers t o t reat as earn ed i n co m e co m b ats erv i ce p ay

ex cl u d edfro m g ro s s i n co m e u n d er
s ect i on 1 1 2 . Res p o n d en t ’ s arg u m en t , h o w ev er, m i s s es th ath e, n o tCo n g res s , h as p ro v id edp et i t i o n ers wi t h a d oub l e t ax b en efi t . Pet i t i on ers ’ i n co m e can n o t b e recl as s ifi edb y

res p o n d en t, th ro u g h a n o ti ce, t o fal l o u t si d e t he p l ai n t ex t o f s ect i o n 3 2 . If l eftal o n e s ect i o n 3 2 wo u l dal l o w p et i t i o n ers th e b en efi t s o f earn edi n co m e fo r t h ei r M ed i cai dwai ver p aym en t , b u tthatp aym en two u l drem ai n s ubjectt o t ax at io n u n d er s ect io n 6 1. Res p o nd en t , h o wev er, h as d eci d edt o d i s tu rb t hi s eq u il i b ri u m

b y t el li n g t ax p ay ers l i k e p et it i on ers th atth ey n eedn o tp ay

t ax o n th ei r M ed i cai dwai v er p aym en ts . Wh i l e res p o n d en t ’ s n o t i ce m ay b e wel l i n t en d edan d
we are n o tcri t i cal o f t h e m o t i v at i o n , o u r ro l e i s t o ap p l y t h e s t atu t o ry p ro v i s i o n s as- 1 6 -

t h ey p res en tth em s el v es . 7 Co n g res s , o f co u rs e, m ay ex erci s e i t s p rero g at iv e t o d efi n i t i v el y

p ro v i d e t h atth es e p aym en ts are earn edi n co m e b u tn ots ub ject t o t ax at io n as i td idwi t h co m b ats erv ice p ay u n d er s ect i o n 3 2 (c)(2 )(B)(v i ). Ou r h o l d i n g s cl ari fy t h at , wh ere i n co m e d o es n o tfal l wi t h i n th e p lai n t ex t o f
a s t atut o ry

ex cl u s i o n fro m

g ro ss i nco m e, t h e IRS can n o trecl as s i fy th ati nco m e t h ro u g h a n o t i ce s o t h ati tn o l on g er q u al i fi es as “ earn ed i n co m e” fo r t h e p u rp o s e
o f d et erm i ni n g t ax cred i t s . W e d o n otreach t he q u es t i on o f wh et h er, i n th e l i g h to f
o u r h ol d i n g s , p et i ti on ers s h ou l dh av e i ncl u d edth ei r M ed icai d wai v er p aym en ti n g ro s s i n co m e. Res p o n d en td idn o t rai s e t hi s i s s u e i n h i s n o t i ce o f d efi ci en cy o r p l eadi ti n th i s cas e. In s tead , res p o n d en t arg u edth atp et i t i o n ers were p recl u d edb y h i s n o t i ce fro m

i n cl u d in g t h ei r p aym en ti n g ro ss i n co m e. 8 Res po n d en tch o s e n o t

7 W e as s um e res p o n d en t ’ s m o t i ve fo r i s s u i n g No ti ce 2 0 1 4-7 , 2 0 14 -4 I.R.B. 4 4 5 , was wel l i n t en d ed ; b u twe n o t e t h at , atl eas tas ap p li edt o p et i t i o n ers , i tm ay act u al l y cau s e m o re h arm

than g o o d . Ap p l y i ng th e n o t i ce as they d i d , t o ex cl u de t h ei r M ed i cai dwai v er p aym en tfro m g ro s s i n co m e, b u ti n cl u d e i t i n cal cu l at i n g earn edi n co m e, p et i t i o ners h adn o t ax l i ab i l i t y an d recei v edo v er $ 4 ,0 00 i n refu nd ab l e t ax cred i ts . Ev en i n t h e ab s en ce o f res p o nd en t ’ s n o t i ce, p et i t i o n ers wo u l dh av e n o t ax li ab i l i t y an do v er $ 2 ,5 0 0 i n refu n d ab l e t ax cred i t s . Ho wev er, i f p et i t i o n ers h adap p li edth e n ot ice as res p o n d en targ u es th ey s h o u l dh av e--t o ex cl u d e t h ei r M ed i cai dwai v er p aym en t fro m g ro ss i n co m e an dfro m

th ei r earn ed i n co m e cal cu l at io n --t h ey

wo u l d s t i l l h av e n o t ax l i ab i l it y , b u two u ldm i s s o u to n o v er $ 2,5 0 0 i n refu nd ab l e t ax cred i t s .

8 In h i s b ri ef res p o n den targ u edth at t h e IRS “ an n o u n cedth atcert ai n M ed i cai dwai v er p aym en ts are wi t h i n th e am b i t o f t h e ex cl us i o n u n der I.R.C. §

(co n ti n u ed ...)- 1 7 -

t o arg u e i n t he al tern at iv e t hatp et i t i o n ers ’ M ed i cai dwai v er p aym en ts h o u l db e i n cl u d edi n g ro s s i n co m e, as o u r Ru l es al l o w h i m t o d o , an dwe wi l l n otarg u e i t fo r h i m . See Ru l e 3 1 (c). Ou r jo b i s t o co n s i d er t h e i s s u es ad v an ced b y th e p art i es , n o tt o craft al t ern at i v e arg u m en t s n ev er rai s ed . Acco rd i n g l y , we wi l l n o t ad dres s wh et h er p et i ti o n ers p ro p erl y ex cl u d edth ei r M ed i cai dwai v er p aym en tfro m g ro s s i n co m e. In reach i n g o u r h o ld in g s , we h av e co n s i dered al l arg u m en t s m ad e, an d , t o t h e ex t en tn o t m en t io n ed ab o v e, we co n cl u d e t h ey are m o ot , i rrel ev an t , o r wi t h o u t
m eri t
. To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredfo r p et i t i o ners .

8 (...co n t in u ed ) 1 3 1 .” Th erefo re, acco rd i ng t o res p o n d en t : Th e ex cl u s i o n o f qu al i fi edM ed i cai d wai v er p aym en t s fro m g ro s s i n co m e u nd er I.R.C. § 1 31 d o es n o t d ep en dup o n a t ax p ay er’ s el ect i o n * * * . Pet i t io ners ’ b el i ef t h atth ey el ect edt o ex cl u d e qu al ifi edM ed i cai d wai ver p aym en t s fro m g ro s s i n co m e--an dth at s u ch el ect i o n s i m

u l t an eo u s l y

ren d ered th e p aym en t s i n cl u d i b l e i n g ro s s i n co m e--i s erro n eo u s . Th ere i s s i m p l y n o el ect i o n av ai l ab l e u n d er I.R.C. § 1 3 1 o r § 3 2 fo r Pet it i on ers t o m ak e * * *