TAX COURT OPINION

Case: Richard L. & Judith G. Rohrer
Docket Number: 2072-12S
Judge: Goeke
Opinion Type: bench
Filed: 06/12/2013
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 Petitioner v. RICHARD L. AND JUDITH G. ROHRER, ) ) ) ) ) Docket No. 2072-12S. ) ) ) ) COMMISSIONER OF INTERNAL REVENUE, Respondent ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at Billings, Montana, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered for petitioners (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. June 10, 2013 Capital Reporting Company 3 1 2 Bench Opinion by Judge Joseph R. Goeke May 9, 2013 3 Richard L. and Judith G. Rohrer 4 5 6 7 8 9 10 11 12 Docket No. 2072-12S THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE, AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This case was heard pursuant to the provisions of section 7463, in effect when the 13 Petition was filed. Pursuant to section 7463(b), the 14 decision to be entered is not reviewable by any other 15 Court. The section reference above is to the 16 17 18 19 20 21 22 23 24 25 Internal Revenue Code. Hereinafter, section references are to the Internal Revenue Code, pertinent to the dispute in this case, and rule references are to the Tax Court Rules of Practice and Procedure. This opinion is rendered pursuant to the authority provided by section 7459(b) and Rule 152. The Court has jurisdiction over this case pursuant to our jurisdiction to review deficiencies in federal income tax, following a determination by Respondent 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 in a timely petition filed by the Taxpayer. In the present case, Respondent issued a Notice of 3 Deficiency for the taxable year 2010, and determined 4 5 6 a deficiency in the amount of $8,289.60. Petitioner timely filed a Petition seeking review of that Notice of Deficiency, and the 7 Petitioner elected to have this case conducted under 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the Small Tax Case procedures provided by section 7463. Respondent initially determined an addition to tax under section 6662.(a), but Respondent has conceded that that addition to tax is not applicable in this case. Therefore, the only issue before the Court is whether Respondent's deficiency determination is correct. That deficiency determination relates to the application of section 23(d) and, as applicable to the year 2010, section 36(C). The Petitioners were residents of Montana at the time they filed their petition in this case. They filed a joint federal income tax return for the year 2010, and claimed the carryover of a qualified adoption credit in the amount of $14,501. The adoption related to a procedure in 2008 whereby the Petitioners adopted the niece and nephew 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 of Mrs. Rohrer. These children were both biological children of the brother of Mrs. Rohrer, who passed away in May of 2005. The children resided where they were born, in the Philippines, in May of 2005. Mrs. Rohrer traveled to the Philippines to care for the children at that time, and adoption proceedings began at that time. These adoption proceedings were not finalized, as previously stated, 9 until 2008. Much of the problem related to the 10 11 adoption proceedings being finalized was the approval of visas allowing the two children to enter the 12 United States. 13 14 15 16 Petitioners maintain significant records relative to the expenses they claimed associated with the adoption, and Respondent has accepted these records in allowing $15,033.57 of expenses·associated 17 with the adoption. The amounts in dispute, amounting 18 19 20 21 22 23 24 25 to $32,864.39, were substantiated, with checks and invoices and other related documentation. We note that Petitioners do not need to sustain the entire amounts in dispute to avoid a deficiency in this case, because the expenses claimed were subject to a statutory limit, and they only have to document roughly $8,000 of the amounts disallowed to avoid a deficiency. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 The amounts in dispute, which have been disallowed, all relate to the expenses incurred by 3 Mrs. Rohrer while she remained in the Philippines and 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 cared for the two children who were adopted, with the exception of some minor expenses associated with copying and other items related to photographs and activities associated with a visa. Because the lion's share of the expenses relate to these living expenses in the Philippines, we will focus our analysis on those expenses. First, Respondent alluded to the fact that these expenses may not have been substantiated in accordance with section 274. We would note that we do not believe section 274 applies to these expenses, because on its face, section 274 (d) provides that the substantiation requirements relate to deductions or credits claimed under section 162 or section 212 for traveling expenses while away from home. Since the current expenses do not relate to either of those sections, we believe that section 274 (d) does not apply on its face. However, we have analyzed whether Petitioners have substantiated the expenses in conformity with the regulations under section 274, since the expenses are analogous to the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 travel expenses often considered under that section. We find that the expenses have been substantiated in accordance with Treas. Reg. Section 1.274-5A(c)(1). Should the question of substantiation be relevant as an issue, we believe Petitioners have adequately substantiated the expenses in dispute. The primary issue in the case is a legal one. It relates to section 23(d), which defines qualified adoption expenses as reasonable and necessary adoption fees, court costs, attorney's fees and other expenses, which are directly related to and the principle purpose of which is for the legal adoption of an eligible child by the taxpayer. The other provisions of section 23(d) are not directly pertinent, and Respondent does not challenge that those provisions would block the Petitioner's position in the present case. Respondent does, however, maintain that the travel expenses in question were not directly related, and did not have as their principle purpose the legal adoption of the eligible children. Respondent candidly discussed with the Court the lack of authority in this area, and Respondent cited the case of Jones v. Commissioner, T.C. Memo. 1985-516. In that case, the Court considered a forerunner of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 section 23, and determ·ined that expenses incurred in fighting custody of two children who were later adopted could not be deducted, because they were not directly related to the legal adoption. The Court in that case analyzed Arizona law, and found that the custody proceeding was a separate and distinct proceeding from the adoption proceeding, and on that basis, the Court determined that the custody proceeding did not directly relate to the legal adoption proceeding. In the present case, we must consider whether the expenses associated with Mrs. Rohrer's caring for the children in the Philippines, for the period from when the adoption proceedings commenced 15 until the children's visa was approved, are 16 17 18 19 20 21 22 23 24 25 deductible. We acknowledge that it is a long period of time, and that the expenses were in the nature of providing both food and medical care for the children, as well as normal support for Mrs. Rohrer. We note that Respondent has conceded some expenses related to Mrs. Rohrer's being in the Philippines, because Respondent has, we think, directl5 determined détAAL that being in the Philippines was necessary to bring the children back into the United States, and was 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 part of the visa process. The question is whether the expenses associated with caring for the children pending the adoption should likewise be treated as part of the adoption process. Mr. Rohrer testified, and we believe his testimony was credible, that had Mrs. Rohrer not provided care for the children in the 8 Philippines from the beginning of the adoption 9 process in May of 2005, the children would have been 10 11 12 13 14 15 16 17 18 19 20 21 placed in an orphanage. It is difficult to determine what, if any, effect this would have had on the adoption process, but it certainly may have adversely affected the health and well-being of the children, which was pertinent to the visa process, which Respondent has conceded was fundamentally important to the adoption process. Given that connection, and the fact that there's no evidence that the Rohrers extended or sought to have Mrs. Rohrer remain in the Philippines for personal reasons, we believe her stay in the 22 Philippines was to provide for care of the children 23 24 25 pending the adoption proceedings, which were ultimately approved in the State of Montana in 2008. Therefore, we believe her stay in the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 Philippines to care for these children was directly 2 3 4 related to the adoption proceedings, and is deductible in the present case. Given our determination, a decision will be entered for the 5 Petitioners in the present case. This concludes the Court's oral findings of fact and opinion in this case. We'll go off the record. (Whereupon, at 3:12 p.m., the above- entitled matter was concluded.) 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com