Case Name: Mary E. Archer, Petitioner v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1980-02-28
Citations: 73 T.C. 963
Docket Number: Docket No. 10128-77
Parties: Mary E. Archer, Petitioner v. Commissioner of Internal Revenue, Respondent
Judges: Simpson, Quealy, and Chabot, JJ., agree with this dissenting opinion.
Reporter: Reports of the Tax Court of the United States
Volume: 73
Pages: 963–980

Head Matter:
Mary E. Archer, Petitioner v. Commissioner of Internal Revenue, Respondent
Docket No. 10128-77.
Filed February 28, 1980.
Sondra R. Harris, for the petitioner.
William F. Halley and Michael N. Balsamo, for the respondent.

Opinion:
OPINION
Wilbur, Judge:
Kespondent has determined an income tax deficiency of $1,400.32 for the calendar year 1974. The sole issue is whether petitioner may claim her mother as a dependent in 1974 pursuant to section 152(a). This depends entirely on whether or not section 152(a) requires that Medicaid payments made on behalf of petitioner's mother for around-the-clock nursing care must be included in the support computation.
The parties have agreed that if this issue is resolved in favor of petitioner, petitioner is entitled to the following:
(1) A dependency exemption for her mother under section 151(e);
(2) The use of head-of-household tax rates under section 2(b);
(3) A medical deduction (after the 1-percent and 3-percent limitations) of $556.39, under section 213;
(4) A deduction for dependent care expenses of $3,439.77 under section 214; and
(5) The balance of the itemized deductions disallowed by respondent in the notice of deficiency, in the amount of $1,440.96.
The facts in this case were fully stipulated. The stipulation of facts and attached exhibits are incorporated herein by reference. The facts necessary for an understanding of this case are as follows:
The petitioner is an individual who resided in Bronx, N.Y., at the time the petition in this case was filed.
During the year 1974, petitioner's mother, Mrs. Mary Archer (hereafter Mrs. Archer), resided with petitioner in petitioner's apartment in Bronx, N.Y. Mrs. Archer was an invalid during the entire year, having been permanently and totally disabled as a result of a stroke and diabetes. This disability left her unable to walk without assistance or to perform the simplest tasks for herself; she required assistance in bathing, dressing, and in all aspects of personal care. Because of her disability, Mrs. Archer required around-the-clock home health care services, which, during the year in question, were provided by Annie M. Ellerby, a licensed practical nurse.
Nurse Ellerby's services were restricted to nursing and other services in connection with the care of Mrs. Archer. Nurse Ellerby provided the following services for Mrs. Archer:
(a) Gave physical therapy;
(b) Administered oral medication as prescribed by a physician;
(c) Changed linens for patient;
(d) Changed patient's clothes;
(e) Attended to patient's daily hygiene;
(f) Cooked meals for patient; and
(g) Provided entertainment for patient.
Nurse Ellerby did not drive Mrs. Archer anywhere in an automobile and did not clean house, wash clothes, do dishes (other than her own or her patient's), or perform any other household chores.
During 1974, it would have cost considerably more to maintain Mrs. Archer in a nursing home than to keep her at home. Because of her eligibility for Medicaid, any such cost, above Mrs. Archer's railroad retirement income, would have been paid out of public funds: city, State, or Federal.
The total amount expended for Nurse Ellerby's services during the year 1974 was $13,968.38. Of this amount, $6,569.81 was paid by a private medical insurance plan, $3,958.80 represented Medicaid payments paid by the New York City Department of Social Services, and $3,439.77 was paid by the petitioner as a contribution towards the support of her mother. It is the payments from the city of New York that are at issue here.
The payments made by the New York City Department of Social Services were authorized by section 365-a(2)(d), tit. 11, art. 5, of the New York Social Services Law. N.Y. Soc. Serv. Law sec. 365 (McKinney 1976). Section 365-a(2)(d) includes within the definition of "medical assistance" the following:
(d) home health care services, including home nursing services and services of home aids and homemaker or housekeeping services in the recipient's home, if rendered by an individual other than a member of the family who is qualified to provide such services, where the services are prescribed by a physician in accordance with a plan of treatment and are supervised by a registered nurse;
Section 365-a is part of the New York State Medicaid program, administered as a plan for medical assistance meeting the requirements of title 19 of the Social Security Act, as amended, 42 U.S.C. sec. 1396 et seq. In this connection, section 1905(a)(7) of title 19, 42 U.S.C. sec. 1396d(a)(7), provides that the Federal Government will provide matching funds under the Medicaid program for State expenditures for "home health care services" on behalf of qualified individuals. Home health services, as pertinent to the issue before us, has been defined by the Department of Health, Education, and Welfare as:
Section IA0-70 Home health services.
(a) "Home health services" means the services in paragraph (b) of this section that are provided to a recipient—
(1) At his place of residence, as specified in paragraph (c) of this section; and
(2) On his physician's orders as part of a written plan of care that the physician reviews every 60 days.
(b) Home health services includes—
(1) Nursing service, as defined in the State Nurse Practice Act, that is provided on a part-time or intermittent basis by a home health agency as defined in paragraph (d) of this section, or if there is no agency in the area, a registered nurse who—
(1) Is currently licensed to practice in the State;
(ii) Receives written orders from the patient's physician;
(iii) Documents the care and services provided; and
(iv) Has had orientation to acceptable clinical and administrative record-keeping from a health department nurse;
(2) Home health aide service provided by a home health agency;
(3) Medical supplies, equipment, and appliances suitable for use in the home; and
(4) Physical therapy, occupational therapy, or speech pathology and audiology services, provided by a home health agency or by a facility licensed by the State to provide medical rehabilitation services. (See sec. 441.15 of this subchapter.) [42 C.F.R. sec. 440.70 (1979).]
Pursuant to these statutes and regulations, the payments made by New York pursuant to its Medicaid program on behalf of petitioner's mother were provided as follows: 50 percent Federal Medicaid funds, 25 percent New York State Medicaid funds, and 25 percent New York City Medicaid funds.
Petitioner reported gross income for the year 1974 of $13,394.04. She used head-of-household tax rates pursuant to section 2(b) and claimed a dependency exemption for her mother under section 151(e), a deduction for medical expenses of $1,405.39 paid on behalf of her mother pursuant to section 213, and a deduction for dependent care expenses of $3,976.28 under section 214, incurred on behalf of her mother. Respondent, in his deficiency notice, stated:
Since you failed to provide more than half of the support of your mother during the 1974 tax year, your deductions for medical expense of $1,405.39 and $3,976.28 for disabled dependents care services on her behalf are nondeductible personal expenses under section 262 of the Internal Revenue Code. Accordingly, your taxable income is increased by $1,405.39 and $3,976.28, respectively for the tax year 1974.
For the same reason, petitioner was denied a $750 dependency deduction under section 152 as well as head-of-household rates pursuant to section 2(b).
Section 152(a) permits a taxpayer to claim as one's dependent any of certain qualified individuals, including one's mother, if the taxpayer has provided more than half of that individual's support during the tax year in question. For each individual determined to be a dependent under the section 152(a) support test, the taxpayer may claim an additional personal exemption pursuant to section 151(e). In addition, section 213 allows the taxpayer to take medical expense deductions for certain expenditures made for the medical care of the taxpayer's "dependents (as defined in section 152)." Finally, section 214 as applicable to the year in issue, permits the deduction of dependent care services necessary for gainful employment.
To establish qualification for dependency status under section 152(a) and to take advantage of the consequent tax benefits under sections 151(e), 213, and 214, the taxpayer must establish the total support costs expended on behalf of the claimed dependent from all sources, and must also demonstrate that they provided over half of this amount. Turecamo v. Commissioner, 554 F.2d 564, 569 (2d Cir. 1977), affg. 64 T.C. 720 (1975), and cases cited therein. Sec. 1.152-1(a)(2)(ii), Income Tax Regs. The alternative computations of the parties are as follows:
Support Petitioner Respondent
Nurse Ellerby. ,.$3,439.77 $7,398.57
Physical therapist. . 1,302.00 1,302.00
Shelter, food, and utilities . 1,500.00 1,500.00
Clothing and linens. . 300.00 300.00
Insurance premiums. 54.24 54.24
Medicine and drugs. . 156.27 156.27
Appliances (medical). 44.57 44.57
Total. ,. 6,796.85 10,755.65
Source of support Petitioner Respondent
Petitioner.$4,147.85 $4,147.85
Petitioner's mother. 2,649.00 2,649.00
New York City...'. — 3,958.80
Total. 6,796.85 10,755.65
The only issue dividing the parties is whether or not the $3,958.80 paid pursuant to Medicaid for home health services provided by Nurse Eller by to petitioner's mother is includable in the support equation. Accordingly, this case, like Turecamo v. Commissioner, 64 T.C. 720 (1975), affd. 554 F.2d 564 (2d Cir. 1977), turns on the proper treatment of third-party medical payments in determining who has provided more than half the support of an individual for dependency exemption purposes.
Petitioner contends that the Court should focus on the nature of the Medicaid payments in this case and conclude that the payments are not includable in the support computation because the payments were applied to satisfy extraordinary medical expenses. Petitioner asserts that the historical development of section 152(a) shows a clear progression toward the exclusion from the support computation of third-party payments of extraordinary medical expenses. Petitioner also contends this interpretation is consistent with the policy underlying both section 152 and the Medicaid program.
Respondent asserts that extraordinary medical payments are includable in the support computation unless the payments constitute either the proceeds of a private medical insurance policy or benefits paid pursuant to a Government program that provides essentially the same health insurance coverage as is furnished by private medical insurance plans. Conceding that Medicare payments fit into this category and are excludable, respondent distinguishes Medicaid and Medicare on the theory that the former is a general welfare program with disbursements determined by the pecuniary need of the recipient, and. the latter program is in the nature of medical insurance.
In explaining why we agree with petitioner, it may be helpful to begin with a brief review of the treatment (for purposes of the support equation) of third-party payments for extraordinary medical expenses. In Rev. Rul. 64-223, 1964-2 C.B. 50, the Commissioner ruled that the premiums paid for a private health insurance policy, rather than the benefits received, are includa-ble in the support equation. In Rev. Rul. 70-341, 1970-2 C.B. 31, revoked in part, Rev. Rul. 79-173, 1979-1 C.B. 86, the Commissioner extended this ruling to benefits paid pursuant to part B of Medicare (providing physician's services and related benefits and funded by general Federal revenues and premium contributions from participants), while making it specifically inapplicable to part A of Medicare (providing hospitalization and related benefits and funded largely from an excise tax on wages). This attempt to treat part A of Medicare differently from part B and from private health insurance was repudiated by the courts. Turecamo v. Commissioner, 64 T.C. 720 (1975), affd. 554 F.2d 564 (2d Cir. 1977). The Service has announced that it will follow the decision in Turecamo (Rev. Rul. 79-173, 1979-1 C.B. 86).
We focus in this case on Medicaid, a program designed to provide third-party vendor medical payments on behalf of needy individuals. The beneficiaries of Medicaid are individuals who are receiving cash assistance benefits for their basic living expenses pursuant to various provisions of the social security law based on need, and also individuals who have sufficient income to meet their basic needs but who are "medically indigent" — those who, unless they receive medical assistance, will be likely to require cash assistance. While the eligibility in each case must be based on reasonable needs standards, once eligibility is provided, a comprehensive benefit package, varying in scope from State to State, is insured by virtue of the provisions of title 19 of the Social Security Act, 42 U.S.C. sec. 1396 et seq. The definition of medical assistance is contained in section 1905, 42 U.S.C. sec. 1396d(a), and includes in-patient and out-patient hospital services, services in a skilled nursing facility, and physician services. These specified services are generally the minimum that must be included in any State plan (see sec. 1902(a)(13)(B), 42 U.S.C. sec. 1396a(a)(13)), but a broader array of medical services may also be provided.
In some cases, the definition of services is directly keyed into title 18 (Medicare) — for instance, section 1905(a)(6), 42 U.S.C. sec. 1396d(a)(5), defines physician services by reference to section 1861(r)(1), 42 U.S.C. sec. 1395x(r)(1). Additionally, many of the States, once eligibility is established, issue Medicaid cards that are much like those issued under Medicare. Thus, aside from basing eligibility on need, the benefits provided under the Medicaid program are similar to those provided under Medicare and private health insurance plans.
It is likely that in almost all instances, a dependent parent who receives in-patient or out-patient medical services of any magnitude will be the beneficiary of a large third-party payment either from: (a) Private health insurance, such as an individual retired from the Government might have under the Federal Employees Health Benefit Act; (b) Medicare, part A and part B (possibly supplemented by private insurance as to deductibles and coinsurances); and/or (c) Medicaid. Respondent contends that health care benefits provided by private health insurance and Medicare do not enter into the support equation, but benefits pursuant to Medicaid are includable in the support equation. Under respondent's interpretation, if three elderly parents (one covered by private insurance, one covered by Medicare, and one covered by Medicaid) all live in the same block and are treated by the same physician at the same hospital for the same conditions with the same result, the children supporting the first two parents would be entitled to a dependency exemption, head-of-household rates, and a deduction for related medical and dependent care expenses, but the child whose parent is covered by Medicaid would be denied those benefits.
Unlike respondent, we do not interpret the applicable law as mandating these sharp horizontal inequities. A child supporting an aged parent is for the most part required to accept the kind of health care protection the parent has — whether it is private insurance, Medicare, or Medicaid. It is often difficult to get private insurance for someone over 65, particularly at an affordable price, unless he already has it, which was one of the main reasons for enacting Medicare. If the parent does not have private health insurance or Medicare, Medicaid will undoubtedly have to pay his extraordinary medical expenses. Large third-party payments based on a health contingency either insured against or covered by Medicaid ought not deprive individuals of a dependency exemption for their parents. In both cases, to include these large contingent third-party payments in the support equation distorts the economic relationship between the taxpayer and his aged parent. In this connection, the Second Circuit in Turecamo affirmed the Tax Court decision "on two separate analytical grounds" (554 F.2d at 568). In addition to specifically determining that Medicare was sufficiently like private insurance to be treated comparably, the court also held:
Mrs. Kavanaugh relied on the taxpayers for the bulk of her normal living costs plus the medical costs for which she would have otherwise been responsible. The fact that certain providers of hospital services received more in Medicare payments from the Federal government on her behalf than Mrs. Kavanaugh received in support from the Turecamos did not change this basic financial relationship. The random and contingent receipt of insurance benefits, whether in [the] form of private insurance proceeds or Basic Medicare benefits under Part A, interrupts but does not alter the otherwise established economic relationship between the beneficiary, Mrs. Kavanaugh, and the Turecamos, who regularly contributed to her support. [554 F.2d at 576. Fn. ref. omitted.]
To require that Medicaid payments be included in the support equation but not Medicare and private insurance means that those individuals whose parents are the neediest will be the least likely to get a dependency exemption for supporting them and be able to deduct medical expenses they pay on their behalf. This distinction will not only be lost on the average individual but seems exceedingly unfair and contrary to the basic thrust of the Medicaid program itself.
While there are distinctions between the Medicare and Medicaid programs, they should not be overemphasized to justify such an idiosyncratic result. An individual retired under Medicare pays no current premiums for part A (this is covered by the tax imposed on current workers and their employers) and a small premium for part B which covers approximately half of the cost of that program, the other half being paid by the Federal Government from general revenues. Only in private health insurance are premiums of any real significance to an aged parent, and even in these instances, the premiums are infinitely small in relation to the large third-party payments that are made for health care when an insured contingency arises.
And premiums also can be of some significance in the Medicaid program, making it more difficult to put Medicare and Medicaid in the two completely separate boxes respondent recommends. We note that the States are permitted under certain circumstances to require some premium contribution by Medicaid participants. Section 1902(a)(14)(B), 42 U.S.C. sec. 1396a(14)(B)(i), provides with respect to individuals who are covered by Medicaid but who are not receiving cash assistance benefits, that:
there may be imposed an enrollment fee, premium or similar charge which (as determined in accordance with standards prescribed by the Secretary) is related to the individual's income
Additionally, section 1843, permits the States to "buy-in" their aged Medicaid recipients under part B of the Medicare program. Pursuant to section 1843, a State, by paying the appropriate premium, may purchase coverage under part B of Medicare for individuals over age 65 who may be eligible for Medicaid payments in that State. Obviously, in these cases, even though the benefits are payable pursuant to title 18, the eligibility of the individuals who are "brought-in" is determined on the basis of need under title 19. Since the State provides part B insurance benefits on the basis of a needs standard, respondent's theory would require that the benefit disbursements during illness, rather than the premiums paid by the State to acquire coverage, be included in the support equation. Again, two individuals whose elderly parents receive precisely the same benefits under part B of title 19 (Medicare), will be treated dramatically different for tax purposes.
Respondent rationalizes this peculiar result by reference to a line of cases holding that cash social security benefits to retired and disabled individuals, and cash public assistance benefits (and equivalent payments) to needy individuals to meet their everyday needs are included in the support equation. See Carter v. Commissioner, 55 T.C. 109 (1970). Virtually all of the cases respondent cites involve cash payments (or their in-kind equivalent) to meet the ordinary daily living expenses of the individuals involved rather than extraordinary medical expenses — and they all precede our decision and the decision of the Second Circuit in Turecamo. And this distinction is significant, for as the Second Circuit emphasized in Turecamo:
The receipt of annuity proceeds by an individual in need of financial assistance has an altogether different effect on his economic relationship with a third party who contributes to his support. The regular receipt of predictable payments through private annuities or public welfare annuities such as OASDI may be understood to reduce the recipient's dependency on the contributing third party on a continuing basis, to the extent of the annuity or welfare benefits being received. Such was the case of Mrs. Kavanaugh in 1970, and the taxpayers readily concede that the $1,140 in social security benefits she received properly constitute support attributable to her for purposes of the section 152(a) dependency support test. See Rev. Rul. 64-222, 1964-2 C.B. 47. [554 F.2d 576 n. 27.]
In view of this compelling statement by the Second Circuit, as well as the reasons set out earlier in this opinion, we believe it is more appropriate to treat cash payments (or their in-kind equivalent) made to cover everyday living expenses, whether they are cash social security payments or cash public welfare payments, as similar items for purposes of the support equation. Similarly, we believe extraordinary medical expenses — whether paid pursuant to Medicare or Medicaid — should be treated as similar items. Respondent, in asking us to compare extraordinary medical expenses under Medicaid with cash insurance benefits under the social security law,- is comparing apples and oranges. Additionally, by lumping Medicaid and cash social security benefits together for similar treatment, he undermines his argument that the includability of extraordinary medical payments within the support equation turns solely on whether they are made pursuant to an insurance program or a welfare program.
In conclusion, the distinction respondent makes between payments under Medicare and Medicaid cannot survive the rationale of Turecamo, is wrong as a matter of fairness and policy, and encounters considerable practical difficulties in view of the interlocking nature of Medicare and Medicaid. We therefore hold for petitioner.
Decision will be entered under Rule 155.
Reviewed by the Court.
All statutory references are to the Internal Revenue Code of 1954, as in effect during* the year in issue, except as otherwise expressly indicated.
A total of $17,822.42 in expenses (including the $13,968.38 paid to Nurse Ellerby) were incurred by or on behalf of Mrs. Archer. Petitioner paid $4,147.85, Mrs. Archer contributed her $2,649 Railroad Retirement Plan receipts, $6,999.81 was paid by a private medical insurance plan, $66.96 was paid by Medicare, and $3,958.80 was paid by Medicaid. Respondent concedes that the amounts paid by the private medical insurance plan and by Medicare are not includable in the support computation.
See R. Myers, Medicare, 263 et seq. (Irwin 1970); R. Stevens, "Medicaid: Anatomy of a Dilemma," 3 Law & Contemp. Prob. 348 (1976); S. Rept. 404 (Part 1), to accompany H.R. 6675 (Pub. L. 89-97), 89th Cong., 1st Sess. 73 et seq. (1965); S. Rept. 744, to accompany H.R. 12080 (Pub. L. 90-248), 90th Cong., 1st Sess. 32,175 (1967).
See H. Rept. 213, to accompany H.R. 6675 (Pub. L. 89-97), 89th Cong., 1st Sess. 20 (1965).
On this point, the court also unequivocally stated:
"We are led to the same conclusion independent of this analysis of the statutory provisions of Part A and the comparison of it with other benefits. In the present case, a consideration of the absence of economic impact of the receipt of Part A benefits on the recipient's financial relationship with the Turecamos convinces us that Part A benefits should not be included as an element of the recipient's total support. [Turecamo v. Commissioner, 554 F.2d 564, 568 (2d Cir. 1977), affg. 64 T.C. 720 (1975). Emphasis added.]"
See also 554 F.2d at 575, 576.
In this connection, the Second Circuit adopted the following statement:
"The average man looks at his health costs as his insurance premiums plus his unreimbursed payments for health care, which accords with the economic realities (and the amount deductible as a medical expense.) Viewing large third party payments (made when the contingency insured against occurs) as support can be viewed as distorting the economic realities. [554 F.2d at 576.]"
The court then concluded that:
"Such a distortion of economic realities would result in this case if the amount of Part A benefits actually paid out on behalf of Mrs. Kavanaugh were included in her aggregate support calculations for the purposes of the support dependency tests of sec. 152(a) of the Code. [554 F.2d at 576.]"
Indeed, anyone age 65 or over when Medicare was adopted in 1965 was covered without ever having paid a health insurance premium. Many others were "blanketed-in" without ever having paid social security taxes of any kind. See R. Myers, Medicare, 89,92 (Irwin 1970).
Act of Aug. 14, 1935, ch. 535, tit. 18, sec. 1843, as amended, provides:
State Agreements for Coverage of Eligible Individuals Who Are Receiving Money Payments Under Public Assistance Programs (or Are Eligible for Medical Assistance)
Sec. 1843. (a) The Secretary shall, at the request of a State made before January 1,1970, enter into an agreement with such State pursuant to which all eligible individuals in either of the coverage groups described in subsection (b) (as specified in the agreement) will be enrolled under the program established by this part.
(b) An agreement entered into with any State pursuant to subsection (a) may be applicable to either of the following coverage groups:
(1) individuals receiving money payments under the plan of such State approved under title I or title XVI; or
(2) individuals receiving money payments under all of the plans of such State approved under titles I, X, XIV, and XVI, and part A of title IV.
Cf. Black v. Commissioner, T.C. Memo. 1972-135 (cash social security payments); Morrison v. Commissioner, T.C. Memo. 1975-73, and Johnson v. Commissioner, T.C. Memo. 1974-150 (cash public assistance payments under the Aid to Family with Dependent Children (A.F.D.C.) Program). Respondent also places unwarranted emphasis on Lutter v. Commissioner, 61 T.C. 685 (1974), affd. per curiam 514 F.2d 1095 (7th Cir. 1975), cert. denied 423 U.S. 931 (1975). In lnitter, the only issue was whether public assistance and medical assistance payments could be considered support provided by petitioner. In the context of the issue as presented by the parties, we assumed, without deciding, that medical assistance was included in the support equation.
We emphasize that respondent in no way argues that the home health services and other health care provided in the instant case are not health care payments that would be excluded from the support equation pursuant to his rulings if paid pursuant to private insurance or Medicare. In fact, respondent has followed this principle in excluding some of the payments made in this case, and his argument for treating the programs differently is based solely on his distinction between extraordinary medical payments made pursuant to an insurance program on the one hand and those made pursuant to a need standard on the other hand.