Rev. Rul. 83-1

ISSUE

To what extent is a taxpayer entitled to the tax credit for child care expenses under section 44A of the Internal Revenue Code if a part of such expenses is reimbursed by a state social services agency?

FACTS

In order to be gainfully employed, A, an individual taxpayer, paid 10x dollars to a child care provider in 1982. All the requirements under section 44A of the Code, as amended by the Economic Recovery Tax Act of 1981, section 124, 1981-2 C.B. 256, 271, were satisfied for purposes of A's claim for the allowance of the limited tax credit for the child care expenses. The 10x dollars paid by A did not exceed either the maximum dollar amount to which the credit can be applied under section 44A(d) or A's earned income for the year. However, as part of its general welfare program, a social services agency of the state where A resides reimburses eligible parents for child care expenses. In the year in question, A was reimbursed 8x dollars by the state agency. The reimbursement checks were made payable directly to A who either cashed the checks and made payment to the child care provider or endorsed the checks over to the provider.

The reimbursements of child care expenses by the state agency are public relief payments provided only for low income parents who meet the eligibility requirements of the program. The amount reimbursed to A, which is based on A's financial need, in the instant case, is considered a payment for the promotion of the general welfare and, accordingly, is not includible in A's gross income.

LAW AND ANALYSIS

Section 44A(a)(1) of the Code provides, in general, that in the case of an individual who maintains a household that includes as a member one or more qualifying individuals (as defined in subsection (c)(1)), there shall be allowed as a tax credit for the taxable year an amount equal to the applicable percentage of the employment-related expenses (as defined in subsection (c)(2)) paid by such individual during the taxable year.

In explaining the reason for changing the treatment of certain child care expenses from an itemized deduction to a tax credit, the report of the Senate Finance Committee on the enactment of section 44A of the Code, states, in part:

Treating child care expenses as itemized deductions denies any beneficial tax recognition of such expenses to taxpayers who elect the standard deduction. The committee believes that such expenses should be viewed as a cost of earning income for which all working taxpayers may make a claim. One method for extending the allowance of child care expenses to all taxpayers, and not just to itemizers, would be to replace the itemized deduction with a credit against income tax liability for a percentage of qualified expenses. While deductions favor taxpayers in the higher marginal tax brackets, a tax credit provides more help for taxpayers in the lower brackets.

S. Rep. No. 94-938, 94th Cong., 2d Sess. 132 (1976), 1976-3 (Vol. 3) C.B. 49, 170.

Thus, while it is clear that Congress intended to provide a tax benefit to low income taxpayers who were unable to take advantage of an itemized deduction for certain child care expenses, there is no indication that Congress intended to provide taxpayers a double tax benefit as a result of enacting the credit for qualified child care expenses.

In Rev. Rul. 80-173, 1980-2 C.B. 60, the Service concluded that an airline pilot may not deduct otherwise allowable flight training expenses to the extent the expenses are directly reimbursed by the Veterans' Administration. The revenue ruling reasoned that the taxpayer suffered no economic detriment and incurred no expense in making the expenditure to the extent of the reimbursement.

Similarly here, A has suffered no economic detriment and incurred no expense in making the child care expenditures as a result and to the extent of the reimbursement by the state agency.

HOLDING

Under section 44A(a) of the Code, A will be allowed a tax credit for only the applicable percentage of 2x dollars in child care expenses for 1982, the extent of A's expenses that exceed the reimbursement made by the state agency.