SCOTUS Reports

Tag: IRC section 131

  • Stromme v. Commissioner, 138 T.C. 213 (2012): Definition of ‘Home’ in Foster Care Tax Exclusion

    Stromme v. Commissioner, 138 T. C. 213, 2012 U. S. Tax Ct. LEXIS 10, 138 T. C. No. 9 (2012)

    In Stromme v. Commissioner, the U. S. Tax Court ruled that foster care payments received by the Strommes were taxable income because the care was not provided in their home. The court defined ‘home’ as the residence where the taxpayers live their private life, not merely a place of business. This decision clarifies the criteria for the tax exclusion under IRC section 131, impacting how foster care providers structure their living and care arrangements.

    Parties

    Jonathan E. Stromme and Marylou Stromme were the petitioners, represented by Jay B. Kelly. The respondent was the Commissioner of Internal Revenue, represented by Christina L. Cook.

    Facts

    Jonathan and Marylou Stromme owned two houses during the years at issue: one on LaCasse Drive in Anoka County, where they lived with their family, and another on Emil Avenue in Shoreview, Ramsey County, which they operated as a group home for developmentally disabled adults. The Strommes received payments from Ramsey County for providing foster care at the Emil Avenue house, which they reported but excluded from income on their tax returns for 2005 and 2006. They did not live at the Emil Avenue house but worked there, with occasional overnight stays on a couch or sofa. The LaCasse Drive house served as their primary residence, where they conducted their personal and family life.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies and penalties against the Strommes for the tax years 2005 and 2006, asserting that the foster care payments were taxable income. The Strommes petitioned the U. S. Tax Court for a redetermination. The case was tried by Judge Holmes, who concurred with the findings of fact. The court reviewed the case and issued a unanimous opinion, with concurring opinions by Judges Holmes and Gustafson.

    Issue(s)

    Whether the payments received by the Strommes for providing foster care at the Emil Avenue house can be excluded from income under IRC section 131, given that the Strommes did not reside at the Emil Avenue house but at the LaCasse Drive house?

    Rule(s) of Law

    IRC section 131(b)(1) allows the exclusion of payments received for the care of a qualified foster individual in the foster care provider’s home. The court interpreted ‘home’ as the place where the taxpayer resides, not merely where they own property or work. The court cited Dobra v. Commissioner, 111 T. C. 339 (1998), which held that ‘home’ means the residence of the taxpayer, not just a place of business.

    Holding

    The court held that the Strommes could not exclude the foster care payments from their income under IRC section 131 because they did not provide care in their home. The Emil Avenue house, where they provided care, was not their residence; their home was the LaCasse Drive house where they lived their private life.

    Reasoning

    The court reasoned that the plain language of IRC section 131 requires the care to be provided in the taxpayer’s ‘home’, which the court interpreted as their residence, not merely a place of business. The court relied on the precedent set in Dobra v. Commissioner, which established that ‘home’ means the place where the taxpayer resides. The Strommes’ argument that ownership of the Emil Avenue house was sufficient was rejected, as was their contention that their frequent presence at the Emil Avenue house made it their home. The court found that the Strommes’ private life, including family celebrations and daily routines, took place at the LaCasse Drive house, making it their home under the statute. The court also considered the legislative history of section 131, which did not provide clear guidance beyond the statute’s plain language. The concurring opinions by Judges Holmes and Gustafson further discussed the interpretation of ‘home’ and the implications of allowing multiple homes under section 131, but the majority opinion did not need to reach these issues to decide the case.

    Disposition

    The court ruled that the foster care payments were taxable income and entered a decision under Rule 155, allowing the Strommes an opportunity to compute their tax liability based on the court’s holding.

    Significance/Impact

    The decision in Stromme v. Commissioner clarifies the definition of ‘home’ under IRC section 131, requiring foster care to be provided in the taxpayer’s residence to qualify for the tax exclusion. This ruling impacts foster care providers who operate group homes separate from their primary residences, as they will not be able to exclude payments received for care provided at such locations. The case also reinforces the principle of narrowly construing exclusions from income, as articulated in Commissioner v. Schleier, 515 U. S. 323 (1995). The court’s interpretation aligns with the legislative intent to simplify recordkeeping for foster care providers but emphasizes the requirement that care must be provided in the taxpayer’s home. Subsequent cases and IRS guidance will likely reference this decision when addressing similar issues under section 131.

  • Cato v. Commissioner, 99 T.C. 633 (1992): Exclusion of Foster Care Payments from Gross Income

    Cato v. Commissioner, 99 T. C. 633, 1992 U. S. Tax Ct. LEXIS 89, 99 T. C. No. 33 (1992)

    Foster care payments, including those from SSI funds administered by a State-licensed nonprofit agency, are excludable from gross income under IRC Section 131, but excess payments over expenses before 1986 are subject to self-employment tax.

    Summary

    Bobby L. Cato operated a licensed Small Family Home (SFH) in California, receiving payments for foster care, including Supplemental Security Income (SSI) funds. The issue was whether these payments were excludable from gross income under IRC Section 131 and subject to self-employment tax. The court held that post-1985, all foster care payments were excludable from gross income under Section 131, as they were administered by a qualifying agency. However, for 1985, the excess of foster care receipts over expenses was taxable as self-employment income due to Cato’s profit motive. The decision clarified the application of Section 131 and its implications for foster care providers.

    Facts

    Bobby L. Cato ran a Small Family Home (SFH) licensed by the California Department of Social Services, providing care for developmentally disabled children. He received payments from two regional centers, which were nonprofit agencies qualifying under IRC Section 501(c)(3). These payments included both state funds and Supplemental Security Income (SSI) funds, which the regional centers received on behalf of the children and then transferred to Cato. For 1985, Cato reported the foster care payments as business income on Schedule C, offsetting it with claimed SSI contributions. From 1986 to 1988, Cato received payments that included both state and SSI funds, with the regional centers issuing Forms 1099 for the total amounts transferred.

    Procedural History

    The Commissioner determined deficiencies in Cato’s federal income taxes for the years 1985 to 1988, asserting that SSI payments were not excludable under Section 131 and that the foster care receipts were subject to self-employment tax. Cato petitioned the Tax Court, which held that post-1985 foster care payments, including SSI funds, were excludable from gross income under Section 131. However, for 1985, the court found that the excess of foster care receipts over expenses was subject to self-employment tax.

    Issue(s)

    1. Whether Supplemental Security Income (SSI) payments received by Cato in 1986, 1987, and 1988 for caring for developmentally disabled children are excludable from income under Section 131.
    2. Whether foster care receipts from the operation of Cato’s Small Family Home are subject to self-employment tax for the years at issue.

    Holding

    1. Yes, because Section 131 excludes from gross income all foster care payments received from a qualifying agency, including those funded by SSI, as they are administered by a State-licensed nonprofit agency.
    2. No, for 1986, 1987, and 1988, because these payments are excluded from gross income under Section 131 and thus not subject to self-employment tax. Yes, for 1985, because the excess of foster care receipts over expenses is taxable as self-employment income due to Cato’s profit motive.

    Court’s Reasoning

    The court interpreted Section 131 to exclude all foster care payments, including SSI funds, from gross income if administered by a qualifying agency, as per the legislative intent to simplify record-keeping for foster parents. The court rejected the Commissioner’s conduit theory, emphasizing that the regional centers benefited from handling SSI funds and that the source of funds was irrelevant for Section 131’s application. For self-employment tax, the court relied on the legislative history of Section 131 and Rev. Rul. 77-280, concluding that pre-1986 excess foster care payments over expenses were taxable as self-employment income if the foster care activity was conducted with a profit motive.

    Practical Implications

    This decision clarifies that post-1985 foster care payments, including SSI funds, are excludable from gross income if administered by a qualifying agency, simplifying tax compliance for foster parents. However, it also establishes that pre-1986 excess payments over expenses are subject to self-employment tax if the foster care activity is conducted with a profit motive. Legal practitioners should advise foster care providers accordingly, ensuring accurate reporting of income and expenses, particularly for years before the 1986 amendment. This ruling may influence how foster care agencies structure their payment systems and how foster parents manage their finances to align with tax regulations.