Bryant v. Comm'r of Internal Revenue

• Decision Date: 03 August 1979
• Docket Number: Docket No. 9631-77.
• Citation: 72 T.C. 757
• Parties: HELEN C. BRYANT, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

72 T.C. 757

HELEN C. BRYANT, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 9631-77.

United States Tax Court

Filed August 3, 1979.

Held: Sec. 214(e)(4), I.R.C. 1954, which disallows a deduction for payments made to relatives described in paragraphs (1) through (8) of sec. 152(a), does not violate the due process clause of the Fifth Amendment to the Constitution. Accordingly, petitioner may not deduct the payments made to her niece and her mother for dependent care services. Jimmylee Gray, for the petitioner.

William F. Hammack, for the respondent.

OPINION

CHABOT, Judge:

Respondent determined a deficiency of $318.09 in petitioner's Federal income tax for 1975. The only issue presented for our consideration is the constitutionality of section 214(e)(4),¹ as then in effect,² which operated to disallow a deduction for amounts paid as dependent care services expenses to petitioner's mother and petitioner's niece.

All of the facts have been stipulated; the stipulation and the stipulated exhibits are incorporated herein by this reference.

When the petition in this case was filed, petitioner was a legal resident of Detroit, Mich.

During 1975, petitioner paid to her mother, Gladys Cannon (hereinafter sometimes referred to as Cannon), $315 for dependent care services rendered. During 1975, petitioner also paid to her niece, Patricia Porter (hereinafter sometimes referred to as Porter), $1,435 for dependent care services rendered. Neither Cannon nor Porter lived with petitioner during 1975 and neither could have been claimed by petitioner as a dependent for 1975. On her 1975 Federal individual income tax return, petitioner deducted $1,750 as dependent care expenses for the combined amounts paid to Cannon and Porter.

Respondent disallowed the dependent care expense deduction on the ground that the payments were made to individuals bearing a relationship to petitioner as described in paragraphs (1) through (8) of section 152(a) and therefore were not deductible because of section 214(e)(4).³ The parties have stipulated that the amounts were paid to individuals bearing a relationship to the taxpayer described in paragraphs (1) through (8) of section 152(a)⁴ and that deductibility is therefore prohibited by section 214(e)(4). However, petitioner maintains that section (e)(4) is unconstitutional because it violates the due process clause of the Fifth Amendment of the Constitution, in that

(1) The classification created by section 214(e)(4) has no rational relationship to the purpose of the legislation;

(2) The section establishes an impermissible “irrebuttable or conclusive presumption” that the payor of dependent care expenses to the listed relatives is making a fraudulent claim;⁵ and

(3) The right of the listed relative-payee to be gainfully employed is being violated without due process of law.

Respondent contends section 214(e)(4) is constitutional.

We agree with respondent.

Where it can fairly do so, a court should interpret statutory provisions so as to avoid serious doubts as to their constitutionality. E. g., Golden Rule Church Association v. Commissioner, 41 T.C. 719, 730 (1964), and cases cited therein. However, petitioner's attack on the statute is a frontal one—the parties' stipulations (in accord with our understanding of the facts) have left us no choice but to assess the constitutionality of section 214(e)(4) as in effect for 1975. We proceed now to that assessment.

I. Statutory Framework—1975

For the taxable year before the Court (1975), section 214 allowed deductions for employment-related dependent care expenses.⁶

In general, the deduction was allowable only—

(1) If the taxpayer itemized deductions “below the line” (sec. 63; mooted for the future by the change to a credit, sec. 44A);

(2) If the taxpayer maintained a household which contained either an under-15 dependent or a dependent or spouse incapable of taking care of himself or herself (sec. 214(b)(1) and (3); now see sec. 44A(c)(1) and (f)(1));

(3) If the expenses were incurred in order to permit the taxpayer to be gainfully employed (sec. 214(b)(2); now see sec. 44A(c)(2)(A));

(4) Up to specified maximum dollar amounts (sec. 214(c)(1) and (c)(2)(B); now see sec. 44A(d) and (e));

(5) Under an adjusted gross income phase-out rule (sec. 214(d));

(6) If, in the case of married taxpayers, they file a joint return (sec. 214(e)(1); now see sec. 44A(f)(2)); and

(7) If the person to whom the payments are made does not bear any relationship to the taxpayer who is described in any of the first eight paragraphs of section 152(a) and is not a dependent described in paragraph (9) of that section⁷ ( sec. 214(e)(4);⁸ now see sec. 44A(f)(6)).

II. History of Deductibility of Dependent Care Expenses

Before enactment of section 214 in 1954, dependent care expenses were nondeductible as personal expenses. O'Connor v. Commissioner, 6 T.C. 323 (1946). See Smail v. Commissioner, 60 T.C. 719, 726 n. 8 (1973), affd. without published opinion (10th Cir., Oct. 9, 1974, 35 AFTR 2d 75-1383, 75-2 USTC par. 9512. In enacting the Internal Revenue Code of 1954, Congress provided in section 214 a limited deduction for child care or other dependent care deductions. Under that section, amounts paid to a dependent of the taxpayer were not deductible.⁹ Section 214 was amended in 1963 (Pub. L. 88-4, sec. 1, 77 Stat. 4) and 1964 (Pub. L. 88-272, sec. 212(a), 78 Stat. 49) to make more generous the provisions concerning qualifying taxpayers, qualifying dependents, the amount of the deduction, and the adjusted gross income limitation. The Revenue Act of 1971 (sec. 210(a), Pub. L. 92-178, 85 Stat. 518) amended section 214 to provide the rules described above (I. Statutory Framework—1975), as applicable to the taxable year before us.

The Tax Reform Act of 1976 (Pub. L. 94-455) repealed section 214 (90 Stat. 1565) and replaced it with a credit (90 Stat. 1563) for dependent care deductions, effective for taxable years beginning after December 31, 1975 (90 Stat. 1569). The Act also made payments to a relative who is not a dependent of the taxpayer eligible for credit if the service which the relative performs is considered employment for Social Security purposes.¹⁰

The report of the Senate Committee on Finance provided the following explanation (S. Rept. 94-938, p. 133 (1975), 1976-3 C.B. (Vol. 3) 49, 171) for the 1976 Act revision on this point:

The committee also views the bar on deducting payments to relatives for the care of children as overly restrictive. Relatives generally provide superior attention. In order to cover the child care expenses paid to relatives and also to limit the risks of abuse (such as splitting or transferring income by gift to relatives who are in lower brackets or have incomes below taxable levels) the committee has provided the child care allowance only for those payments made to a relative who is not the taxpayer's dependent and whose wages are subject to social security tax.

The Senate amendment differed only slightly from the bill passed by the House of Representatives and the report of the House Committee on Ways and Means provided essentially the same explanation for the change from then present law. (H. Rept. 94-658, p. 148 (1975), 1976-3 C.B. (Vol. 2) 695, 840. See S. Rept. 94-1236 (Conference Rept.), p. 432, 1976-3 C.B. (Vol. 3) 807, 836; General Explanation of the Tax Reform Act of 1976, prepared by the staff of the Joint Committee on Taxation, p. 125, 1976-3 C.B. (Vol. 2) 1, 137.)

This provision was further revised by section 121 of the Revenue Act of 1978 (Pub. L. 95-600, 92 Stat. 2779), for taxable years beginning after December 31, 1978, to eliminate the requirement that the relative's services be considered employment for Social Security purposes.¹¹ The provision was added to the 1978 Act on the Senate floor, with the following explanation by its proponent, Senator Dole:

This legislation is necessary to enable working parents to claim the day care tax credit when one of their parents—their children's grandparents—is the babysitter. As you may recall, when the section 44A day care tax credit was enacted in the 1976 Tax Reform Act, we decided to allow this nonrefundable credit no matter whether relatives, neighbors, strangers, or day care centers did the babysitting. However, in drafting this provision, it was cross-referenced to the definition of employment under the Social Security Act in such a way that babysitting done by grandparents virtually never qualifies for the tax credit.

What my amendment does is simply to delete this cross reference and rewrite the part of section 44A pertaining to relatives so that it does what we had originally intended—allow the tax credit when the grandparents are the babysitters. The amendment does not change the present rule which denies the credit for amounts paid to dependents, nor is the credit allowed for amounts paid to one's own spouse or minor children. (124 Cong. Rec. 17,669 (daily ed. Oct. 7, 1978).)

This is substantially the same explanation given by the House Committee on Ways and Means for the adoption of that statutory language in H.R. 8535. H. Rept. 95-1092. See H. Rept. 95-1800 (Conference Rept.), pp. 202-203, 1978-3 C.B. (Vol. 1) 521, 536-537; General Explanation of the Revenue Act of 1978, prepared by the staff of the Joint Committee on Taxation, p. 64.

III. Rational Relationship Test

Petitioner asserts that the classification created by section 214(e)(4) has no rational relationship to the purpose of the legislation and that, as a result, the statute violates the equal protection of the laws concepts (applicable to the States under section 1 of the 14th Amendment¹²) as they are embodied in the 5th Amendment¹³ to the United States Constitution. Johnson v. Robison, 415 U.S. 361, 364 n. 4 (1974); Bolling v. Sharpe, 347 U.S. 497 (1954).

It is well settled that deductions are a matter of legislative grace. E. g., New Colonial Ice Co. v. Helvering, 292 U.S. 435,...