Turecamo v. C. I. R., 1027

• Citation: 554 F.2d 564
• Decision Date: 09 May 1977
• Docket Number: No. 1027,D,1027
• Parties: , 77-1 USTC P 9415 Alfred H. TURECAMO and Frances M. Turecamo, Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellant. ocket 76-4014.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 564

554 F.2d 564

46 A.L.R.Fed. 912, 77-1 USTC P 9415

Alfred H. TURECAMO and Frances M. Turecamo, Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.

No. 1027, Docket 76-4014.

United States Court of Appeals Second Circuit.

Argued Aug. 18, 1976.

Decided May 9, 1977.

Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, Leonard J. Henzke, Jr., William S. Estabrook III, Tax Div., Dept. of Justice, Washington, D. C., for appellant.

Michael H. Simonson, New York City, for appellees.

Before VAN GRAAFEILAND, Circuit Judge, KELLEHER ^* and GAGLIARDI, ^** District Judges.

GAGLIARDI, District Judge:

The Commissioner of Internal Revenue ("the Commissioner") here appeals the decision of the Tax Court permitting Alfred and Frances Turecamo ("the taxpayers") to claim Mrs. Turecamo's mother, Mrs. Kavanaugh, as a dependent pursuant to Section 152(a) of the Internal Revenue Code ("the Code"), 26 U.S.C. § 152(a), and to claim certain attendant tax deductions. The single issued raised on this appeal may be stated simply: Are Basic Medicare hospitalization benefits paid pursuant to Part A of Subchapter XVIII of the Social Security Act ¹ to be considered support provided by the Medicare beneficiary for the purposes of determining whether a related taxpayer may claim the beneficiary as a dependent under the dependency support test of § 152(a) of the Code? The Tax Court concluded that for these purposes Basic Medicare benefits are not to be considered support furnished by the recipient. For the reasons stated below, we agree and affirm.

The Facts

The material facts are undisputed. In 1970 Mrs. Kavanaugh was 81 years old and lived with the Turecamos, her son-in-law and daughter, in their home. On August 5, 1970 Mrs. Kavanaugh was admitted to the Long Island Jewish Hospital in New Hyde Park, New York, where she remained until her discharge on October 9, 1970. On that date she returned to the taxpayers' home and continued to reside there until her death in December, 1970.

The total hospital bills incurred by Mrs. Kavanaugh were $11,095.75, of which $10,434.75 was paid by Medicare allowances pursuant to the provisions of Part A of Subchapter XVIII of the Social Security Act, "Hospital Insurance Benefits for Aged and Disabled," 42 U.S.C. §§ 1395c to 1935i-2. The taxpayers paid the balance of the hospital charges not covered by Part A as well as all of the additional costs of nursing care required when Mrs. Kavanaugh was at their home. They thus paid a total of $3,531.00 in medical expenses on her behalf in 1970.

That year the taxpayers also provided Mrs. Kavanaugh with several rooms in their home for her use as an apartment. In sum, the taxpayers provided Mrs. Kavanaugh with food, lodging, clothing and entertainment worth approximately $4,000. Although Mrs. Kavanaugh received $1,140 in social security benefits which she applied toward her support, she did not reimburse the taxpayers for any of the expenditures made by them on her behalf.

Acting on the assumption that they had provided more than half of Mrs. Kavanaugh's support in 1970 and that consequently she qualified as their dependent, as provided in § 152(a) of the Code, ² the taxpayers claimed an additional dependency exemption on their 1970 joint federal income tax return and also listed $3,531 as deductible medical expenses paid on her behalf. ³

The Commissioner disallowed the taxpayers' claims, ruling that the $10,434.75 in Part A Basic Medicare payments made on behalf of Mrs. Kavanaugh were to be considered as having been contributed by Mrs. Kavanaugh herself in determining whether she could be claimed as a dependent by the Turecamos. In so ruling the Commissioner relied on his previous decision in Rev.Rul. 70-341, 1970-2 C.B. 31, in which he characterized Part A Basic Medicare benefits as social security payments and thus, in accordance with the traditional tax treatment of governmental disbursements made in furtherance of social welfare objectives (discussed infra ), he ruled that Basic Medicare payments are includible as the recipient's own contribution to her support in determining who had provided more than one-half of her support under the § 152(a) dependency support test. ⁴ As a result of the inclusion of the Basic Medicare payments in the computation of Mrs. Kavanaugh's support, it was held that the Turecamos did not meet the § 152(a) dependency support test because they had failed to establish that they had provided over half of Mrs. Kavanaugh's support. ⁵ Consequently they were not entitled to claim her as a dependent and the additional personal exemption and medical expenses deduction were denied. A resulting tax deficiency was assessed.

The Tax Court overruled the Commissioner and held that the Part A Basic Medicare benefits paid out on behalf of Mrs. Kavanaugh are not to be included in the computation of the support furnished by the recipient-dependent. 64 T.C. 720 (1975). With the amount constituting Part A benefits thus disregarded by the Tax Court, the Turecamos' expenditures on behalf of Mrs. Kavanaugh easily made up more than one-half of her total support, as required by § 152(a) of the Code. See footnote 5, supra. The dependency claims were therefore allowed and it was determined that no tax deficiency existed.

We affirm the Tax Court's holding that Part A Basic Medicare benefits are to be excluded from a calculation of the recipient's total support for purposes of the dependency support test of § 152(a) of the Code on two separate analytical grounds. A proper determination of the issue on each ground requires, as a general preliminary matter, a consideration of the dependency exemption provisions of the Internal Revenue Code of 1954 and a review of the kinds of financial benefits traditionally included or excluded from the support test of those provisions.

We have compared the characteristics of these financial benefits which determine their support test consequences with the relevant characteristics of Part A payments. As appears more fully below, based upon this comparison and upon an analysis of the provisions and legislative history of the entire Medicare statute, Subchapter XVIII of the Social Security Act, 42 U.S.C. §§ 1395-1395pp, we are unable to conclude that benefits paid pursuant to Part A, Basic Medicare, should be treated any differently from those paid out under private insurance policies or under Part B, Supplementary Medicare, which are disregarded when calculating the beneficiary's support, as the Commissioner concedes.

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.

Section 152(a) Support Dependency Test

Section 152(a) of the Code permits a taxpayer to claim as his dependent any of certain qualified individuals, including his mother or mother-in-law, if he has provided more than half of that individual's support during the taxable year in question. ⁶ For each individual determined to be his dependent under the § 152(a) support test, the taxpayer may claim an additional personal exemption pursuant to § 151(e) of the Code. In addition, § 213 of the Code allows the taxpayer to take medical expense deductions for certain expenditures made for the medical care of himself, his spouse, and "dependents (as defined in Section 152)."

In order to prove the dependency status claimed under § 152(a) and to take advantage of the consequent tax benefits under §§ 151(e) and 213 of the Code, the taxpayer must first establish the total support costs expended on behalf of the claimed dependent from all sources and then demonstrate that over half of this amount was provided by the taxpayer. See, e. g., Hogg v. U. S.,428 F.2d 274, 283 (6th Cir. 1970), cert. denied, 401 U.S. 910, 91 S.Ct. 871, 27 L.Ed.2d 808 (1971); Klofta v. U. S., 333 F.Supp. 781 (N.D.Ohio 1970); Hopkins v. Commissioner, 55 T.C. 538, 541 (1970). In this respect " support" is broadly defined to include "food, shelter, clothing, medical and dental care, education, and the like," Treas.Reg. § 1.152-1(a)(2)(i). For the purposes of determining whether the taxpayer who is claiming the individual as a dependent has provided more than half of that individual's support, "there shall be taken into account the amount of support received from the taxpayer as compared to the entire amount of support which the individual received from all sources, including support which the individual himself supplied." Id. Thus, as a general rule under the support test, the medical expenses of an individual, including extraordinary hospitalization expenses, are to be considered part of his support. Payment of these extraordinary expenses plainly constitutes support supplied by the individual himself if made by him, while if made on his behalf by a third party is to be considered support received from that third party. Thus it is conceded by both parties here that if the Turecamos had themselves paid the extraordinary hospitalization costs which were incurred by Mrs. Kavanaugh and actually covered by Part A benefits, that payment would have been included in her support calculation and would have been attributed to the Turecamos.

However, when the cost of medical care is covered by privately obtained health or hospitalization insurance there is an exception to the otherwise broadly inclusive definition of support of Treas.Reg. § 1.152-1(a)(2)(i), supra. In Rev.Rul. 64-223, 1964-2 C.B. 50, the Commissioner ruled that where an individual is covered by a renewable term policy providing insurance against medical costs, the proceeds paid by the insurance company are to be disregarded in computing the individual's support. The...