When’s Your Baby?

The tax code has plenty of perks for having kids.  (I’m not really supposed to give tax advice, but I should say that notwithstanding the $1000 per child tax credit, and the additional per-child dependent exemption, and, if your income is low enough, an increased earned-income tax credit, as well as various other child-related tax benefits, having children will be a net financial loss.)

Very bad tax shelter.

Very bad tax shelter.

But when do you get these tax advantages?  When do you have kids?  (No, not like that–have kids whenever it works for you–why are you asking me?)  I mean, is a child an individual for tax purposes only when he is born, or are yet-to-be-born children also individuals for tax purposes?  As I’ll discuss in a later post, this question matters for figuring out whether a federal adoption tax credit is available for embryo exchanges, because the federal adoption tax credit is available only for the adoption of an “eligible child,” and an eligible child is defined as an “individual” who meets certain requirements.  So we will need to figure out whether an embryo counts as an individual for these purposes.

There is no general definition of “individual” in the Code, and there is no guidance in either case law or administrative interpretations that directly addresses whether an embryo is an eligible child for purposes of the adoption tax credit. However, cases and guidance regarding the definitions of “individual” in related areas, in particular the area of exemptions for dependents, shed light on the question of whether the term “individual,” and thus the term “eligible child” for the purposes of the adoption tax credit, can reasonably be interpreted to include children not yet born.

A taxpayer may take an exemption–that is, reduce his taxable income by thousands of dollars ($3650 in 2009)–for every individual who is the taxpayer’s dependent.  A dependent includes a “qualifying child,” which is, like an “eligible child” for adoption tax credit purposes, an “individual” who meets certain requirements.

The IRS has consistently taken the position that a taxpayer may take a dependency exemption only for children who are born, and who are born alive.  The most recent court to examine the issue reached the same conclusion.  In Cassman v. United States, 31 Fed. Cl. 121 (1994), Andrea Cassman’s son, Jonathan, was born in July 1992, but Andrea and her husband tried to take a dependency exemption for Jonathan in 1991, because, they argued, Jonathan was a “dependent” for exemption purposes from the moment of his conception.   The Code tells us that a dependent includes a “qualifying child,” which is an “individual” who meets certain requirements. But the Code nowhere defines “individual.”

The court rejected the Cassmans’ argument based on, among other things, legislative history and textual analysis. (It declined to decide the “sensitive issue[]” of whether an unborn child is a person, although it did cite Roe v. Wade in a footnote for the proposition that “the unborn have never been recognized as persons in the whole sense.” )

The court pointed out that although the statute did not explicitly state that a dependent must be born in order to qualify a taxpayer for a dependency exemption, it did require that the child be younger than a particular age in order to qualify as a dependent. As the court explained, “The imposition by Congress of age limits would be impracticable if the age of dependents was to be determined by reference to the date of conception rather than the date of birth.”

The court also noted that a dependent was required to be either a citizen or resident of the United States. Immigration law required a person to be born in order to be a citizen of the United States, and therefore the unborn child could not be a citizen. The court dismissed as “without merit” the contention that the unborn child should be considered a resident of the United States.

The Cassman court was not persuaded by the single tax case treating an unborn child as a person for tax law. In that 1940 case, Faulkner v. Commissioner, the Board of Tax Appeals treated a gift in trust to an unborn child as a valid gift of a present interest for gift tax purposes. Like the Faulkner board itself, the Cassman court found Faulkner irrelevant for income tax purposes, as Faulkner was based almost entirely on an analysis of how trust and estate law treated unborn children.

Finally, the dependency exemption is a special exemption created by Congress to assist taxpayers. Such exemptions are, as the Supreme Court has held, “a matter of legislative grace,” and “provisions granting special tax exemptions are to be strictly construed.” But there is no sign in the language of the statute or the legislative history that Congress intended children not yet born to be counted as dependents.

I personally find this reasoning to be persuasive, though not everyone agrees.  And I also think that it is in Congress’s power to, if it wishes, expand the dependency exemption so that a taxpayer may take an exemption for an as-yet-unborn dependent.  But under current law, a child is a child for the purposes of the dependency exemption only after he or she is born.

(An expanded version of this discussion is available here.)

Update (May 10, 2009, 7:30 a.m.):  Jens Müller asks in the comments, “What the hell is an ’embryo exchange?'”  Excellent question, especially given that this is a term that Naomi Cahn and I made up, so it might be obscure to anyone who isn’t, say, me or Naomi.  Naomi discusses this briefly in an earlier post, which I of course failed to link to in the original version of this post, so, not so helpful.  Anyway, here’s the idea:  sometimes, after fertility treatments (specifically, IVF), there are embryos left over.  One of the things that can happen to an extra embryo is that it can be provided to someone else who wants a child.  We call this an “embryo exchange.”  (It is more commonly called an “embryo adoption,” but as Naomi and I explain, what happens is not an adoption as a matter of law, so that’s a problematic name, and the name itself is probably the source of (SPOILER ALERT) the incorrect claim that an adoption tax credit is available for these events.)

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5 Responses

  1. Jens Müller says:

    What the hell is an “embyro exchange”?

  2. James Joyner says:

    Hasn’t the requirement to supply a Social Security number obviated this discussion? My daughter was born New Year’s Eve and we still had to get her SSN before claiming her in April.

  3. Sarah Lawsky says:

    James Joyner–Excellent point–thanks. The taxpayer ID number (TIN) requirement (Section 151(e)) does indeed resolve the issue for the dependency exemption, and that is not at all clear in my post. But it does not resolve the issue for the adoption tax credit, so Cassman is still extremely helpful for our purposes, because it provides general insight into whether an “individual” for tax purposes includes a child not yet born.

    More details on the adoption tax credit TIN issue: it was my initial thought when Naomi first asked me the question of whether an adoption credit could be taken in this scenario. Section 23(f)(2) does ask the taxpayer to provide a taxpayer ID number (TIN), but it also says that the child’s name, age, and TIN must be included “if known,” and the legislative history says that “available” information must be provided. In other words, unlike for the dependency exemption, the social security number isn’t actually required for the adoption tax credit–it’s required only if you know it.

    An obsessive reader of IRS forms can get a sense of this from the instructions for Form 8839, the form that has to be filed to get the adoption tax credit, which says, with regard to this information, “If you do not give correct or complete information, your credit…may be disallowed” (emphasis added). That “may” is a concession. An auditor might try to disallow the adoption tax credit without a social security number, but I don’t think there’s a firm statutory basis to do so.

  4. Jens Müller says:

    OK. That practice is prohibited in Germany according to the Embryonenschutzgesetz (Embryos Protection Act) (misdemeanor punishable by up to three years in prison or a fine).

  5. Tim Zinnecker says:

    As one who has recent experience with the federal adoption tax credit, I found it interesting to slog through the provisions to determine when my wife and I could claim the credit. The year of expenses? The year we took the newborn home? The year the judge “finalized” the adoption?

    Looking forward to your post on that credit!