152 T.C. No. 15
T.C.2019Background
- Mary and Edward Feigh reported a $7,353 Form W-2 Medicaid waiver payment (care for their disabled adult children) on their 2015 return and excluded it from gross income relying on IRS Notice 2014-7.
- Petitioners claimed Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) for 2015 based on their reported wages; respondent disallowed both credits in a notice of deficiency.
- The parties stipulated that Notice 2014-7 treats qualified Medicaid waiver payments as difficulty-of-care foster payments excludable under I.R.C. §131.
- Section 32 defines "earned income" for EITC/ACTC as wages and other employee compensation only if "includible in gross income" for the taxable year.
- The narrow legal question: does a Medicaid waiver payment that the IRS, via Notice 2014-7, treats as excludable under §131 nevertheless qualify as "earned income" under §32 for credit eligibility?
Issues
| Issue | Plaintiff's Argument (Feigh) | Defendant's Argument (Commissioner) | Held |
|---|---|---|---|
| Whether Medicaid waiver payments excluded under Notice 2014-7 are "earned income" under §32 | The IRS cannot, by subregulatory notice, reclassify otherwise earned wages as not includible to deny a statutory credit; the payment remains §32 "earned income." | Because Notice 2014-7 treats these payments as excludable under §131, they are not "includible in gross income" and thus do not qualify as §32 "earned income." | The payment does not fall within the plain text of §131; the IRS notice cannot reclassify income to deprive petitioners of a statutory credit. Notice 2014-7 is entitled to little, if any, deference. Petitioners prevail. |
Key Cases Cited
- Welch v. Helvering, 290 U.S. 111 (taxpayer bears burden to show error in Commissioner determination)
- INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (credits and deductions are matters of legislative grace)
- Skidmore v. Swift & Co., 323 U.S. 134 (agency interpretations may receive weight based on persuasiveness)
- United States v. Mead Corp., 533 U.S. 218 (degree of deference to agency depends on care, consistency, formality, persuasiveness)
- Commissioner v. Schleier, 515 U.S. 323 (interpretive rulings lack force of law and may not overturn plain statutory language)
- Deputy v. Du Pont, 308 U.S. 488 (tax benefits depend on legislative grace)