Definition of Qualifying Child for Adoptions

Facts:
Foreign Adoption
Placement Agreement filed with Agency: June of 2009
Adoption finalized: August 2009
Child first living in taxpayers home: September 2009
Taxpayer provides >50% of support for year
Child's age < 10

Initial thought is no child tax credit is allowed due to section 152(c)(1)(B) requirement of >6 months in the taxpayers home.

Looking at the regs though, under reg 1.152-2(c), it looks like by the example under reg 1.152-2(c)(3) that the year the placement agreement is filed would possibly "define" the child as a "qualified child" based on the uniform definitions in place since 2005.  The example does use a U.S. citizen, but I'm not seeing why a child's qualification as a dependent based on section 152(b)(3)(B) would matter as reg 1.152-2(b) specifically states an agency authorized to place children by a foreign country.

Really just annoyed as to why it was obvious to claim an adopted child as a "qualified child" before 2005, but after 2005 they didn't make specific exemption from the residency requirement in the code section similar to the one for a new born.

Any thoughts on my laymen's attempt to look at this?

In order to qualify for the child tax credit, the child must be a qualifying child and you must be able to take a dependent exemption for the child. For this purpose, "qualifying child" has the same meaning as for the dependent exemption, and thus Internal Revenue Code (I.R.C.) section 152 applies here.

In the case of the adopted child under your set of facts, he or she is is not a qualifying child because the requirement that the child must have the same principal abode as you for more than 6 months of the year has not been met. This rule applies whether the child is a citizen, resident, or non-resident alien (as determined by the tax rules, not immigration rules).

The regulation you cited, Treas. Reg. § 1.152-2(c), does not change this result. The reason is that this regulation was issued in 1960, when I.R.C. § 152 was significantly different than it is now. In particular, the 2004 changes (which were effective in 2005), created two different categories for the dependent exemption, a "qualifying child" and a "qualifying relative" test. Prior to those changes, the test for the dependent exemption was a single standard which looked very much like the "qualifying relative" test. Under that old test, how long a child lived with you during the year did not matter (except in the case of divorced or separate parents); all that mattered was whether you provided over half the total support for the child for the year. That's why, in the case of an adopted child who was a citizen or resident of the U.S., under the old rule it did not matter how long the child resided with the taxpayer. So long as the person was the taxpayer's child and the taxpayer provided over half the total support, the taxpayer could take the dependent exemption. The example in Treas. Reg. § 1.152-2(c)(3) merely applies the rule that an adopted child is treated as a blood child of the taxpayer in the year of the adoption, so that if (prior to 2005) the taxpayer provided over half the total support, the taxpayer would get the dependent exemption, regardless of how long the child lived with the taxpayer, if the child was a U.S. citizen or resident. But the 2004 act changed the rules, and that old regulation cannot override the clear language of the statute.

The regulation example still holds true today when applying the "qualifying relative" test for the dependent exemption. In order to do that, the child could not be the "qualifying child" of any taxpayer. The example just does not apply for a "qualifying child." The problem is, of course, that while you might still get the dependent exemption for the child using the qualifying relative test, you could not get the child tax credit because the child must be your "qualifying child", not your "qualifying relative." Congress made a choice to limit the tax credit to taxpayers with "qualifying children," and in doing so changed the qualification for the credit from what existed before 2005. That affected more than just taxpayers with adopted kids, by the way.

Since the child was not born in the U.S., he or she is not a citizen of the U.S. It is not clear where the child was living prior to September from your facts. If the child resided in the U.S. for less than 183 days during the year, he or she was not a resident of the U.S. for tax purposes, either. If the child was neither a citizen nor resident of the U.S. for 2009, then rule of I.R.C. § 152(b)(3)(B) comes into play and requires that the child have shared the same abode with you as a member of your household for the entire tax year. The example of Treas. Reg. § 1.152-2(c)(3) does not help you because the child in that example was a U.S. resident and as a result, the requirement imposed by I.R.C. § 152(b)(3)(B) did not apply. The example specifically notes that to be the case. However, had the child been a newborn, the rule of Treas. Reg. § 1.152-2(a)(2)(ii) would have helped you, as it states that:

The period during the taxable year preceding the birth of a child shall not prevent such child from qualifying as a dependent under this subparagraph. Moreover, a legally adopted child who actually becomes a member of the taxpayer's household during the taxable year shall not be prevented from being considered a member of such household for the entire taxable year, if the child is required to remain in a hospital for a period following its birth and if such child would otherwise have been a member of the taxpayer's household during such period.

If the child was born prior to the start of the tax year, however, that rule doesn't help you.

LoneOne:

Really just annoyed as to why it was obvious to claim an adopted child as a "qualified child" before 2005, but after 2005 they didn't make specific exemption from the residency requirement in the code section similar to the one for a new born.

For a foreign adoption, the same rule in I.R.C. § 152(b)(3)(B) applied prior to the 2004 changes and the result would have been the same. There was no exemption from the residency requirement prior to 2005.

While I never like to question taxagent, I have always thought that adopted children were treated no differently than newborns.  Admittedly its not anything that I have researched in probably 20 years, but that has always been the general consensus amongst any tax professionals in our office or that I have known.

@ Taxagent

First off, great answer, that's exactly what I was thinking based on my reading.  Just was curious if someone thought there was an exception that wasn't obvious...but it's obvious there isn't.  I've heard many comments similar to LdiJ without any real substantiation other than someone trying to use that reg 1.152-2(c)(3) example erroneously like that.  It's nice to know someone smart agrees that is completely wrong.  I also hadn't originally quite read section 152(b)(3)(B) that way regarding the entire year, but now that you mentioned it, it seems obvious that's what is meant.

Taxagent:

For a foreign adoption, the same rule in I.R.C. § 152(b)(3)(B) applied prior to the 2004 changes and the result would have been the same. There was no exemption from the residency requirement prior to 2005.

I meant to say it's "obvious that you could NOT claim an adopted child as a "qualified child" before 2005."  Mostly referring to the fact it'd have been nice for adoptive families if they had thrown in a secific exemption.  But then, getting a $10k+ credit to be used over five years, is a nice tax benefit in itself.

Thanks again for the detailed response.

LdiJ:

While I never like to question taxagent, I have always thought that adopted children were treated no differently than newborns. Admittedly its not anything that I have researched in probably 20 years, but that has always been the general consensus amongst any tax professionals in our office or that I have known.

I think perhaps this comes from folks hearing a rule that applies in one circumstance and then applying it more broadly than they should.

I think this may be a case of folks thinking the rule is more broad than it really is. Let’s start with the statute. I.R.C. § 24 permits a taxpayer a credit of $1,000 for each qualifying child’ For this purpose, qualifying child is the same as a qualifying child under I.R.C. § 152(c). I.R.C. § 152(c) has four criteria that must be met for a qualifying child:

1. The person must be “(A) a child of the taxpayer or a descendant of such child, or (B) a brother, sister, stepbrother, or stepsister of the taxpayer or descendant of any such relative.”
2. The person must have had the same principal place of abode as the taxpayer for more than one-half of the taxable year.
3. The person must meet certain age requirements.
4. The person must not have provided over one-half his/her total support for the year.

I.R.C. § 152(f) states that a legally adopted child, or a child lawfully placed with the taxpayer for legal adoption shall be treated as a child of the taxpayer. All this does, however, is treat adopted child just like any natural born child of the taxpayer and thus allows them to meet the first condition above. The adopted child must still meet the other three conditions, including having had the same principal place of abode as the taxpayer for more than half the year.

Treas. Reg. § 1.151-1(b) says, in part, that “[t]he fact that the dependent dies during the year shall not deprive the taxpayer of the deduction if the dependent lived in the household for the entire part of the year preceding his death. Likewise, the period during the taxable year preceding the birth of an individual shall not prevent such individual from qualifying as a dependent under section 152(a)(9).”

This regulation is from 1960, and it applied to a rather different statute than we have today, so its application to the qualifying child rule is questionable. Nevertheless, the IRS seems to believe it applies, as indicated in Publication 501, which states in the qualifying child discussion on page 12 that “[a] child who was born or died during the year is treated as having lived with you all year if your home was the child's home the entire time he or she was alive during the year. The same is true if the child lived with you all year except for any required hospital stay following birth.” Treas. Reg. § 1.152-2(a)(2)(ii) makes it clear that the newborn rule also applied to adopted children, though I think that was pretty clear just from the statute. The statute treats adopted kids just like kids by blood, so that result seemed pretty obvious, though it is nice that the regulation made that explicit.

Thus, if you adopt a newborn and take him or her home from the hospital after birth so that the child lives with you the entire time he or she was alive during the year, that adopted child would be deemed to meet the requirement for having lived with the taxpayer for more than half the taxable year.

The only other rule in I.R.C. § 152 relating to adopted children is in paragraph (b)(3)(B). Under the general rule of paragraph (b)(3)(A), if the child is not a citizen or resident of the U.S., he or she cannot qualify as a dependent. But I.R.C. § 152(b)(3)(B) allows adopted children who are not citizens or residents to be dependents if all the other requirements are met and the child had the same principal place of abode of the taxpayer for the (entire) taxable year and the taxpayer is a citizen or resident of the U.S. Again, the newborn rule would apply here, too, in determining whether the child had lived with the taxpayer for the entire tax year.

But no where in either the statute or the regulations does it say that adoption of an older child will allow you to disregard the requirement that the child must have lived with you for more than half the tax year to be a qualifying child. In other words, if you adopted a five year old child who came to live with you starting October 1, that child could not be your “qualifying child” for that year because he or she only lived with you for three months of the year. Since the child is not a newborn, that exception doesn’t apply. And there is no other exception to get around the requirement that the child must have lived with you for more than half the year. Yes, the adopted child is treated just like a child related by blood, but if your five year old son only lived with you for three months of the year, he wouldn’t be your qualifying child. Same thing for the adopted child. In both cases, you might qualify to take a dependent exemption under the qualifying relative test, which doesn’t require that your child live with you, only that you provided over half the child’s support. But in that case, you don’t get the child tax credit.

If you know folks who think that a five year old child whom you adopt in 2009 and who comes to live with you in October of 2009 would be a qualifying child by applying something like the newborn child rule, I would appreciate seeing the analysis and citation to authority for that because I don’t see it and would like to know where it comes from. Note that the discussion of qualifying child in Publication 501 does not say anywhere that adoption provides an exception to this requirement. Although publications are not citable authority, it suggests the IRS sees it the same way.

Thank you for that information.  I do see exactly where you are coming from.  To be honest, it has only come up in conversation in our office.  I don't believe that we have actually had any adoption situations in a long time where the child didn't already live with the taxpayer for quite a while prior to the adoption (grandparents or stepparents adopting, or adoptions of newborns, or foster parents adopting children that had previously been their foster children).  I am certain that we haven't seen a foreign adoption in the years that I have been there.