Is the receipt of room and board excludable from income?

I have a client who cares for her adopted adult child, who is developmentally disabled. They live together in the mother’s home. The mother is receiving Medicaid waiver payments from a Colorado Program Approved Service Agency. Per IRS Notice 2014-7, the Service will treat these Medicaid waiver payments as difficulty of care payments excludable from gross income under section 131. In addition, the adult child is paying her mother $695 per month for room and board from her own private funds, which come, $10k each, from SSDI benefits and W-2 wages. $695 is the max allowed by the State. The mother insists, per her conversation with others, that the room and board is also excludable from gross income. Two individuals at the Colorado Department of Health Care Policy and Financing, one a CPA, are also saying it’s excludable, as the mother qualifies to exclude the “difficulty of care payments”. However, this is second hand information and they did not provide specific support for their position. I haven’t been able to find any support for excluding it. The IRS Notice states that the non-medical support services provided under a Medicaid waiver program do not include room and board. Secondly, the payment for room and board is not being made by the State or an approved agency.

Any thoughts or guidance would be greatly appreciated.

I think you are right but I spent little time on it.

Back in the 80s proposed regs. were issued on 131. They were withdrawn in the 90s or so on the basis they did not have plans to finalize them. Here they are.

Proposed amendments to the regulations.

The proposed amendments to 26 CFR Part 1 are as follows:

Paragraph. The following new section is added in the appropriate place.

§1.131-1 Certain foster care payments.

(a) Exclusion from gross income —(1) In general. Gross income shall not include amounts received by a foster parent during the taxable year as qualified foster care payments.

(2) Qualified foster care payment. The term “qualified foster care payment” means any amount that is paid by a state or political subdivision thereof OF by a child-placing agency described in section 501(c)(3) and exempt from tax under section 501(a) and—

(i) That is paid to reimburse the foster parent for the expenses of caring for a qualified foster child in the foster parent’s home, or

(ii) That is a difficulty of care payment, as defined in section 131(c) and Paragraph (c) of this section.

(3) Limitation on exclusion of difficulty of care payments. In the case of any foster home, difficulty of care payments for any period to which such payments relate shall not be excludable from gross income under section 131(a) and paragraph (a)(1) of this section to the extent such payments are made for more than 10 qualified foster children. If difficulty of care payments for any period are made for more than 10 qualified foster children and any of the children was not in the foster home for the entire period to which the payments relate, the exclusion shall apply to the payments for the 10 children who were in the foster home for the greatest number of days during the period.

(b) Qualified foster child. For the purposes of this section, the term “qualified foster child” means any individual who—

(1) Has not attained age 19, and

(2) Is living in a foster family home in which the individual was placed by an agency of a state or political subdivision thereof, or an organization that is licensed by a state (or political subdivision thereof) as a child-placing agency and that is described in section 501(c)(3) and exempt from tax under section 501(a).

(c) Difficulty of care payments —(1) In general. For purposes of this section, the term “difficulty of care payments” means payments to individuals that are not described in paragraph (a)(2)(i) of this section and that are compensation (and designated as such under paragraph (c)(2) of this section) for providing the additional care of a qualified foster child that is—

(i) Required by reason of a physical, mental, or emotional handicap of the child with respect to which a state or a political subdivision of a state (or an agency thereof, but not a licensed private agency) has determined that there is a need for additional compensation, and

(ii) Provided in the home of the foster parent.

(2) Payor designation. Payments will be treated as difficulty of care payments only if they are designated by the payor as compensation described in paragraph (c)(1) of this section. The designation may be made by means of a written statement furnished to the foster parents on or before January 31 of the year following the calendar year in which such payments are made (or, in the case of payments made before January 1, 1985, on or before the last date on which the foster parents may file a claim for credit or refund of income tax with respect to such payments). The statement need not use the words “difficulty of care payments,” but must indicate that the payment is for care that has been determined by a state or political subdivision of a state to be required by reason of a physical, mental, or emotional handicap of a qualified foster child, and that is provided in the home of the foster parents. In lieu of a written statement, the designation may be made by means of a separate check issued under a program to compensate foster parents for providing, in their homes, the additional care determined by a state or political subdivision of a state (or an agency thereof, but not a licensed private agency) to be required by reason of the physical, mental, or emotional handicap of their foster child.

(d) Examples. The provisions of paragraphs (a) through (c) of this section may be illustrated by the following examples:

Example (1). A married couple provide foster care to a ten-year-old child who has been placed in their home by a licensed private child-placing agency described in section 501(c)(3) and exempt from tax under section 501 (a). The child-placing agency makes a specified payment at the end of the month as reimbursement for amounts expended by the foster parents in providing food, shelter, school supplies, and other items of support for the child during the preceding month. The foster parents report to the child-placing agency the amounts paid or incurred for clothing and medical expenses, and the agency makes direct payment to the vendor or physician (if the goods or services were supplied on credit) or increases the monthly check to the foster parents if they have expended their own funds. The payments made by the child-placing agency to the foster parents are solely for the purpose of reimbursing them for their expenses incurred in taking care of the child placed in their home, and such payments do not exceed the expenses incurred. Accordingly, the payments are excluded from the gross income or the foster parents.

Example (2). A married couple entered into an agreement with a licensed private child-placing agency described in section 501(c)(3) and exempt from tax under section 501 (a) to provide foster care for a ten-year-old child in their home. They provide the child with room, board, clothing, medical and dental care, insurance, school expenses, recreation items, transportation, and spending money. The child-placing agency makes monthly payments to the foster parents covering (1) compensation for the services of the foster parents and (2) a per-child support payment that varies with the age of the child. The total amount received exceeds the expenses incurred in caring for the foster child. The portion of each payment that represents reimbursement or advancement for expenses subsequently incurred by the foster parents and does not exceed the expenses incurred is not includible in their gross income. The remaining portion of each payment is includible in gross income.

Example (3). A department of public welfare of a state administers an emergency shelter care program under which children in physical or moral danger are placed in the homes of temporary foster parents where they remain for periods of not more than 30 days before being placed in permanent foster homes. Foster parents who provide emergency shelter care must have adequate house space, be physically fit, and have suitable personalities. To assure the availability of suitable homes for such care, the welfare department is authorized to pay a monthly subsidy ranging from 20 dollars to 40 dollars a bed, totaling 100 dollars to 200 dollars a month, depending on the locality. Foster parents who participate in this program are paid these amounts for making the emergency shelter care available, and payment is not dependent upon a child being currently in the home. The payments are remuneration for keeping space available, not payments to reimburse the foster parents for the expenses of caring for qualified foster children. Accordingly, the payments are includible in gross income.

Example (4). The welfare department of a county conducts a specialized foster-family-care program to place physically, mentally, or emotionally handicapped foster children in the homes of other parents who, by reason of their training or work experience, are qualified to provide the children with the special care they need. Before a child is placed with the foster parents, a service worker employed by the welfare department must determine that the child has a physical, mental, or emotional problem requiring special care. The service workers’s determination must be supported by the judgment of an appropriately qualified professional or the worker’s supervisor. The child’s record must document the physical, mental, or emotional problem that requires special care, and the special care to be paid for must be designated in the child’s service plan. Payments for the special care required by the child’s handicap are in addition to, and are made under the specialized foster-family-care program separately from, payments for basic room, board, and supervision. In these circumstances, an agency of a political subdivision of a state has determined that additional compensation should be paid to foster parents for the additional care they provide their handicapped foster children, and the payor has designated the additional compensation as compensation described in paragraph (c)(1) of this section. Accordingly, the payments for the special care are excludable from the gross income of the foster parents subject to the limitation in paragraph (a)(3) of this section.

Example (5). A county department of public welfare makes difficulty of care payments on the fifteenth of each month for handicapped foster children cared for in the prior month. The payments are adequately designated as difficulty of care payments. A husband and wife have been providing care in their home for 10 handicapped foster children. During the last week of May, they take one more handicapped child into their home. On June 15, the Welfare department makes a difficulty of care payment for the 11 children cared for in May. The foster parents may exclude from their gross income only the portion of the payment representing compensation for the additional care provided from the 10 children who were in their home for the entire month of May.

(e) Effective date. The provisions of this section apply to amounts received by foster parents during taxable years begining after December 31, 1978.

ROSCOE L. EGGER, JR.,
Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register on January 31, 1985, 8:30 a.m., and published in the issue of the Federal Register for February 1, 1985, 50 F.R. 4702)

I don't think your question has been answered yet so I will give it a shot .

First off I don't believe the issue of whether the "room and board " is excludible from income has any connection with the exclusion of Medicare Waiver payments. I recall previous discussions on whether room and board payments made by an adult child to their father /mother is taxable. I think the conclusion was that it's going to get down to a facts and circumstances analysis.

With your particular circumstances I am of the opinion that the $695 payment for "room and board " is not taxable to the mother. I am assuming the mother pays for all the rent ,food ,and utilities . If this is the case just the meal cost of say $15 a day would come to $450 a month. The adopted adult child is merely helping out with the ongoing common household expenses.

As a sideline issue, there was a very recent tax court decision that states even though the Medicare Waiver payments are excludible from federal taxation the payments can be considered as wages for the earned income tax credit. IRS has stated they will appeal this decision .

I personally am in the same boat as your client, only my daughter pays $400 a month. This is very common for someone receiving SSI because SSI benefits would be reduced (my daughter is now receiving benefits off of my social security). Though I don't have any regulation to support it, I don't include it as income. It would be the same as any adult child paying room and board, or individuals sharing household expenses or even an unmarried couple living together and the rent or mortgage is in the other person's name. If the room and board exceeded that person's share, then it would be taxable.

In general, to the extent that payments like this are used/will be used to cover expenses that can be treated as the expenses of the child, the payments aren't income. This would probably exclude all of it if it's a rental situation. If the parent owns his/her own home, some of the payments might have to be treated as rents unless he/she wants to take the position that the child shares equitable/beneficial ownership of the house and is thus treated as liable for the mortgage interest and real estate taxes.

In this particular situation, I gather that the medicare waiver payments are being received for the purpose of being able to care for the adopted child. This presents a risk if the payments aren't used to cover other types of expenses, as the IRS could easily say something like "the child's grocery, utility, and other similar expenses are covered by the waiver payments, so no part of the 'room and board' payments can be allocated to those expenses". The counter-argument is that the the waiver payments can't be treated as reimbursements because they are compensation income similar to wages.

Taking that one step further, if there are substantial non-room and board expenses to help the child cope with her condition, that could be a slam dunk as the "room and board" payments could be argued to cover those expenses.

As far as support for the position on cost-sharing arrangements not being income, we might have to dig through case law to find some. The governing doctrines or concepts would be substance over form and the Glenshaw definition of income (accession to wealth).

As far as this goes...

Two individuals at the Colorado Department of Health Care Policy and Financing, one a CPA, are also saying it’s excludable, as the mother qualifies to exclude the “difficulty of care payments”.

...it's completely baseless. Section 131 only applies to foster care payments made by the government or a foster care placement agency. Even the medicaid waiver payments themselves can't be excluded by section 131—rather, they're excluded (rather dubiously) by sole reason of Notice 2014-7. See Feigh v. Commissioner.

Finally, if it turns out there is a rental situation, I would want to take the position that the entire payment is for rent and none of it is for groceries, etc. Doing this would probably push the payment up to fair market value so that expenses can be deducted against it. Area-based expenses would be limited to the area exclusively used for rental while usage-based expenses could be split according to actual usage.

Thanks to all for your input. Your comments have been very helpful. My take away is that the potential exclusion of room and board from gross income has nothing to do with Sec. 131 or IRS Notice 2014-7. With regard to sharing expenses, I ran across an IRS Q&A for caregivers where the question asked was: I care for my parents in my home. My parents occasionally give me money to pay for their share of household expenses. Is this money taxable to me? IRS answer: An amount of money that your parents give you to offset their expenses isn't taxable to you. This amount is treated as support provided by your parents in determining whether your parents are your dependents. So it would appear that, in the context of a caregiver receiving reimbursement from a family member, IRS is OK with the concept of excluding from income the reimbursement of shared expenses that are reasonably allocated. In my client's case, the $695 may be in excess of the child's share of expenses. If so, she can reduce the amount reimbursed, as she doesn't need the money.