Form vs. Substance – Deductible Expenses

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Form vs substance

When you pay tax-deductible expenses for someone who’s not your dependent, who gets the deduction?

In T.C. Memo. 2010-286 (Lang), the question arose when a mother paid medical bills and real estate tax for her daughter, and the daughter deducted those expenses on her personal income tax return.

The IRS said mom wasn’t responsible for the expenses, and therefore couldn’t deduct them, and that the daughter, who was responsible for them, hadn’t paid them and therefore couldn’t deduct them.

The daughter argued that she was entitled to the deductions, saying the transaction was no different than if her mother had given her the money as a gift and she had paid the expenses herself.

At issue: $24,559 of medical expenses and $5,508 of real estate taxes.

The court, noting there was no issue of a double deduction since the mother had not claimed the expenses on her return, agreed with the daughter and allowed the deductions.

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