We thank one of our clients for bringing this case to our attention. In Judith Lang v. Commissioner (December 10, 2010), a mother paid medical expenses that had been incurred by her adult daughter. She made direct payment to the providers of the medical services, for which she had no legal obligation. The daughter deducted the medical expenses on her own federal income tax return and, upon audit, the IRS disallowed the deduction on the basis that the daughter had not paid the expenses for which she was claiming a tax deduction. The Tax Court held in favor of the daughter. The court construed the transaction as though the mother had made a gift to her daughter and the daughter then used the proceeds of the gift to pay her medical expenses.
A second benefit that the parties enjoyed here was that the mother did not incur any gift tax liability as a result of paying her daughter's medical expenses, even though the court characterized the payment as a gift from the mother to her daughter. IRC Section 2503(e)(2)(B) provides a gift tax exemption for the direct payment of medical expenses on behalf of another individual.
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