Adoption expenses credit: foreign-born child.

• Author: Robinson, Walter J.

Rev. Proc. 2005-31, superseding Notice 2003-15, provides a safe harbor for determining the finality of the adoption of a foreign-born child for purposes of the Sec. 23 adoption expenses credit and Sec. 137 income exclusion for employer-provided assistance. Sec. 23 provides a credit for qualified adoption expenses (QAEs) paid or incurred in connection with the adoption of an eligible child. Sec. 137 provides an exclusion from income for employer-provided adoption assistance for QAEs. Under a special rule applicable to the adoption of a foreign child who is not a U.S. citizen or resident at the time the adoption commenced, the credit and/or the exclusion is only available for adoptions that become final.

Overview

The Intercountry Adoption Act of 2000 (IAA), 42 USC Sections 14901-14954, will implement the Hague Convention on Protection of Children and Co-operation in Respect of Intercountry Adoption (the Convention).When the Convention enters into force, the IAA generally will apply to adoptions in which both the sending and receiving countries are parties to the Convention. A Convention adoption subject to the IAA will be final for Federal income tax purposes in the (1) tax year for which the Secretary of State certifies as final an adoption subject to IAA Section 301(b); or (2) year in which the state court enters a final decree of adoption (IAA Section 301(c)). The U.S. is expected to ratify the Convention in 2007. Rev. Proc 2005-31 provides a safe harbor for determining the finality of the adoption of a foreign-born child (1) until the Convention is ratified and (2) from a country not a party to the Convention after ratification.

Safe Harbors

Rev. Proc. 2005-31 provides separate safe harbors for the finality of the adoption and the tax year of finality. The tax year of finality is the year in which the adoption credit or assistance exclusion is recognized and reported on the adoptive parent's return. Determination of the tax year of finality is subject to the type of visa issued and to whether and when a domestic home state court acts in the adoption process.

Adoption finality: Under the safe harbor for the adoption finality, the IRS will treat an adoption of a foreign born child as final if:

1. A competent authority of a foreign-sending country has entered a decree of adoption with respect to the foreign-born child or has authorized the child to leave the foreign-sending country under a guardianship or legal custody arrangement; and

2. The...