[Federal Register Volume 85, Number 111 (Tuesday, June 9, 2020)]
[Proposed Rules]
[Pages 35233-35236]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-10224]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-118997-19]
RIN 1545-BP52


Dependent Defined; Notice of Proposed Rulemaking and Partial 
Withdrawal of Notice of Proposed Rulemaking

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking; partial withdrawal of a notice 
of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations that clarify the 
definition of a ``qualifying relative'' for purposes of various 
provisions of the Internal Revenue Code (Code) for taxable years 2018 
through 2025. These proposed regulations generally affect taxpayers who 
claim Federal income tax benefits that require a taxpayer to have a 
qualifying relative. This document also withdraws a portion of the 
proposed regulations published on January 19, 2017, addressing the 
support test for a qualifying relative, and proposes replacement 
language.

DATES: Written or electronic comments and requests for a public hearing 
must be received by July 24, 2020. Requests for a public hearing must 
be submitted as prescribed in the ``Comments and Requests for a Public 
Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-118997-
19) by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The IRS expects to have limited personnel available to 
process public comments that are submitted on paper through mail. Until 
further notice, any comments submitted on paper will be considered to 
the extent practicable. The Department of the Treasury (Treasury 
Department) and the IRS will publish for public availability any 
comment submitted electronically, and to the extent practicable on 
paper, to its public docket. Send paper submissions to: CC:PA:LPD:PR 
(REG-118997-19), room 5203, Internal Revenue Service, PO Box 7604, Ben 
Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Victoria J. Driscoll (202) 317-4718; concerning submissions of comments 
and/or requests for a public hearing, Regina Johnson, (202) 317-5177 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    On January 19, 2017, the Treasury Department and the IRS published 
a notice of proposed rulemaking providing rules regarding the 
definition of a dependent under section 152, which includes a 
qualifying relative, in the Federal Register (82 FR 6370) (January 2017 
Proposed Regulations). This document revises the January 2017 Proposed 
Regulations by adding a paragraph to clarify the definition of a 
``qualifying relative'' for taxable years 2018 through 2025, and 
withdrawing and reproposing a rule in the January 2017 Proposed 
Regulations regarding the support of a dependent under section 152.

I. Zero Exemption Amount

    Generally, section 151 allows a taxpayer to claim deductions for 
exemptions for the taxpayer and his or her spouse, and for any 
dependents. Section 152(a) of the Code generally defines a 
``dependent'' as a ``qualifying child'' or a ``qualifying relative.'' 
The definition of a qualifying relative in section 152(d)(1) includes 
the requirement that the individual have gross income for the calendar 
year that is less than the exemption amount as defined in section 
151(d). Such an individual must also satisfy the requirement of section 
152(d)(1)(C) that the individual receive more than one-half of his or 
her support from the taxpayer claiming the individual as a qualifying 
relative.
    Before amendment by section 11041(a)(2) of Public Law 115-97, 131 
Stat. 2054 (2017), commonly referred to as the Tax Cuts and Jobs Act 
(TCJA), section 151(d) provided for an exemption amount of $2,000 that 
was adjusted annually for inflation beginning with calendar year 1990. 
Before the enactment of the TCJA, the IRS had determined that the 
exemption amount for calendar year 2018 was $4,150. Rev. Proc. 2017-58, 
2017-45 I.R.B. 489, modified and superseded by Rev. Proc. 2018-18, 
2018-10 I.R.B. 392.
    Section 11041(a)(2) of the TCJA added section 151(d)(5) to provide 
special rules for taxable years 2018 through 2025 regarding the 
exemption amount in section 151(d). Section 151(d)(5)(A) provides that, 
for a taxable year beginning after December 31, 2017, and

[[Page 35234]]

before January 1, 2026, the exemption amount is zero, thereby 
suspending the deductions for personal exemptions and the dependency 
exemption. H.R. Rep. No. 115-466, at 202-204 (2017) (Conference 
Report). However, section 151(d)(5)(B) provides that the reduction of 
the exemption amount to zero is not taken into account in determining 
whether a deduction under section 151 is allowed or allowable to a 
taxpayer, or whether a taxpayer is entitled to a deduction under 
section 151, for purposes of any other provision of the Code. The 
Conference Report states that this provision clarifies that the 
reduction of the personal exemption to zero ``should not alter the 
operation of those provisions of the Code which refer to a taxpayer 
allowed a deduction . . . under section 151,'' including the child tax 
credit in section 24(a). Id. at 203 n.16.
    Section 11022(a) of the TCJA amended section 24 of the Code to 
create a $500 credit for certain dependents of a taxpayer other than a 
qualifying child described in section 24(c) for whom the child tax 
credit is allowed. The $500 credit applies to two categories of 
dependents: (1) Qualifying children for whom a child tax credit is not 
allowed, and (2) qualifying relatives as defined in section 152(d). 
Section 24(h)(4)(A) and (C). Like the amendment to section 151(d) 
reducing the exemption amount to zero, this new credit applies for 
taxable years 2018 through 2025. The Conference Report explains that 
``[t]he credit is further modified to temporarily provide for a $500 
nonrefundable credit for qualifying dependents other than qualifying 
children. The provision generally retains the present-law definition of 
dependent.'' H.R. Rep. No. 115-466, at 227.
    The definition of head of household in section 2(b)(1)(A) includes 
the requirement that the taxpayer maintain as his or her home a 
household for a qualifying individual for a specified period of time. A 
qualifying individual under section 2(b)(1)(A)(ii) includes a 
qualifying relative if the taxpayer is entitled to a deduction under 
section 151 for the person for the taxable year. As noted above, 
taxpayers are allowed a deduction under section 151 for individuals who 
are dependents as defined in section 152, including qualifying 
relatives described in section 152(d).
    On August 28, 2018, the Treasury Department and the IRS issued 
Notice 2018-70, 2018-38 I.R.B. 441. This notice announced the intent to 
issue proposed regulations providing that the reduction of the 
exemption amount to zero under section 151(d)(5)(A) for taxable years 
2018 through 2025 will not be taken into account in determining whether 
an individual meets the requirement of section 152(d)(1)(B) to be a 
qualifying relative. Notice 2018-70 also stated that, before the 
issuance of the proposed regulations described in the notice, a 
taxpayer may rely on the rules described in the notice.
    Consistent with Notice 2018-70, these proposed regulations provide 
that in determining whether an individual is a qualifying relative for 
purposes of various provisions of the Code that refer to section 152 in 
years in which the exemption amount is zero, the section 151(d) 
exemption amount will be the inflation-adjusted section 152(d)(1)(B) 
exemption amount in the annual revenue procedure setting forth 
inflation-adjusted items that is published in the Internal Revenue 
Bulletin. Thus, the exemption amount is $4,150 for 2018 (section 3.24 
of Rev. Proc. 2017-58, 2017-45 I.R.B. 489, modified and superseded by 
Rev. Proc. 2018-18, 2018-10 I.R.B. 392); $4,200 for 2019 (section 3.25 
of Rev. Proc. 2018-57, 2018-49 I.R.B. 827); and $4,300 for 2020 
(section 3.25 of Rev. Proc. 2019-44, 2019-47 I.R.B. 1093).

II. Alimony and Separate Maintenance Payments

    Prior to the TCJA, alimony and separate maintenance payments were 
deductible by the payor spouse and includible in income by the 
recipient spouse under sections 61(a)(8), 71(a), and 215(a) of the 
Code. Under section 71(c), child support payments were not treated as 
alimony. Section 11051 of the TCJA repealed sections 61(a)(8), 71 and 
215, and, in a conforming change, also repealed section 682 of the Code 
for any divorce or separation instrument executed after 2018, and for 
any instrument executed before 2019 and later modified to apply the 
provisions of the TCJA.
    To conform with the repeal of section 71, section 11051(b)(3)(B) of 
the TCJA amended section 152(d)(5) of the Code regarding the source of 
a qualifying relative's support. As mentioned in part I of this 
Background, section 152(d)(1)(C) requires that an individual receive 
more than one-half of his or her support from the taxpayer to be 
claimed as a qualifying relative of that taxpayer. Consistent with 
prior law, the TCJA provides that payments of alimony or separate 
maintenance paid to a spouse or former spouse are not treated as 
support of a dependent provided by the payor spouse. However, the TCJA 
revised the language of section 152(d)(5) to eliminate references to 
sections 71 and 682, which were repealed by the TCJA. Section 1.152-
3(d)(2) of the January 2017 Proposed Regulations originally included 
references to sections 71 and 682. Accordingly, these proposed 
regulations withdraw Sec.  1.152-3(d)(2) of the January 2017 Proposed 
Regulations and replace it with proposed Sec.  1.152-3(d)(2) to reflect 
these amendments to section 152(d)(5).

Explanation of Provisions

    Section 151(d) provides for two different exemption amounts for 
taxable years 2018 through 2025. For purposes of the deduction allowed 
for a personal exemption or a dependency exemption, section 
151(d)(5)(A) provides that the exemption amount is zero, thereby 
effectively suspending the deduction. However, for purposes of applying 
other provisions of the Code that reference that deduction, Congress 
provided in section 151(d)(5)(B) that the reduction of the exemption 
amount to zero is not to be taken into account. For purposes of those 
other Code provisions, proposed Sec.  1.152-3(c)(3) provides that the 
exemption amount instead should be $4,150 for 2018, and should be 
adjusted for inflation for 2019 through 2025, as set forth in guidance 
published in the Internal Revenue Bulletin. This interpretation accords 
with section 151(d)(5), which suspends the deduction for a personal 
exemption or a dependency exemption without substantively changing 
other Code provisions that directly or indirectly reference the section 
151(d) exemption amount.
    This interpretation also is confirmed by the structure of several 
Code provisions that necessitate a non-zero exemption amount in section 
152(d)(1)(B). For example, to be a qualifying relative under section 
152(d)(1)(B), an individual must have gross income that is ``less than 
the exemption amount.'' If the exemption amount were zero, an 
individual's gross income would have to be less than zero, a near 
impossibility. Under such a reading, virtually no individual would meet 
the definition of a qualifying relative. Thus, a zero-exemption amount 
for this purpose would effectively render section 152(d)(1)(B) 
inoperable and eliminate an entire category of dependents. The Treasury 
Department and the IRS find no indication that Congress intended to 
make such a significant change in such an indirect manner.
    In addition, the new $500 credit under section 24(h)(4), also 
enacted in the TCJA, likewise depends on a non-zero exemption amount 
under section 152(d)(1)(B). Section 24(h)(4)(A) creates

[[Page 35235]]

a $500 credit available for each dependent of the taxpayer other than a 
qualifying child for whom the child tax credit is allowed. This 
provision references the definition of dependent in section 152, which 
includes both qualifying relatives and qualifying children, and it was 
understood at the time of enactment that this provision ``generally 
retain[ed] the present-law definition of dependent.'' H.R. Rep. No. 
115-466, at 227. However, if the exemption amount referenced in section 
152(d)(1)(B) were treated as zero for this purpose, the entire category 
of qualifying relatives would be effectively excised from the 
definition of dependent. As a consequence, the $500 credit generally 
would not be available for qualifying relatives, and the class of 
individuals who could qualify a taxpayer for this credit would shrink 
to only a limited category of qualifying children for whom the child 
tax credit is not allowed. The Treasury Department and the IRS find no 
indication that Congress intended for the suspension of the deduction 
for a personal exemption or a dependency exemption to have such a broad 
effect, or intended for the eligibility for the new $500 credit to be 
so narrow.
    Further, head of household filing status also depends on a non-zero 
exemption amount under section 152(d)(1)(B). Under section 2(b)(1)(A), 
an individual is considered a head of household if, among other 
requirements, he or she maintains as his or her home a household for 
either (i) a qualifying child, or (ii) any other person who is a 
dependent of the taxpayer. Because the only dependents other than 
qualifying children are qualifying relatives, a zero-exemption amount 
under section 152(d)(1)(B), and the resulting near elimination of 
qualifying relatives, would render the express provision for other 
dependents in section 2(b)(1)(A)(ii) surplusage. It also would deny 
head of household filing status to many individuals who previously 
qualified for that filing status and otherwise would continue to 
qualify. Again, the Treasury Department and the IRS find no indication 
that Congress intended for the suspension of the deduction for a 
personal exemption or a dependency exemption to have such a broad 
effect.
    Accordingly, consistent with the guidance provided in Notice 2018-
70, proposed Sec.  1.152-3(c)(3) provides that the reduction of the 
exemption amount to zero in section 151(d)(5)(A) for taxable years 2018 
through 2025 does not apply for purposes of the gross income limitation 
in the definition of a qualifying relative in section 152(d)(1)(B). 
These proposed regulations also withdraw and repropose Sec.  1.152-
3(d)(2) of the January 2017 Proposed Regulations. Reproposed Sec.  
1.152-3(d)(2) is substantively the same as the proposed provision it 
replaces, but the reproposed regulation describes the payment to the 
spouse without references to repealed sections 71 and 682.
    Finally, the proposed regulations clarify an issue raised regarding 
a cross reference in section 24(h)(4) to ``a qualifying child described 
in subsection (c).'' The proposed regulations clarify that the cross 
reference is a reference to section 24(c), rather than to section 
152(c).

Applicability Date

    Section 1.152-3(c)(3) of these regulations is proposed to apply to 
taxable years ending after August 28, 2018, the date the Treasury 
Department and the IRS issued Notice 2018-70. See section 
7805(b)(1)(C). Sections 1.24-1 and 1.152-3(d)(2) of these regulations 
are proposed to apply to taxable years beginning on or after the date 
the regulations are published as final regulations in the Federal 
Register. Pending the issuance of the final regulations, taxpayers may 
rely on these proposed regulations in any open taxable year.

Special Analyses

    These regulations are not subject to review under section 6(b) of 
Executive Order 12866, pursuant to the Memorandum of Agreement (April 
11, 2018) between the Department of the Treasury and the Office of 
Management and Budget, regarding the review of tax regulations.

Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is certified that these regulations will not have a significant 
economic impact on a substantial number of small entities. These 
regulations primarily affect individuals and will not have a 
significant economic impact on a substantial number of small entities. 
Pursuant to section 7805(f) of the Code, these proposed regulations 
will be submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on their impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed amendments to the regulations are adopted as 
final regulations, consideration will be given to comments that are 
submitted timely to the IRS as prescribed in the preamble under the 
``ADDRESSES'' section. The Treasury Department and the IRS request 
comments on all aspects of the proposed regulations. Any electronic 
comments submitted, and to the extent practicable any paper comments 
submitted, will be made available at www.regulations.gov or upon 
request.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are also encouraged to be made electronically. If a 
public hearing is scheduled, notice of the date and time for the public 
hearing will be published in the Federal Register. Announcement 2020-4, 
2020-17 IRB 1, provides that until further notice, public hearings 
conducted by the IRS will be held telephonically. Any telephonic 
hearing will be made accessible to people with disabilities.

Drafting Information

    The principal author of these proposed regulations is Victoria 
Driscoll of the Office of Associate Chief Counsel (Income Tax and 
Accounting). However, other personnel from the Treasury Department and 
the IRS participated in their development

Statement of Availability of IRS Documents

    IRS notices and other guidance cited in this preamble are published 
in the Internal Revenue Bulletin (or Cumulative Bulletin) and are 
available from the Superintendent of Documents, U.S. Government 
Publishing Office, Washington, DC 20402, or by visiting the IRS website 
at http://www.irs.gov.

Partial Withdrawal of Proposed Regulations

    Under the authority of 26 U.S.C. 7805, Sec.  1.152-3(d)(2) of the 
notice of proposed rulemaking (REG-137604-07) published in the Federal 
Register on January 19, 2017 (82 FR 6370) is withdrawn.

Proposed Amendments to the Regulations

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.
    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *

[[Page 35236]]

0
Par. 2. Section 1.24-1 is added to read:


Sec.  1.24-1  Partial credit allowed for certain other dependents.

    (a) In general. For purposes of section 24(h)(4)(A), a taxpayer may 
be eligible to increase the credit determined under section 24(a) by 
$500 for a dependent of the taxpayer, as defined in section 152, other 
than a qualifying child described in section 24(c).
    (b) Applicability date. This section applies to taxable years 
beginning on or after [date the Treasury Decision adopting these rules 
is published in the Federal Register].
0
Par. 3. Section 1.152-3, as proposed to be revised by 82 FR 6370, 
January 19, 2017, is amended by:
0
a. Adding paragraph (c)(3); and
0
b. Revising paragraph (d)(2).
    The addition and revision read as follows:


Sec.  1.152-3  Qualifying relative.

* * * * *
    (c) * * *
    (3)(i) For tax year 2018, the exemption amount under section 
152(d)(1)(B) is $4,150.
    For tax years 2019 through 2025, the exemption amount, as adjusted 
for inflation, is set forth in annual guidance published in the 
Internal Revenue Bulletin. See Sec.  601.601(d)(2) of this chapter.
    (ii) Paragraph (c)(3)(i) of this section applies to taxable years 
ending after August 28, 2018.
* * * * *
    (d) * * *
    (2) Certain income of a taxpayer's spouse. A payment to a spouse 
(payee spouse) of alimony or separate maintenance is not treated as a 
payment by the payor spouse for the support of any dependent. 
Similarly, the distribution of income of an estate or trust to a 
divorced or legally separated payee spouse is not treated as a payment 
by the payor spouse for the support of any dependent. The preceding 
sentence shall not apply, however, to the extent that such a 
distribution is in satisfaction of the amount or portion of income 
that, by the terms of a divorce decree, a written separation agreement, 
or the trust instrument is fixed as payable for the support of the 
minor children of the payor spouse.
* * * * *

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-10224 Filed 6-8-20; 8:45 am]
BILLING CODE 4830-01-P