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«OVERTAXING THE WORKING FAMILY: UNCLE SAM AND THE CHILDCARE SQUEEZE Shannon Weeks McCormack* Today, many working parents are caught in a “childcare ...»

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Cl. 1972) (“[F]rom 1913 on, Congress has always directed the domestic levy at some net gain or profit, and for almost 60 years the concept that the income tax seeks out net gain has been 580 Michigan Law Review [Vol. 114:559 and sell a widget—say, for $15 and $20, respectively—that taxpayer should not be taxed on the full sales price received but rather the sales price less the cost of the widget ($20 less $15). The $15 expense produced no consumptive benefit and instead was aimed purely at income production. It has, therefore, long been accepted that the tax system may not tax one’s “return of capital” (the $15), a requirement that seems to rise (at least almost) to the level of constitutional necessity.120 Similarly, to accurately measure net income, the Code allows taxpayers to deduct the “ordinary and necessary” expenses associated with activities aimed at earning a profit (as opposed to activities pursued for enjoyment).121 Section 162 of the Internal Revenue Code, for instance, allows taxpayers to deduct “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”122 and § 212 allows the deduction of expenses associated with other income-producing activities that are not quite “continuous” and “regular” enough to rise to the level of a trade or business.123 To illustrate, suppose Tony Toymaker is in the business of making and selling adorable handmade toys. In addition to deducting the costs of making the toys that he sells to customers (such as the cost of raw materials),124 which ensures that Tony has not been taxed on his return of capital, Tony may also deduct other necessary costs associated with his toy business. For instance, if he received a loan to purchase the space he uses to make and sell the toys, he may deduct the interest on that loan;125 if he instead rents the space, he may deduct the rental payments.126 If he hires an employee to help him in his shop, he may deduct the employee’s salary.127 Tony may not, however, deduct any of the costs associated with toys made inherent in our system of taxation. That is the ‘well-understood meaning to be derived from an examination of the [United States] statutes which provide for the laying and collection of income taxes’—the basic test set forth in Biddle v. Commissioner of Internal Revenue....” (alteration in original) (quoting Biddle v. Comm’r, 302 U.S. 573, 579 (1938))).

120. See Mertens Law of Federal Income Taxation §§ 5.06, 5.13 (Hertsel Shadian ed., 2008). See generally Eisner v. Macomber, 252 U.S. 189 (1920); Doyle v. Mitchell Bros., 247 U.S.

179 (1918); Sullenger v. Comm’r, 11 T.C. 1076 (1948).

121. I.R.C. § 162(a) (2012); see Surrey, supra note 109, at 705–13 (explaining how business expenses must be deducted in order to properly calculate one’s tax liability).

122. I.R.C. § 162(a).

123. See, e.g., Higgins v. Comm’r, 312 U.S. 212 (1941) (stating general rule that a taxpayer may be engaged in a trade or business if his activities are extensive, regular, continuous, and undertaken with a profit motive).

124. I.R.C. § 1012 (providing a general rule that one’s basis in an asset is its cost); see id.

§ 1001 (defining taxable gain as amount realized minus basis).

125. Id. § 163.

126. Id. § 162(a)(3) (allowing deduction for “rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business”).

127. Id. § 162(a)(1) (allowing deduction for “a reasonable allowance for salaries or other compensation for personal services actually rendered”).

Uncle Sam and the Childcare Squeeze 581 February 2016] for his children, as these costs fall under § 262’s auspices,128 a result which is also theoretically sensible since these costs are purely consumptive.

Thus, tax relief for nonconsumptive costs such as deductions for costs associated with income-producing activities are necessary adjustments needed to properly measure taxable income. Congress cannot limit these sacrosanct adjustments without compromising the accurate calculation of the tax base.

C. Hybrid Expenses

While some expenses can be easily placed in the “consumptive” or “nonconsumptive” categories, other expenses are associated with activities that have both elements. For instance, consider Larry Lawyer who takes his client to lunch at Lawyer’s favorite restaurant to discuss a pending case.129 Is the expense a consumptive expenditure or is it associated with income production? The answer is clearly both. On one hand, the lawyer has had the opportunity to eat, which he needed to do regardless of his work on the client’s case. On the other hand, had he not had matters to discuss with his client (who might be a person of very fine taste, requiring some degree of pampering), he may well have eaten a peanut butter sandwich at his desk.130

As Professor Surrey puts it:

An individual is... regarded for tax purposes as having two personalities:

one is a seeker after profit who can deduct the expenses incurred in that search; the other is a creature satisfying his needs as a human and those of his family but who cannot deduct such consumption and related expenditures.131 Thus, if it were possible to tease out the motives of Larry Lawyer, he could not deduct the portion of the meal cost that represents the sustenance and enjoyment he derived from eating—the consumptive element—but could deduct the portion that was related to his business with the client, that

128. See id. § 262.

129. Expenses associated with business-related travel, meals, and entertainment are often cited as a classic example of expenses that are difficult to categorize. See generally Daniel I.

Halperin, Business Deduction for Personal Living Expenses: A Uniform Approach to an Unsolved Problem, 122 U. Pa. L. Rev. 859 (1974).

130. In Moss v. Comm’r, 758 F.2d 211, 212 (1985), Judge Posner presented the problem

colorfully as follows:

Suppose a theatrical agent takes his clients out to lunch at the expensive restaurants that the clients demand. Of course he can deduct the expense of their meals, from which he derives no pleasure or sustenance, but can he also deduct the expense of his own? He can, because he cannot eat more cheaply; he cannot munch surreptitiously on a peanut butter and jelly sandwich brought from home while his client is wolfing down tournedos Rossini followed by souffl´ au grand marnier.


131. 1 Stanley S. Surrey et al., Federal Income Taxation 496 (1972).

582 Michigan Law Review [Vol. 114:559 is, the additional cost, if any, he incurred to take the client to lunch compared to the lunch he would have eaten otherwise.132 In reality, it would be impractical (if not impossible) to make these differentiations and, as discussed further in Part III, the tax law would have to determine a practical, though almost always imperfect, way to handle these hybrid expenses. But presently, it is important for the reader to see that childcare expenses that enable a taxpayer to work as opposed to other childcare expenses—the costs of hiring babysitters for date nights, for example— may at least as an initial, intuitive matter be seen to fall somewhere in this middling area.

Further, it is important that the reader see that the tax relief provided in §§ 151 and 24, the sections allowing for the nonworking childcare credit and personal exemption discussed in Part I, is very different than the tax relief with which this Article is concerned—namely, tax relief to reflect childcare expenses associated with a taxpayer’s income-driven activities. As a matter of tax policy, Congress need not provide any relief for the expenses of caring for one’s children unrelated to work, as these represent purely consumptive expenses. By contrast, to the extent that working childcare costs are nonconsumptive expenditures, the Code should, as a matter of fundamental policy, offer tax relief to accurately calculate that taxpayer’s net income. Part III explores where working childcare expenses fall on this “expense spectrum.”

III. Analyzing the Working Childcare Expense

It seems almost intuitive that working childcare expenses are at least partly nonconsumptive costs of earning income and not purely consumptive costs.133 In fact, as discussed in Part I, when Congress changed § 21’s tax relief from a phased down deduction to a percentage credit, it “believe[d] that [working childcare] expenses should be viewed as a cost of earning income for which all working taxpayers may make a claim.”134 Nonetheless, some argue that all childcare expenses are purely personal expenditures, suggesting that tax relief is unnecessary. These arguments have some superficial appeal. But, as Section III.A shows, once this argument is analyzed more closely, it is entirely unpersuasive.

132. See Halperin, supra note 129, at 859–60; see also Moss, 758 F.2d at 212–13 (“Although an argument can thus be made for disallowing any deduction for business meals, on the theory that people have to eat whether they work or not, the result would be excessive taxation of people who spend more money on business meals because they are business meals than they would spend on their meals if they were not working.”).

133. Indeed, many share the intuition. See, e.g., Bittker, supra note 112, at 953 (“If the mother of small children takes a job outside the home, she may have to hire a nurse or babysitter; thus, [allowing a deduction for childcare expenses] is a plausible way to reflect the fact that the working mother’s salary is not all gravy.”); Feld, supra note 43, at 415–16, 447 (characterizing expense as at least in part an expense of earning income); William A. Klein, Tax Deductions for Family Care Expenses, 14 B.C. L. Rev. 917, 919 (1973) (stating the same categorization); Daniel C. Schaffer & Donald A. Berman, Two Cheers for the Child Care Deduction, 28 Tax L. Rev. 535, 536 (1973) (explicitly agreeing with Feld’s characterization).

134. S. Rep. No. 94-938, at 132 (1976).

Uncle Sam and the Childcare Squeeze 583 February 2016]

A. Working Childcare Costs as Purely Personal Costs

It is often argued that parents make the personal choice to have a child and that, therefore, all expenses associated with that initial choice—including childcare costs that enable a taxpayer to work—should not be used to

reduce one’s tax liability.135 It is easier to address this argument if it is broken into parts:

• Premise 1: The decision to have children is a personal choice.

• Conclusion 1: Thus, all expenses associated with children are personal expenses.

• Premise 2: No tax relief should be provided for any personal expenses.

• Conclusion 2: No tax relief should be provided for any expenses associated with children, since they are personal expenses.

In addition to seeming harsh (which is not in and of itself a failing), there are several weaknesses in this argument. First, the jump from Premise 1 to Conclusion 1 is incomplete. While some families are carefully planned, not every caregiver would say that she chose to have children. Many pregnancies are unplanned.136 Sometimes a caregiver gains custody of children after a loved one passes. And some individuals believe that their God prohibits birth control and that He alone is able to choose the number of children they should have.137 If it is the initial choice to have a child that renders all expenses associated with that child’s care unworthy of tax relief, may a family deduct the expenses if its members can show they did not wish to have the child? It is odd to think that tax relief would hinge on the circumstances under which each child was conceived.

Further, even for perfectly planned pregnancies, the “choice” to have children is a different choice than the choice to subscribe to Netflix or use an iPhone. In Article 16 of its Declaration of Human Rights, the United Nations recognizes the “family [as] the natural and fundamental group unit of society” and provides that “[m]en and women of full age, without any limitation due to race, nationality or religion, have the right to marry and to

135. See, e.g., Halperin, supra note 129, at 865 (“The nondeductibility of [childcare expenses] is probably not caused by any doubt that these expenses are business related, but by the belief that they are based on underlying personal decisions which give rise to personal satisfaction.”).

136. According to one study in 2006, 49 percent of pregnancies were unintended—a slight increase from 48 percent in 2001. Unintended Pregnancy Prevention, Centers for Disease Control & Prevention (citing Lawrence B. Finer & Mia R. Zolna, Unintended Pregnancy in the United States: Incidence and Disparities, 2006, 84 Contraception 478 (2011)), http://www.cdc.gov/reproductivehealth/unintendedpregnancy/ [http://perma.cc/NGU6-NF4J].

137. For instance, among traditional interpretations of the Torah, active prevention of pregnancy is in violation of the commandment “be fruitful and multiply.” Genesis 1:28.

584 Michigan Law Review [Vol. 114:559 found a family.”138 In other words, for many, having children is not a choice so much as it part of the basic human experience.

In light of this and the original intent of Congress in enacting § 21’s percentage credit,139 it is better to think that the initial choice to procreate does not coat all expenses associated with one’s offspring with the taint of nondeductibility. But even if one were to take the rather staunch view that those costs are purely personal, Premise 2—that no tax relief should be given for any personal costs—is theoretically immature despite its ostensible statutory support. As discussed, § 262’s default rule that “personal, living, or family expenses”140 are nondeductible can be reasonably viewed as a proxy rule reflecting the more theoretically mature notion that consumptive costs should not reduce one’s tax liability because they do not represent a decrease in one’s wealth.

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