Rev. Rul. 74-153

Advice has been requested whether adoptive parents are required to include in gross income for Federal income tax purposes the adoption payments received by them from the State of Maryland under the circumstances described below.

The taxpayers receive monthly payments for necessary support and maintenance of their adopted child under a program administered by the Maryland State Department of Social Services and use the payments for the care of the adopted child.

Section 67 of Article 16 of the Annotated Code of Maryland, as reenacted with amendments effective July 1, 1969, provides that a court, in passing on a petition for adoption, shall give due consideration to any assurance by the State Department of Social Services that it will provide or contribute funds for necessary support and maintenance of the adoptive child. The program is administered by the State Department of Social Services pursuant to its Rule 500. Rule 500 provides, in effect, that payments may be made for any child in the local department's foster care program upon the placement of that child in an adoptive home that meets all other eligibility tests as an adoptive home except for the ability to provide financially for an adoptive child. The amount and duration of the payments are based upon a written agreement between the adoptive parents and the local Department of Social Services. The payments are disbursed from foster care funds at a maximum rate of three-fourths of the foster care rate for board and clothing.

The adoption payments made by the Maryland State Department of Social Services under these circumstances are disbursements from a general welfare fund in furtherance of the social welfare objectives of the State and are furnished to assist the adoptive parents in the care of the adopted child.

Accordingly, the adoption payments received by the adoptive parents in the instant case are not includible in their gross income for Federal income tax purposes. However, such amounts are to be taken into account in the determination of who furnished the principal support of the adopted child for purposes of claiming the child's dependency exemption. See Rev. Rul. 57-344, 1957-2 C.B. 112, which holds similarly with respect to payments made under the Social Security Act to the child of a deceased individual in the care of the surviving parent, or other person having custody of the child.