Rev. Rul. 76-278

Advice has been requested whether, under the circumstances described below, amounts paid by an individual for household services and dependent care during a period when the individual was absent from work on account of sickness are employment-related expenses within the meaning of section 214(b)(2) of the Internal Revenue Code of 1954, so as to qualify for the deduction provided under section 214(a) as expenses for household and dependent care services necessary for gainful employment.

The individual, B, a taxpayer who files tax returns on a calendar year basis, is the custodial parent of two children under 15 years of age who are "qualifying individuals" under section 214(b)(1) of the Code. In order that the children might be cared for while B was gainfully employed away from home in the daytime, B hired a nonrelative as a housekeeper for a stated salary per month. B's expenditures for the housekeeper's salary met the requirements for deductibility as expenses for household and dependent care under section 214.

B's employment of the housekeeper continued during a 6-month period in 1974 when B was absent from work on account of an illness that required treatment for two full months in a hospital and for four full months at home where B received medication and therapy administered by a visiting nurse. During this 6-month period, B performed no employment services. B received payments under the employer's wage continuation plan for the entire 6-month period of absence and thereafter returned to work at the regular job. The payments B received for this 6-month period of absence qualified for exclusion as sick pay within the limitations of section 105(d) of the Code.

Section 214(a) of the Code provides that in the case of an individual who maintains a household that includes as a member one or more qualifying individuals, there shall be allowed as a deduction, subject to certain limitations, the employment-related expenses paid by the individual during the taxable year. A qualifying individual, under section 214(b), includes a dependent of the taxpayer who is under the age of 15 and with respect to whom the taxpayer is entitled to a deduction under section 151(e).

"Employment-related expenses" are defined in section 214(b) of the Code as amounts paid for (A) expenses for household services, and (B) expenses for the care of a qualifying individual, but only if such expenses are incurred to enable the taxpayer to be gainfully employed.

Thus, in order for an amount to be recognized as an employment-related expense, it must be determined both (1) that the taxpayer making the expenditure was gainfully employed or in search of gainful employment during the period the expenses were incurred, and (2) that the taxpayer's payments for household and dependent care services for that period were, in fact, incurred for the purpose of enabling the taxpayer to be gainfully employed. Whether an expense is incurred for the purpose of enabling the taxpayer to be gainfully employed depends on the facts and circumstances of each particular case.

Since, in the instant case, B continued to be compensated through the employer's wage continuation plan during the period of illness, retaining status as an employee with the expectation of returning to work upon recovery, it is concluded that B was gainfully employed throughout that period.

However, B's payments for household and dependent care services during the period of illness were not incurred for the purpose of enabling B's gainful employment since such payments did not contribute to B's ability to be gainfully employed during that period.

Accordingly, the amounts B paid the housekeeper for household services and dependent care during the 6-month period when B was absent from work on account of sickness are not employment-related expenses within the meaning of section 214(b)(2) of the Code, so as to qualify for the deduction provided under section 214.