Rev. Rul. 64-223

The Internal Revenue Service has been requested to state to what extent the cost of medical care of an individual (1) paid by an insurance company under a medical care insurance policy, or (2) paid by a person who has injured the individual, or by an insurance company on his behalf, or (3) provided by the United States Government medical facilities under the provisions of Dependents' Medical Care Act of 1956, as amended, 10 U.S.C. 1071, enters into the support of the individual for the purpose of determining whether the taxpayer has provided more than half of such support so that he may claim that the individual is his `dependent' within the meaning of section 152(a) of the Internal Revenue Code of 1954.

Section 151(e) of the Code provides, in general, that a taxpayer may take an exemption of $600 for each dependent, as defined in section 152 of the Code, whose gross income for the calendar year in which the taxable year of the taxpayer begins is less than $600, or who is a child of such taxpayer and who (1) has not attained the age of 19 at the close of the calendar year in which the taxable year of the taxpayer begins, or (2) is a student. Under section 152(a) a `dependent' is defined as an individual coming within any of certain prescribed relationships to the taxpayer who, for the calendar year within which the taxable year of the taxpayer begins, receives over half of his support from the taxpayer.

Section 1.152-1(a)(2)(i) of the Income Tax Regulations provides as follows:

`For purposes of determining whether or not an individual received, for a given calendar year, over half of his support from the taxpayer, there shall be taken into account the amount of support received from the taxpayer as compared to the entire amount of support which the individual received from all sources, including support which the individual himself supplied. The term `support' includes food, shelter, clothing, medical and dental care, education and the like. Generally, the amount of an item of support will be the amount of expense incurred by the one furnishing such item. If the item of support furnished an individual is in the form of property or lodging, it will be necessary to measure the amount of such item of support in terms of its fair market value.' Emphasis added.

The term `medical care' as used in this section of he regulations is considered to have the same meaning as when used in section 213 of the Code dealing with deductions for medical expenses. The term is defined in section 213(e) of the Code for purposes of section 213 of the Code to mean amounts paid:

`(A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body (including amounts paid for accident or health insurance), or

`(B) for transportation primarily for and essential to medical care referred to in subparagraph (A).'

The extent to which medical expenses of an individual enter into his `support' for purposes of determining whether a taxpayer may claim him as a dependent is to be determined under the following rules:

(1). Where the taxpayer or the individual is covered under a renewable term policy which provides insurance against the cost of medical care (whether payment is made directly to hospitals and doctors or reimburses the policyholder), the policyholder will be considered as having furnished the care since the policyholder, under a privately financed medical insurance plan, is regarded as providing medical care for himself and the other beneficiaries of the policy. In determining (a) the total amount of support of the individual, and (b) the amount contributed to support by the individual himself or by the taxpayer claiming him as a dependent, the amount paid by the insurance company should be disregarded and only the premiums paid on the policy and the unreimbursed portion of the expenses for medical care should be taken into account.

Section 213(e) of the Code as cited above, indicates that amounts paid for accident or health insurance constitute `medical care.' The inclusion in the computation of support of such payments has been recognized by the Tax Court in several cases, although the precise question has never been presented. Lena Hahn , 22 T.C. 212 (1954); Donald Lopez , T.C. Memo 1959-9; James Parker , T.C. Memo 1959-182; William Peery , T.C. Memo 1962-202; John J. Mora , T.C. Memo 1964-122. Recently, the United States District Court for the Northern District of Georgia held in Samples v. United States , 226 Fed.Supp. 115 (1963) that the benefits received under a health policy must be included in support in determining dependency. The question now presented is whether the premiums paid and the benefits received should be included in support. In considering the question, the Service has reached the conclusion that to include both premiums and benefits in support would in essence be duplication and that the cost of the insurance is the proper amount to be included. Accordingly, the Samples case will not be followed.

(2). Where an individual incurs medical expenses as a result of an automobile accident for which he is reimbursed (i) through insurance carried by the person who is at fault (the tort-feasor) or (ii) directly by the tort-feasor, no part of the amount so paid will enter into the computation of support in determining dependency. The amount paid by the insurance company or the tort-feasor is not considered as support provided by them because this amount is paid in release and satisfaction of a legal claim for an injury to the person of the individual involved and in no way resembles an item of support.

(3). Under the provisions of the Dependents' Medical Care Act of 1956, as amended, 10 U.S.C. 1071, dependents of members of the uniformed services are entitled to receive medical care in medical facilities of the United States Government. The term `uniformed services' means the armed forces and the Commissioned Corps of the Coast and Geodetic Survey and of the Public Health Service. The hospitalization and medical care furnished to the dependent of a member of the uniformed services is furnished because of the member's employment and, therefore, its cost is considered as provided by the member. However, since that member did not incur any expense in connection with the furnishing of such medical services, he is not to be credited with having furnished the dollar value of such services as an item of support in determining dependency under section 152 of the Code.