SECTION 2. BACKGROUND

.01 Section 23 of the Internal Revenue Code allows a credit for qualified adoption expenses paid or incurred by an individual in connection with the adoption of an eligible child. Section 137 allows an exclusion from an employee’s gross income for qualified adoption expenses paid or incurred by the employer under an adoption assistance program. See Notice 97–9, 1997–1 C.B. 365, for general guidance concerning the credit under § 23 and the exclusion under § 137.

.02 Section 23(d)(2) provides that an eligible child includes any individual who has not attained age 18, or who is physically or mentally incapable of caring for himself. However, under § 23(d)(1)(C), no credit or exclusion is allowed for the adoption of a stepchild.

.03 Section 23(a)(2) provides the general rule that, for qualified adoption expenses paid or incurred in a taxable year before the adoption is final, the credit is allowed in the next taxable year after the taxable year in which the qualified adoption expenses are paid or incurred. For qualified adoption expenses paid or incurred during or after the taxable year in which the adoption is final, the credit is allowed in the taxable year in which the qualified adoption expenses are paid or incurred.

.04 Section 23(e) provides, in the case of an adoption of an otherwise eligible child who is not a citizen or resident of the United States at the time the adoption commences (“foreign adoption”), that: (1) the credit is allowed only if the adoption becomes final, and (2) qualified adoption expenses paid or incurred in any taxable year before the taxable year in which the adoption becomes final are treated as paid or incurred in the taxable year in which the adoption becomes final. Similar rules apply for purposes of the exclusion under § 137 for employer-provided adoption assistance.

.05 Therefore, for a foreign adoption, qualified adoption expenses paid or incurred before the taxable year in which the adoption becomes final, or during the taxable year in which the adoption becomes final, are allowed as a credit under § 23 in the taxable year in which the adoption becomes final. Similarly, the exclusion under § 137 for amounts furnished by an emp

Proposed Revenue Procedure Regarding Finality of Adoptions

Notice 2003–15

This notice provides a proposed revenue procedure that would establish certain safe harbors for determining the finality of the adoption of a foreign-born child for purposes of the adoption credit and the exclusion for employer-provided assistance for qualified adoption expenses.

The proposed revenue procedure applies to qualified adoption expenses paid or incurred in connection with the adoption of a foreign-born child who has received an “immediate relative” (IR) visa from the Department of State. The Department of State issues an IR visa only to a foreign-born child who enters the United States pursuant to a decree of adoption or guardianship granted by a court or other governmental agency (“competent authority”) with jurisdiction over child welfare matters in a foreign-sending country. Thus, the proposed revenue procedure does not apply to the adoption of a child who is a citizen or resident of the United States at the time the adoption proceedings commence.

The proposed revenue procedure provides that a taxpayer may treat an adoption of a foreign-born child who receives an IR–3 visa as final for federal income tax purposes in the taxable year in which the competent authority enters a decree of adoption. The adoption of a foreign-born child who receives an IR–4 visa and enters the United States under a guardianship or legal custody arrangement may be treated as final for federal income tax purposes in the taxable year in which a court of the home state enters a decree of adoption. A taxpayer who adopts a foreign-born child who receives an IR–2 visa, or who receives an IR–4 visa and enters the United States under a decree of simple adoption, may treat the adoption as final for federal income tax purposes in the taxable year in which a home state court enters a decree of readoption or the home state otherwise recognizes the adoption decree of the foreignsending country.

The Service requests general comments on the proposed revenue procedure. The

Service also requests specific comments on the following matters:

(1) Whether other specified events (such as the date on which a foreign-born child obtains United States citizenship) should be treated as safe harbors, either in addition to or in lieu of events provided in the proposed revenue procedure;

(2) Whether the term “enters a decree of adoption” is sufficiently precise (in light of variations in the laws of foreign countries and of states within the United States, and of the possibility that a decree of adoption might be appealed or otherwise contested) to establish a reliable date for determining the finality of an adoption, and if not, what term is more precise; and

(3) Whether the phrase “the taxable year in which a home state court enters a decree of re-adoption or the home state otherwise recognizes the adoption decree of the foreign-sending country” is sufficiently broad to encompass the manner in which various states acknowledge the existence of a parent-child relationship and, if not, what phrase is more encompassing.

Comments should be submitted by June 2, 2003, either to: Internal Revenue Service P.O. Box 7604 Ben Franklin Station Washington, DC 20044 Attn: CC:PA:T:CRU (ITA) Room 5529 or electronically at: Notice.Comments@ irscounsel.treas.gov (the Service’s comments e-mail address). All comments are available for public inspection and copying.

Although the revenue procedure is in proposed form, the Internal Revenue Service will not challenge the finality of adoptions by taxpayers who apply the proposed revenue procedure in any taxable years for which the period of limitation under § 6511 of the Internal Revenue Code has not expired on February 11, 2003.

Rev. Proc. 2003—