SECTION 2. BACKGROUND

.01 Section 23 of the Internal Revenue Code allows a credit for qualified adoption expenses (QAE) paid or incurred by an individual in connection with the adoption of an eligible child. Section 137 provides an exclusion from an employee’s gross income for QAE 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 QAE are defined in § 23(d)(1) and Notice 97–9 as reasonable and necessary adoption fees, court costs, attorney’s fees, traveling expenses (including amounts expended for meals and lodging) while away from home, and other expenses directly related to, and for the principal purpose of, the legal adoption of an eligible child by the taxpayer.

.03 Under § 23(d)(2), an eligible child is an individual who has not attained age 18 or who is physically or mentally incapable of caring for himself. Section 23(d)(1)(C) provides that a stepchild is not an eligible child.

.04 Section 23(a)(2)(A) provides the general rule that, for QAE paid or incurred before the taxable year in which the adoption is final, the credit is allowed in the taxable year that follows the taxable year in which the QAE are paid or incurred. For QAE paid or incurred during or after the taxable year in which the adoption is final, the credit is allowed for the taxable year in which the QAE are paid or incurred. Sec. 23(a)(2)(B). For a foreign adoption, however, § 23(e) provides that (1) the credit is allowed only if the adoption becomes final, and (2) QAE 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. Rules similar to those under § 23(e) apply under § 137(e) for purposes of the exclusion for employer-provided adoption assistance.

.05 The Intercountry Adoption Act of 2000, Pub. L. 106–279, 42 U.S.C. §§ 14901–14954 (IAA), will implement the Hague Convention on Protection of Children and Co-operation in Respect of Intercountry Adoption (the Convention). See Senate Treaty Doc. 105–51 (Sept. 20, 2000). When the Convention enters into

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IR2, IR3, or IR4 (if the child was adopted in a simple adoption) visa as final in:

(i) The taxable year in which the competent authority enters a decree of adoption; or

(ii) The taxable year in which a home state court enters a decree of re-adoption or the home state otherwise recognizes the decree of the foreign-sending country, if that taxable year is one of the next two taxable years after the taxable year in which the competent authority enters the decree.

(b) Children who receive an IR4 visa (guardianship or legal custody) . The Service will not challenge a taxpayer’s treatment of the adoption of a child who was subject to a guardianship or legal custody arrangement and who receives an IR4 visa as final in the taxable year in which a home state court enters a decree of adoption.

.02 Re-adoption expenses . Otherwise qualified expenses paid or incurred in connection with a re-adoption satisfy the requirement that expenses be “reasonable and necessary” for purposes of determining whether the expenses are QAE.