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Under section 1.265-1(b)(1), Income Tax Regs., the term
"class of exempt income", as that term is used in section 265,
means any class of income wholly excluded from gross income or
wholly exempt from tax. Allowable expenses directly allocable to
any class of exempt income shall be allocated thereto and
expenses directly allocable to any class of nonexempt income
shall be likewise allocated thereto. Where an expense is
indirectly allocable to both a class of nonexempt income and a
class of exempt income, "a reasonable proportion thereof
determined in the light of all the facts and circumstances in
each case shall be allocated to each." Sec. 1.265-1(c), Income
Tax Regs.
The class of gross income for which petitioners' deductions
are denied under section 265 is section 131 qualified foster care
payments. In the case of petitioners, such payments are for
"caring for a qualified foster individual in the foster care
provider's home". Sec. 131(b)(1)(B) (emphasis supplied).
Under Oregon State law the term "adult foster home" means a
"family home or facility in which residential care is provided
for five or fewer adults who are not related to the provider by
blood or marriage." Ore. Rev. Stat. sec. 443.705(1) (1992)
(emphasis supplied). The term "residential care" means providing
"room and board and services that assist the resident in
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