dependents

[fliszt]

Burton,

it's really nice to see your posts! I too work from home (for the past 15 years) with no persons to bounch anything off of. You and a half dozeon others help so many people. Thanks very much for your generosity.

[Brad Imsdahl]

Burton and Brad can give good arguments on both sides of the "taxpayer" wording. But, the bottom line is - it is truly beyond any RATIONAL belief that Congress or the tax writers who work for them intended the different consequences in examples 1 and 2. I think the intent of Congress was to stop the problem with more than one person claiming the same child but the law of unintended consequences reared its ugly head.

When you look at the Conference Report for the Working Families Tax Relief Act of 2004, it become obvious that Congress intended all rules to stay the same, except in the area of making a uniform definition of a qualifying child, and to settle the tie breaker issues. Here was an attempt to make the law simpler, and to resolve the problems of more than one person claiming the same kid.

You are absolutely correct in stating that Congress did not intend for no person to be able to claim the kid. This is purely a case of incompetence on the part of those who wrote the law.

However, having said that, it is not going to be resolved by playing games with the definition of words or twisting rules to make things seem fair. The only solution is for Congress to re-write the law they messed up.

[Koss]

Live clients

Boy! I have really enjoyed reading all these responses to this question.

This is what really makes this message board valuable to me.
I have been doing taxes for 23 years now but I work alone in an in home office and I dont have anyone to bounce these things off from.

This is REALLY a real live case and I am still torn. I really believe that the taxpayer in this case should be able to claim the child.

Thanks again for your answers.
Ken

I haven't had that many of these cases, but here's what I actually do:

My carefully considered professional opinion is that there are alternate readings of the new tax law that do indeed allow the guy to claim his girlfriend's kid in the fact pattern you have described.

I explain this to the client, and then let the client make a decision. That sounds easy, but it's not. I make sure the client fully understands what may happen down the road, and I try to help them quantify the risk level. I also make sure they understand just how much economic benefit they would derive from the dependent exemption in question.

And that's all it is: the dependent exemption. In my various controversial arguments, I have never asserted that the guy can claim any of the other benefits, such as Head of Household, Child Tax Credit, or Earned Income Credit. That part of the law is quite clear. So in many cases, we're only talking about a few hundred dollars ($3300 x .15 = $495).

Ultimately, the client has to decide how comfortable they are with the risk, and how they would respond if the IRS challenges the return. Most of my clients have no interest in becoming a test case. But a couple have decided to take the exemption. If the IRS disallows it, they'll probably cave in and simply pay up. I make sure they understand that the IRS can wait up to three years to review it, and that interest can pile up.

I think we could probably get them off the hook on any penalties.

This is NOT a frivolous position as this term is defined and understood by the IRS and the courts. Quite to the contrary, it is an entirely reasonable interpretation of the law, that has been discussed in documents published by tax attorneys and other professionals. It is an interpretation that appears to be in conflict with the interpretation adopted by the IRS. But as we all know, the IRS does not have the last word. The courts do. I consider this an unsettled question. For tax years beginning 01/01/07 and later, it's probably going to get resolved by more changes in the law that will be enacted later this year.

With that being said, I'll make one final comment on the "risk level."

I don't tell clients to just make stuff up on their taxes because I think they won't get caught. That's obviously unethical and probably criminal. But if you're going to file a return that is based on a reasonable position that the IRS does not accept, it is fair to ask the question: What is the probability that the IRS will "catch" this?

If the woman had no income at all, and is not filing a return, I consider the risk level low. But that's educated speculation. I don't have a valid statistical sample, and 2005 returns are open for audit for quite awhile anyway. What makes the risk level low, in my opinion, is not just that the child's mother is not filing a return. It's the fact that the child's SSN does not appear on any other tax return. The guy is only claiming the exemption, and no one else is asserting a claim to any other benefits for that child.

Even if the child's mother does file a return, I'm not sure the IRS will even notice anything if she does not claim any benefits for the child. The problem here is that once the mother files a return, depending on what kind of income she has, the whole position becomes a lot harder to defend.

The ABA report suggests that it is reasonable to conclude that someone with no taxable income might not be a "taxpayer" as defined by the IRC. That's interesting, but it doesn't really matter. If the kid's mom worked only a few days and earned only $150, this tiny amount of earned income will make her eligible for EIC. And at this point I have to concede that the kid does indeed appear to be her qualifying child, at least for EIC.

There is a different question that arises even if the mother had no income at all. The mother is her boyfriend's qualifying relative. This is not in dispute. If he claims her and the child as dependents, then he is asserting that they both lived in his home the entire year. And it is her very presence in the home that is said to make the child her qualifying child (even though she is not eligible for any benefits), thereby disqualifying him from claiming the child as a qualifying relative. Thus, by listing both the mother and her child as qualifying relatives, the taxpayer is conceding the fact that the child lived with his mother for the entire year.

Even if he claims both the kid and the kid's mother as dependents, I still think that the IRS probably will NOT notice anything, as long as the kid's SSN does not appear on any other tax return. I admit that I'm speculating here, but I really don't think the IRS is using an automated system to cross-check relationships between dependents. There are too many variables, and that kind of analysis would involve reading data from social security records--not just tax records. I'm not saying the IRS doesn't have the authority to use this data; they probably do. But I don't think they have the resources.

Again, I don't advise my clients, or prepare returns, based on what I think someone "can get away with." But I believe I have an ethical obligation to inform the client that some tax professionals have concluded that there is another way to read the law that produces a more favorable outcome. I then allow the client to make a fully informed decision. And the more sophisticated clients are going to ask me to somehow guess how likely or unlikely it is that the IRS will review and challenge the return.

Burton M. Koss
koss@usakoss.net

[Koss]

Meaning and Intent

When you look at the Conference Report for the Working Families Tax Relief Act of 2004, it become obvious that Congress intended all rules to stay the same, except in the area of making a uniform definition of a qualifying child, and to settle the tie breaker issues... <snip> You are absolutely correct in stating that Congress did not intend for no person to be able to claim the kid. This is purely a case of incompetence on the part of those who wrote the law.

I have not read the Conference Report. (Or if I have, it was a long time ago, and I don't remember what I read.)

But if the intent is as clear as you say it is, then...

If someone chooses to challenge the IRS on its interpretation of the current law, the courts may ultimately side with the taxpayer and rule on the basis of what the Congressional intent was.

When the plain English meaning of the law produces outcomes that are patently absurd, and there is widespread agreement that this is not what the lawmakers meant, the courts will begin to seek an alternate reading of the law.

I don't know if it will ever reach the courts. I think we're going to see some revisions to the law that will be effective for returns for tax years beginning 01/01/07 and later. And I'm just not convinced that the IRS is going to expend a lot of resources attempting to enforce the more bizarre provisions of this law.

I'm not saying it won't be enforced at all. I'm speculating that the IRS may develop an official or unofficial internal policy of not implementing those aspects of UDC that we all seem to agree are not what Congress actually intended.

Many years ago, one state legislature--I don't remember which state--actually passed a law declaring the value of pi to be exactly 3.00.

I'm not kidding. This actually happened. It may have been 75 years ago, or 100 years ago. But that doesn't matter. Our scientists and mathematicians knew back then what the value of pi is, and they knew it wasn't 3.00.

I have no idea what the legislature what trying to accomplish with such a law. But I can tell you this: the law was never enforced in any meaningful way.

Yeah, I know, this is totally different. But is it really?

Let's pass a law that says that the ratio of the circumference of a circle to its diamater is exactly 3.00. If the engineers at the local auto plant adhere to this law, the outcome will be square wheels on new cars.

Let's pass a law that says that a four year old boy has a qualifying child (his seven year old brother), even though the four year old cannot claim any benefits associated with having a qualifying child. If taxpayers adhere to this law, the outcome will be...

Well, I've made my point.

In extreme cases, the courts and administrative agencies (such as the IRS) will simply choose not to enforce a law or regulation that simply doesn't work the way it was intended to. This may not happen often. But it happens. Whether it will happen with respect to the unintended consequences of UDC remains to be seen.

Burton M. Koss
koss@usakoss.net

[Ken]

Birdlegs

the barber that my clients keep telling me they get their tax information from?
About 80% tells me that their barber says they can deduct this or do that on the tax return.

Well Birdlegs if I ever find out that the people I am giving free advice to, are going to you to get their taxes done, I'm going to bald them next time.

[Oxtrainer]

Dependents

This lofty discussion is all very fine and interesting but at the desk I believe that
here in NC neither the girlfriend or child may be claimed and in SC the Girlfriend
may be claimed but not the child. How far am I off?

Before I believe the child could be claimed but not the girlfriend in NC.

[Brad Imsdahl]

If someone chooses to challenge the IRS on its interpretation of the current law, the courts may ultimately side with the taxpayer and rule on the basis of what the Congressional intent was.

When the plain English meaning of the law produces outcomes that are patently absurd, and there is widespread agreement that this is not what the lawmakers meant, the courts will begin to seek an alternate reading of the law.

Patently absurd outcomes are a matter of opinion. Courts generally do not overrule the code on such grounds.

In 122 T.C. No. 1, the court noted under what conditions it would look to Congressional intent:

"Before proceeding, we briefly review the principles of statutory
construction that guide our analysis. It is well settled that in
interpreting a statute, we start with the language of the statute itself.
Consumer Prod. Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108
(1980). If the language of the statute is plain, clear, and unambiguous,
we generally apply it according to its terms. United States v. Ron Pair
Enters., Inc., 489 U.S. 235, 241 (1989); Burke v. Commissioner, 105 T.C.
41, 59 (1995). In Huntsberry v. Commissioner, 83 T.C. 742, 747-748 (1984),
we stated that "where a statute is clear on its face, we would require
unequivocal evidence of legislative purpose before construing the statute
so as to override the plain meaning of the words used therein." However,
if a statute "is ambiguous or silent, we may look to the statute's
legislative history to determine congressional intent." Ewing v.
Commissioner, 118 T.C. 494, 503 (2002) (citing Burlington N. R.R. v. Okla.
Tax Commn., 481 U.S. 454, 461 (1987)); see Wells Fargo & Co. v.
Commissioner, 120 T.C. 69, 89 (2003); Allen v. Commissioner, 118 T.C. 1, 7
(2002)."

I don't believe the code is silent on this issue. In fact, it is the way it was written that is producing an un-desired outcome. In that case, the court would have to conclude there is "unequivocal evidence of legislative purpose" before they could step in and rule based on congressional intent. The court cases dealing with AMT keep losing on those grounds. It was clear congressional intent for AMT was to close loopholes for the rich. Yet as more and more middle class taxpayers get hit with AMT, the courts say, "sorry, we can't change it because the code is clear. You have to get Congress to fix it."

[jainen]

once again

>>You are absolutely correct in stating that Congress did not intend for no person to be able to claim the kid. This is purely a case of incompetence on the part of those who wrote the law.<<

What bothers me is not that there are different interpretations, but that some interpretations are characterized as patently absurd in following "the plain English meaning of the law." It is especially frustrating to me that no one will respond to my observation that the uniform definition of child had already been in effect for years before it was applied to the Working Families Tax Relief Act of 2004. Congress knew exactly what it meant, and they have had many opportunities to change it if it wasn't what they wanted.

I have read the Conference Committee Report. It says, "The use of a residency test for the uniform definition should be easier to apply than a support test.... There may be confusion for taxpayers who may no longer be eligible to claim a child." Obviously, Congress was perfectly aware that they were taking the deduction away from people who supported an unrelated child. Those people are unmarried boyfriends and girlfriends.

It isn't true that "somebody" should be able to claim every potential exemption. In our scenario, the only reason the mother can't is that it exceeds her taxable income. The same could be if a child had Social Security income, and there are other situations where nobody gets the exemption. I don't see any of these provisions as "bizarre," but it's certainly possible that some court will address them or Congress will change its mind. If and when, we'll have to adjust our interview once again.

[Brad Imsdahl]

I have read the Conference Committee Report. It says, "The use of a residency test for the uniform definition should be easier to apply than a support test.... There may be confusion for taxpayers who may no longer be eligible to claim a child." Obviously, Congress was perfectly aware that they were taking the deduction away from people who supported an unrelated child. Those people are unmarried boyfriends and girlfriends.

All that means is Congress wanted to shift the test from a support test to a residency test. Who does the kid live with? Who is the parent? That’s who we want to claim the deduction. I don’t believe that means Congress intended to take the exemption away from everybody.

Having said that, I think there are probably very few situations where nobody benefits. Even in the single mom living with boyfriend situation, most will have at least some earned income during the year in which case they will benefit from EIC.