New EIC Question

[Koss]

This is not a trick question. All standard assumptions are valid. All individuals are US citizens, young children have no income, all individuals lived in the same household all year, no one else lived in the home, etc.

This question is not tied to UDC or to IRS Notice 2008-5. This particular issue appears to have existed before UDC, and the outcome does not appear to be changed by UDC.

The question involves the "three generation household" that appears in many examples in IRS publications:

Christine is 58, unmarried, with $21000 in wages, no other income
Christine paid more than half the cost of keeping up the home

Alicia is 26, unmarried, with $4100 in wages, no other income
Alicia is Christine's daughter

Lindsey is 3, unmarried, with zero income
Lindsey is Alicia's daughter

If you choose to respond to this post, please confirm that you agree that:

1. Lindsey is a qualifying child of Christine and Alicia
2. Alicia is not a qualifying child of Christine, because she is over 24 and not disabled
3. Alicia is not a qualifying relative of Christine, because her AGI is too high
4. Alicia and Christine may choose which of them will claim Lindsey
5. The tiebreaker rules are not applicable unless they both claim the same child

Now, assume that Alicia and Christine agree that Christine will claim Lindsey.

I think everyone will agree that with Lindsey as her qualifying child, Christine is now eligible for Head of Household filing status, the Earned Income Credit, the Child Tax Credit, and the dependent exemption for Lindsey.

Okay... Here's the question:

Can Alicia claim the Earned Income Credit for taxpayers who do not have a qualifying child?

My software seems to be saying no... but that's only because the software "knows" that Alicia lived with Christine and Lindsey, and that Alicia "has a qualifying child," but has chosen not to claim the qualifying child.

Because Christine is claiming Lindsey, based on an agreement with Alicia, Lindsey is Christine's qualifying child. Lindsey is not Alicia's qualifying child; Alicia does not have a qualifying child, because of her agreement with Christine.

I cannot find any basis for disallowing the EIC for Alicia. She meets all the criteria, and she is clearly not a dependent or qualifying child of another person.

I suspect that my software has a bad algorithm that is based on a paragraph in Pub. 17 which is found within the tiebreaker rules. It says that if two people claim the same qualifying child, the IRS will apply the tiebreaker rules, and disallow the EIC for the one who "loses" under the tiebreaker rules. Then it says that the loser cannot claim EIC at all--not even the EIC for a person who does not have a qualifying child.

But this section of Pub. 17 also makes it crystal clear that the tiebreaker rules are not even applicable unless two different taxpayers actually claim the same child. Denying the EIC for a person without a qualifying child, when that person otherwise qualifies, actually appears to be some sort of penalty that arises when the IRS steps in to apply the tiebreaker rules.

I have not yet taken the time to review the text of the Internal Revenue Code for EIC, but I suspect that it has absolutely no reference to this rule. Maybe it's in the Treasury Regulations somewhere.

But it still doesn't explain why Alicia, in my example, could not claim the EIC for a person without a qualifying child when she is not claiming Lindsey. The tiebreaker rules never come into play in this case...

Burton M. Koss
koss@usakoss.net

[Lion]

Software

Could your software have a box to check to ignore the tie-breaker rules when the taxpayers have agreed who will claim the qualifying child? When I worked at Block, the software had a box to check if we wanted to continue on to the section that applied the tie-breakers.

[BP.]

Can Alicia claim the Earned Income Credit for taxpayers who do not have a qualifying child?

My software seems to be saying no... but that's only because the software "knows" that Alicia lived with Christine and Lindsey, and that Alicia "has a qualifying child," but has chosen not to claim the qualifying child.

I cannot find any basis for disallowing the EIC for Alicia. She meets all the criteria, and she is clearly not a dependent or qualifying child of another person.

I suspect that my software has a bad algorithm that is based on a paragraph in Pub. 17 which is found within the tiebreaker rules. It says that if two people claim the same qualifying child, the IRS will apply the tiebreaker rules, and disallow the EIC for the one who "loses" under the tiebreaker rules. Then it says that the loser cannot claim EIC at all--not even the EIC for a person who does not have a qualifying child.

But this section of Pub. 17 also makes it crystal clear that the tiebreaker rules are not even applicable unless two different taxpayers actually claim the same child. Denying the EIC for a person without a qualifying child, when that person otherwise qualifies, actually appears to be some sort of penalty that arises when the IRS steps in to apply the tiebreaker rules.

Pub 596 EIC for TY 2005: Your Qualifying Child Cannot Be Used By More Than Person To Claim the EIC

"The other person cannot take any of these five
tax benefits unless he or she has a different qualifying child.

If you and the other person(s) cannot agree
and more than one person claims the EIC or
the other tax benefits just listed using the same
child, the tie-breaker rule (explained in Table 36-2) applies."

Your situation was explicitly denied, but it was in the paragraph before the tiebreaker rules were explained, and before they would be applied, that is, merely on the basis of 2 people qualifying based on the same child, not 2 people actually claiming EIC based on the same child.

Post UDC, the language changed in 2006 and 2007:

Pub 17, p. 236:

The two paragraphs are transposed. The tiebreaker language comes first, then, your problem comes into play only after 2 people have actually made an EIC claim for the same child, and one is denied.

The software is rooted in the 2005 and prior years' rule and language. The language changed in 2006 & 2007, but did the rule??

[DonPriebe]

I agree with your software ...

My problem with your analysis is ...

Because Christine is claiming Lindsey, based on an agreement with Alicia, Lindsey is Christine's qualifying child. Lindsey is not Alicia's qualifying child; Alicia does not have a qualifying child, because of her agreement with Christine.

Christine and Alicia can certainly agree as to which of them shall claim Alicia as a qualifying child. But that does not change the fact that they both have a qualifying child, so neither has the option of calculating EIC for a taxpayer without a qualifying child.

It may be a little clearer in Pub 596, where they walk you thru the decision matrix. After the section on rules for everyone (SSN, investment income, etc.) they give the criteria for having a qualifying child. You then branch into one of two mutually exclusive categories - taxpayers with a qualifying child or taxpayers without a qualifying child. Both Alicia and Christine fall into the first category. Later on the question of multiple people having the same QC is addressed, and it is here that Christine stops.

[bertrans]

The criterion is the 'having' of a qualified child. IRC Section 32(c)(1)(A)(ii) -'...any other individual who does not HAVE[emphaisi added] a qualifying child for the taxable year...' This is the 2nd type of 'eligible individual'.

The applicable Treasury Reg is silent on this issue - perhaps because of 'the clear intent of the statute'.

[Koss]

Qualifying Child

My problem with your analysis is ...

Christine and Alicia can certainly agree as to which of them shall claim Alicia as a qualifying child. But that does not change the fact that they both have a qualifying child, so neither has the option of calculating EIC for a taxpayer without a qualifying child.

It may be a little clearer in Pub 596, where they walk you thru the decision matrix. After the section on rules for everyone (SSN, investment income, etc.) they give the criteria for having a qualifying child. You then branch into one of two mutually exclusive categories - taxpayers with a qualifying child or taxpayers without a qualifying child. Both Alicia and Christine fall into the first category. Later on the question of multiple people having the same QC is addressed, and it is here that Christine stops.

I am going to reluctantly concede that one way to read the language of IRC 32 leads to the conclusion that both women in my example "have a qualifying child," and that this means that neither can claim the EIC for those who do not have a qualifying child.

This, however, is only one possible interpretation of the law, and I do not think it is the most rational one.

IRC 32 incorporates IRC 152 by reference, using a "copy and paste" operation for the definition of a qualifying child. The text of the IRC 152 and the text of the IRS instructions and publications clearly expresses the basic concept that...

Two different taxpayers cannot claim benefits for the same qualifying child.

Many of the examples in IRS texts use phrases such as "only you can treat your daughter as a qualifying child," or "only your mother can treat your son as a qualifying child," or "you cannot treat your daughter as a qualifying child." Other examples say things like "your mother agrees to let you treat the child as a qualifying child."

This language, as well as the language of the IRC itself, strongly implies that one who does not treat a child as their qualifying child effectively does not have a qualifying child.

In my original post, I said that this particular question does not involve the "clarification" in IRS Notice 2008-5. But in fact it does drag some of the baggage of that notice into the discussion. Notice 2008-5 addresses only certain situations involving a child who meets the criteria for qualifying relative of one person, and also appears to be the qualifying child of another person. Thus, Notice 2008-5 does not appear relevant to the scenario I presented.

But Notice 2008-5 debunks the claim that a child who meets the age, residency, and relationship tests is considered to be "the qualifying child of another taxpayer," when the "other taxpayer" has no filing requirement, or files a return only to get a refund of tax withheld.

Notice 2008-5 also debunks the bizarre and ridiculous consequences of that reasoning, such as the claim that two young brothers are somehow qualifying children of each other, even though neither had any income at all.

In my example, the claim that Alicia "has a qualifying child" even though she is not claiming the child for any tax benefits is disturbingly similar, and indeed almost indentical, to the claim that a nine year old boy somehow "has a qualifying child" even though he is not claiming the child.

The notion that the qualifying child relation somehow exists even when the taxpayer is unable to claim any of the benefits associated with the child is simply not the original intent of the UDC legislation.

Burton M. Koss
koss@uskoss.net

[Kram BergGold]

What TTB says I think

On p 3-15 TTB says Alicia's age disqualifies her as a qualifying child for Christine.
Lindsay is a qualifying child for Alicia and Christine. As long as only one claims Lindsay as their qualifying child either can have her. However, if they both claim her, Alicia gets her due to the tie breaker rules on pafe 3-17 of TTB.

[Jack the Tax Lady]

No Alicia can't claim EIC

Here is the excerpt from Pub 596, page 20:

If you have a qualifying child. If you meet Rule 8, you have a qualifying child. If you
meet Rule 8 and do not claim the EIC with a qualifying child, you cannot claim the EIC
without a qualifying child.

>>>That surprised me, I hadn't come across that particular scenario yet.

jb

[Koss]

Qualifying Child

After reviewing the citation from Pub. 596, I have to concede that the IRS appears to be taking the position that in my example, Alicia "has a qualifying child," even though she is not claiming the child for any tax benefits.

But I don't see any basis for this position in the Internal Revenue Code. And, as I noted earlier in this thread, this position conflicts with the logic of IRS Notice 2008-5. Notice 2008-5 deals with dependency, and not EIC, and it deals with the rules for qualifying relative, not qualifying child. Nevertheless, the notice effectively provides an interpretation for certain parts of IRC 152. IRC 152 is the definition of a qualifying child for dependency, and this code section is incorporated by reference, minus the support test, as the definition of a qualifying child for EIC.

This means that the logic and reasoning presented in Notice 2008-5 could arguably be applied to EIC. I am certainly not asserting that anyone could ever claim EIC for a qualifying relative; rather, I am asserting that Notice 2008-5 provides substantial support for the argument that:

Even if the age, residency, and relationship tests are met, a child is not considered the qualifying child of a taxpayer if that taxpayer is unable to claim the child for any of the applicable benefits.

Finally, I would argue that in my example, Alicia is unable to claim the child in question because she has agreed to allow her mother to claim the child. The agreement, which is expressly licensed by the code, effectively prohibits her from claiming the child.

The IRS, and those who support the position that EIC for Alicia is disallowed, seem to want to have it both ways. On the one hand, you argue that a qualifying child can only be "treated as the qualifying child" of one taxpayer, and that two taxpayers cannot claim the same qualifying child. But then you take the position that the child is still considered the qualifying child of both taxpayers.

Alicia meets all the criteria for EIC for someone without a qualifying child. The position taken here is that the child's mere presence in the home with Alicia makes the child her qualifying child, even though she is not claiming any of the associated benefits. This is exactly the same reasoning that was used to assert that a pair of nine year old twin brothers are qualifying children of each other.

It simply doesn't make sense.

The qualifying child relation does not arise unless the taxpayer is eligible for at least one of the benefits that is authorized by a code section that refers to a qualifying child. By agreeing not to the claim the child, the taxpayer gives up all those benefits, and therefore does not have a qualifying child.

I will reiterate at this point that at least on the surface, the language of Pub. 596 appears to indicate that the IRS explicitly rejects the argument I have just presented. But there is still a shred of ambiguity, even in Pub. 596, because it says that you have a qualifying child "if you meet Rule 8." I can still argue that in my example, Alicia does not meet Rule 8, because even though the tests are met, she does not have a qualifying child because she has agreed not to claim the child, and therefore, according to the IRS's own words, she "cannot treat the child as her qualifying child."

As I have observed in other posts, the code itself desperately needs to be rewritten to eliminate the ambiguities that arise due to language that appears to establish rules that require analysis of an alternate reality. No one should be disqualified from anything simply due to the fact that they, or someone else, could have claimed a child but didn't.

And that basic argument is supported, at least to some degree, by Notice 2008-5.

Burton M. Koss
koss@usakoss.net

[bertrans]

Whether the Code should be purged of ambiguities is a moot point.

As to the current quite fruitful discussion, the language of Section 32 in the relevant subparagraph is clear in this sense: the determinant criterion is 'having' a qualifying child. It is unarguable, on its face, that the two TPs, mother and grandmother, each have a qualifying child. One may reasonably believe that if Congress had intended to say 'claim' rather than 'have', it would have done so. Before we engage, at this point, in the time-honoured American tradition of automatically disparaging Congress, let us recall that IRS Counsel may have had a few things to say about this matter to the Joint Committee on Taxation.

All of the above having been said, I submit that this issue would gain in clarity from vigorous litigation.

[Jack the Tax Lady]

The IRC should be dumped, not rewritten

I know, we would be out of business, but I would find something else to do. And, if congress really reformed the federal government, we wouldn't need so much money to be prosperous anyway. I know wishful thinking.

Anyway, I agree that the Pub 596 isn't fair.

Put your scenario another way:


Mom is 50 years old, only makes $5000 and is living with Alicia and granddaughter. Alicia's income qualifies her for EIC, and Mom can't get any EIC for herself. Patently not fair.

The whole EIC is ridiculous on the face anyway. How can a person say with a straight face that they support 2 kids on $4000 annual income? So why is there an EIC amount for a person with 2 kids and $4000 income? The Congress, through the IRC, sets people up to lie.