Like last week’s lesson, this week deals with how the Tax Code treats families as economic units and the difficulty in determining the scope of the proper family group.
Section 151 permits taxpayers a deduction for dependents. Section 152 defines that term. It divides the general concept of dependent into two buckets: one is labeled “Qualifying Child” (QC) and the other is labeled “Qualifying Relative” (QR). The QC bucket is then used—more or less—to determine eligibility for the various child-rearing-related tax benefits in the Tax Code, such as the child credit, the earned income tax credit, etc.
Both labels are misnomers, but today’s lesson is about two common issues that arise with determining who is a QC. In Carol Denise Griffin v. Commissioner, T.C. Sum. Op. 2021-26 (Aug. 16, 2021) (Judge Vasquez), we learn that a taxpayer can claim a deduction for a Qualifying Child who is not, actually, the taxpayer’s literal child. However, in Nowran Gopi v. Commissioner, T.C. Sum. Op. 2021-41 (Dec. 2, 2021) (Judge Panuthos), we learn that a taxpayer may not do that when the Qualifying Child’s actual parent also files a tax return claiming the same QC. Details below the fold.
Law: How We Got To “Qualifying Child” Concept
As we saw last week, the modern income tax system has contained from its very beginning the idea that certain amounts of income necessary for basic living should not be taxed. The original personal exemption for taxpayers in 1913 was centered on the idea that only income in excess of what was reasonably necessary to support a family should be subject to taxation as Representative Murray explained: “There are those who would say that should begin at $1000, in lieu of $4000. They forget the principle upon which this tax is founded, and that is that every man who is making no more than a living should not be taxed upon living earnings, but should be taxed upon the surplus that he makes over and above that amount necessary for good living.” quoted in Edwin R. A. Seligman, The Income Tax: A Study Of The History, Theory And Practice Of Income Taxation At Home And Abroad (2d Ed. 1914) at 686 (sorry, no free link).
In short: let’s tax the rich! Thus the 1913 Act created what we now term the personal exemption.
One difficulty with that idea is families. How should Congress account for what it means to make "no more than a living" when one has a family? The income tax is imposed on individuals, not families. But an individual’s basic living expenses changes when the individual is part of a family unit; the relevant economic unit to tax seems, in some sense, the family and not the individual. The tension between individual and family as the relevant economic unit is seen in myriad Code sections; the related party rules in §267 are one good example. See last week's lesson for another example.
Recognizing that difficulty, Congress added to the exemption amount an allowance for dependents in the Revenue Act of 1917. This tailored the exemption more closely to family size.
The revenue needs generated by WWII significantly undercut the idea that only “excess” income should be taxed. Congress massively expanded income taxation to reach even middle and lower income taxpayers. Yet the idea that taxpayers ought not to pay tax on some basic amount of their income persisted. Congress retained the personal and dependency exemptions, even though their effect in sheltering income from taxation was much reduced.
Starting in the 1970’s, the original idea from 1913 had morphed into the idea that Congress ought to adjust tax burdens to account for the costs of maintaining families. Thus, over the years Congress has added and expanded various tax benefits keyed to the idea of a dependent: the §32 Earned Income Tax Credit (1975); the §21 Child and Dependent Care Tax Credit (1976); the §24 Child Tax Credit (1997); the §25A educational tax credits (1997).
As Congress added these benefits over time, it tied each benefit to a particular definition of “dependent,” usually focusing on the idea of who was a “child” of the taxpayer for the purpose of each tax benefit.
Congress was not consistent in the particular definitions it used. The multiple definitions created confusion and uncertainty. In the early 2000’s, nudged by the National Taxpayer Advocate Nina Olsen, Treasury proposed to simplify matters by creating a Uniform Definition of Child. You can read all about it in Treasury’s 2002 explanation. The explanation has a particularly useful chart of the various and someone conflicting definitions. For good short history of the modern EITC and child tax credit, see Thomas L. Hungerford and Rebecca Thiess, “The Earned Income Tax Credit and Child Tax Credit," (September 25, 2013). And for a good history of the child tax credit, with pretty graphics, see Margot Crandell-Hollick, “The Child Tax Credit: Legislative History,” (Congressional Research Service Report R45124) (Dec. 23, 2021).
The Uniform Definition of Child concept is why §152 now is divided into two buckets: the QC bucket and the QR bucket. The rules defining the QC bucket are in §152(c), which basically creates 4 requirements: (1) a relationship requirement; (2) an age requirement; (3) a residency requirement; and (4) a support requirement.
Each of these four requirements contain various nuances. Here’s just what you need to know for today’s lesson:
Relationship. The person being claimed as a QC must fall within one of the relationships listed in §152(c)(2). Those include children, grandchildren, nieces, nephews and, interestingly enough, siblings.
Age. The person being claimed as a QC must be younger than the taxpayer claiming them—which means my childhood friend Mike would not have been able to claim his niece, who was older than he. The QC must not have turned 19 by the end of the relevant calendar year. And, yes, a person becomes their new age on the day of their birthday. Rev. Rul. 2003-72. See Coda 2, at the end of the post. But if the person is a full time student, then that age restriction gets bumped up to age 24. And if the person is disabled, then any age will do.
Residency. The person being claimed as a QC must have had the “same principal place of abode” as the taxpayer claiming them for “more than one-half” of the relevant taxable year. For most ordinary folks their taxable year is the standard Gregorian calendar year.
Support. The person being claimed as a QC must not have provided more than half of their own support during the relevant calendar year.
Careful (or experienced) readers will understand that under these rules it may sometimes be possible for more than one taxpayer to claim a person as a QC. If you think the residency requirement prevents that, just think about extended families living together, and you will see it.
This is a feature, not a bug. Congress has designed the system to allow extended family economic units to allocate the tax benefits of a QC, at least within limits. Thus, as to the Qualifying Child, for example, §152(c)(4) works out to say that if the QC’s actual parent claims them, then no other taxpayer may do so, but if neither parent claims their child as a QC, then another taxpayer may do so, so long as that other taxpayer’s AGI is more than the parent’s.
So let’s now look at two ways in which the term “Qualifying Child” is a misnomer.
Lesson 1: A Qualifying Child Does Not Have To Be Your Actual Child
In the Griffin case the tax year at issue was 2015. During that year, Ms. Griffin reported wage income from a senior service’s agency, earned for taking care of one of their clients in her home. That client was Ms. Griffin’s mom.
Ms. Griffin also provided extensive help to her disabled brother, a single parent of three kids, the oldest of whom turned 15 that year. The other two were 8 and 5. It’s the extent of that help which created the issue in the case. Specifically, the question in the case was whether the three kids had their “place of abode” with Ms. Griffin for more than half the year.
At bottom this is a substantiation issue: did the kids share a “principle place of abode” for more than half the year with Ms. Griffin? Ms. Griffin testified that the kids stayed with her overnight during the summer break “from the last two weeks of May to mid-August” and also “during weekends, school closures, and holidays (including Thanksgiving, Christmas, and Easter).” They stayed overnight with her disabled brother on school nights, but even then they would come to Ms. Griffin’s home if they left school early or if the brother could not pick them up. Using a school calendar from the 2015-2016 school year, Ms. Griffin showed the children stayed with her for most days and nights in 2015.
Judge Vasquez accepted Ms. Griffin’s testimony and found that “the children resided with petitioner for more than on-half of 2015.” That meant that each of her brother's children was a Qualifying Child for her, even though she was their aunt and not their mom.
The IRS introduced a Form 8332 signed by Ms. Griffin’s brother during the examination of her return. It argued that the Form 8332 should be read as an admission that the brother was the custodial parent of the children. While creative, the argument failed for the simple reason that the Form 8332 was totally irrelevant to the case. There is no requirement for a custodial parent to have their kids for more than half of a calendar year, the requirement is simply that the custodial parent is the parent with whom the kids stay overnight the most nights. See Treas. Reg. 1.152-4 (“The custodial parent is the parent with whom the child resides for the greater number of nights during the calendar year”). So Ms. Griffin’s brother might well have been the “custodial parent” for purposes of allocating the QC between divorced spouses. Who cares? Ms. Griffin was not an ex-spouse of her brother! She was the children’s aunt. So the Form 8332 was a red herring.
Lesson 2: A Non-Parent Cannot Claim A Qualifying Child Claimed by The Parent
The tax year at issue in Gopi was also 2015. In March 2015, Mr. Gopi’s daughter left her husband in Chicago and moved into Mr. Gopi’s home in New York along with her little kid. Apparently, she was also pregnant at the time because while she otherwise lived with Mr. Gopi for the rest of the year, there was a “two-week period in fall 2015” when his daughter “traveled to Chicago and gave birth to her second child...before returning to petitioner’s home....” Op. at 3.
Ok. Families are sometimes strange. And sometimes communication within families is not the best. Even though Mr. Gopi’s daughter had been married for more than 10 months, Judge Panuthos writes that Mr. Gopi “was unaware of their marriage,” until she turned up on his doorstep. Op. at 3. And then, when Mr. Gopi timely filed his 2015 tax return claiming both of his grandchildren as QC’s, he was likewise unaware that his daughter and her husband (still married) had also claimed the two kids as their QC's on their timely filed joint tax return. In his original return Mr. Gopi reported AGI of just of $11,600.
Even over a year later Mr. Gopi was apparently still unaware that his daughter had filed a return claiming her kids as QC’s. In 2017 Mr. Gopi amended his return to report some additional earned self-employment income for 2015 that he had apparently overlooked. Coincidently, it was just enough to raise his AGI to the sweet spot for EITC for two kids, just over $15,500. See these charts.
The problem, of course, is that Congress allows only limited reallocation of QCs among family members. Judge Panuthos explains that while he totally believed Mr. Gopi’s testimony that “petitioner was not aware that his daughter filed a joint tax return,” Op. at 11, that was not the test. Congress permitted his daughter to allocate the kids to Mr. Gopi by not claiming them on her own return (notice her husband would be ineligible to claim them as QCs filing alone). But by actually claiming them on her own return, she denied her father the ability to also claim them.
The good news for Mr. Gopi was that the Service dropped the §6662(a) penalty. The bad news was that he not only lost the ability to claim the EITC based on two kids, he also lost the ability to claim any EITC credit at all, thanks to his amended tax return, which while taking his AGI to the sweet spot for two kids, took it above the phaseout amount for taxpayers with no kids.
Coda 1: Calling the rules in §152(c) a “Uniform Definition of Child” is also a misnomer. Congress still shapes particular tax benefits for families using definitions specific to the particular benefit. For example, while a taxpayer can take a §151 deduction for child who is 18—or even a child who is 22 under certain conditions—the taxpayer cannot claim a §24 child tax credit for that same child. Section 24 cuts that tax benefit off in the year the child turns 17, period. There are other such departures from the “uniform” definition, but they are for a future lesson.
Coda 2: The age requirement to be a Qualifying Child is a statutory time period. Like all statutory time periods, it raises the perennial problem of counting. When does the period start, and when does it end? Currently, the counting rule for the age requirement is that a person born on December 31st turns their new age each December 31st and not a day earlier or later. That rule started in 2003 with Rev. Rul. 2003-72 (sorry, cannot find a free link). Before 2003, the IRS used the common law counting rule that a person became their new age on the day before their birthday. Thus, a person born on January 1st would turn their new age on December 31st. See Information Letter 2003-0215 (August 29, 2003). When it changed the rule, the IRS sent these Information Letters out to contact taxpayers whose QC’s had a January 1st birthday to let them know of the rule change so they could now claim the QC for children born January 1st.