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Prison Inmate Not Eligible for Earned Income Tax Credit on Income Earned While in Hospital

(Parker Tax Publishing June 2017)

The Tax Court held that a prison inmate who was transferred to a hospital while serving his sentence and earned income working at the hospital was not eligible for the earned income tax credit (EITC). As the court noted, an inmate in a penal institution is not eligible for the EITC, and the individual who claimed the EITC was still an inmate while residing in the hospital and the hospital qualified as a penal institution. Skaggs v. Comm'r, 148 T.C. No. 15 (2017).

In 2008, Kevin Skaggs was convicted in Kansas of several felony offenses and sentenced to 310 months in prison. From 2012 to 2016, Skaggs resided in Larned State Hospital, which was established to treat mentally ill inmates and to hold them in custody. The Kansas Department of Corrections listed his transfer as an inter-facility movement. Skaggs earned income working part time as a custodian for the hospital.

Skaggs filed his 2015 tax return reporting almost $3,000 in income, including $62 in taxes withheld by his employer. He claimed an earned income tax credit (EITC) of $224 for a total refund of $286. The IRS sent Skaggs a notice of deficiency denying his claimed EITC because, under Code Sec. 32(c)(2)(B)(iv), income earned while an inmate in a penal institution is not included in income for the purpose of calculating the EITC. The IRS determined a deficiency of $224 and withheld Skaggs' refund.

Skaggs filed a petition with the Tax Court and argued that while he was in the hospital in 2015, he was not an inmate and that the hospital was not a penal institution. Skaggs said he was not an inmate because he was not treated like an inmate and that his wages were not treated like the wages of an inmate. He asserted that he was subject to fewer restrictions, could wear his own clothes, and had more freedom to communicate with the outside world. He also said that his wages were not subject to the restrictions and mandatory deductions of the earnings of inmates in Kansas prisons.

The Tax Court rejected Skaggs' arguments and held that he was an inmate during the time he was confined to the state hospital and the hospital was considered a penal institution. Thus, Skaggs was an inmate in a penal institution for the year at issue and his earnings were not eligible for the EITC. Noting that neither the statute nor the regulations define inmate or penal institution, the Tax Court turned to the dictionary definition of an inmate, which specifically includes a person confined to a hospital. Likewise, the definition of a prison is defined as a place of confinement.

Although Skaggs asserted that he was no longer an inmate while confined to the hospital, his records showed the transfer as an inter-facility movement rather than a release. The Tax Court was not persuaded by Skaggs' argument that he was subject to fewer restrictions in the hospital, reasoning that inmates are often treated differently according to any number of factors.

The Tax Court also did not agree with Skaggs' main argument that the hospital was not a prison because it was not included in the list of correctional institutions in the state statute. The court found that the same statute designates the hospital as the state security hospital, which was established to hold mentally ill inmates in custody for treatment.

The Tax Court noted that inmates in the hospital are kept in separate quarters, their sentences are not tolled, and that inmates can be treated at the hospital only during their sentence. An inmate could be released from the hospital only once his or her sentence is over; if the inmate no longer needs treatment, the inmate is returned to prison. In the Tax Court's view, the state security hospital steps into the shoes of the prison while providing treatment; inmates are still undergoing punishment for a crime while they received treatment. The hospital was therefore a penal institution.

Finally, the Tax Court rejected Skaggs' contention that he was not a participant in a prison work program while in the hospital. The court said that this was irrelevant for the purpose of determining EITC eligibility. The court noted that it had previously held that the source of the income, including whether the employer is a government entity or private company and the location of the work, is not relevant to the EITC eligibility determination.

For a discussion of the earned income tax credit, see Parker Tax ¶102,101.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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