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Tie-Breaker Rule Prevents Grandmother from Claiming Grandkids as Dependents

(Parker Tax Publishing February 2017)

The Tax Court held that, under the tie-breaker rule, a grandmother was not entitled to dependency deductions, or other tax benefits, with respect to the grandchildren for which she provided almost all financial support during 2012. Although her son told her to file a return and claim the children as dependents to recoup some of the money she had spent supporting his family, he had also filed a return claiming the children as dependents. Smyth v. Comm'r, T.C. Memo. 2017-29.

In 2012, Grisel Smyth, a certified nursing assistant, provided a home for her unemployed son, his wife, and their two small children. Smyth's job does not pay much, but, with her wages and social security benefits, Smyth had a higher adjusted gross income than either her son or his wife. In 2012, she provided all the financial support for the household because her son "did not work, and he was into dealing drugs." Smyth's daughter-in-law stayed home and took care of the children. Smyth timely filed her 2012 income tax return claiming the two grandchildren as her dependents after her son told her that he and his wife were not going to file a return and that she should try to get back some of the money she had spent supporting his family.

In 2014, Smyth received a notice of deficiency from the IRS that increased her 2012 tax by more than $5,000 and determined a penalty of another $1,000. The notice said that the IRS had decided that the grandchildren were not her "qualifying children." Because her grandchildren were not qualifying children, she was not entitled to a dependency deduction, child tax credit, earned income credit, or head-of-household filing status.

At first Smyth thought she might have been the victim of identity theft, but then realized that someone else had claimed dependency exemption deductions for her grandchildren for the same year. Smyth's son later admitted that he and his wife had filed a tax return claiming dependency deductions for the children. Smyth's son then offered to write an affidavit in support of his mother's position and even prepared an amended 2012 return that deleted his claim that his children were his dependents. Smyth's case went before the Tax Court and a copy of this amended return was given to the IRS's counsel two weeks before trial.

Under Code Sec. 151, only one person can claim a "qualifying child" as a dependent. When writing the law relating to dependent deductions, Congress expected that there would be some families where more than one person could say a child was his or her "qualifying child," so the Code has tie-breaking rules. Under Code Sec. 152(c)(4)(A), if the same children are the "qualifying children" of both their parents and someone else, then only the parents can claim the children. However, under Code Sec. 152(c)(4)(C), if the children's parents do not claim them, then another taxpayer may claim the children as his or her "qualifying children" if that taxpayer has a higher adjusted gross income than either parent.

Before the Tax Court, the IRS argued that the exception in Code Sec. 152(c)(4)(C) did not apply because Smyth's son and his wife, the children's parents, claimed the grandchildren as dependents on their tax return.

Smyth argued that even if her son and his wife did file an original return, they also filed an amended return before trial in which they released any claim they had to the children as their "qualifying children."

Smyth testified that she didn't know her son and his wife had filed their own 2012 return claiming her grandkids as their "qualifying children" and that she never would have claimed her grandchildren as her own "qualifying children" if she thought her son had done so too. Smyth also testified that her son admitted he filed a return in order to get the refund "for his drugs" and prepared an amended return in which he and his wife released any claim they had to the children as their "qualifying children." According to Smyth, this amended return was "filed" when it was delivered to IRS legal counsel.

While expressing extreme sympathy for Smyth, the Tax Court nonetheless held that she was not eligible to claim her grandchildren as her dependents. First, the court found that Smyth's son's amended return was not properly "filed" and thus could not be the basis for a claim that Smyth's son and his wife gave up their right to claim Smyth's grandchildren as their "qualifying children." In so finding, the court cited its decision in Quarterman v. Comm'r, T.C. Memo. 2004-241, where it held that hand delivery of a return to IRS counsel does not constitute the filing of that return. The problem, the court said, is that the IRS's counsel is neither the service center that serves taxpayers living in El Paso nor a person that the IRS has assigned to receive returns for the local IRS office. Similarly, in Espinoza v. Comm'r, 78 T.C. 412 (1982), the Tax Court found that delivery of a return to an IRS agent did not amount to the filing of a return. Thus, the Tax Court concluded that Smyth's son and his wife did not give up their right to treat their children as their qualifying children and, under the tie-breaker rules, they get to claim the children as dependents. The court also found that, because the children were not Smyth's "qualifying children," she did not qualify for the earned income credit, child tax credit, or head-of-household filing status.

In closing the court said: "it is impossible for us to convince ourselves that the result we reach today that the IRS was right to send money meant to help those who care for small children to someone who spent it on drugs instead is in any way just. Except for the theory of justice that requires a judge to follow the law as it is but explain his decision in writing so that those responsible for changing it might notice."

For a discussion of the tie-breaker rule that applies when more than one person is eligible to claim a child as a dependent, see Parker Tax ¶10,720.

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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