Originally published on Forbes.com June 23rd, 2014
Does divorcing your spouse divorce you from your stepchildren? Well, it turns out that for the “relationship” piece of the dependency exemption it does not. The Tax Court was able to use that rule to cut Tony R Duncan a bit of a break in its decision in his case. He was representing himself, so he probably needed a little help from the judge. It was one of those confusing situations, that I think the IRS should just let slide and go fight crime elsewhere, but when your return is wrong, it’s wrong. Here is the story.
Mr. Duncan married Candice Lee Arbogast in 2008. She already had two children, whom the Tax Court refers to as B.E. and H.A. For the year 2011, Mr. Duncan prepared a joint return claiming himself, Ms. Arbogast, B.E., and H.A. There was a serious flaw in that filing. Mr. Duncan’s divorce from Ms. Arbogast had become final on November 15, 2011. Marital status for filing purposes is determined on the last day of the year.
Rules like that don’t just confuse the taxpayers, the IRS can also mix them up as the Tax Court notes:
The notice of deficiency is no model of clarity insofar as filing status is concerned. Thus, Form 4549, Income Tax Examination Changes, suggests that petitioner’s appropriate filing status is “single”, whereas Form 886-A, Explanation Of Items, suggests that it is “married filing separately”. Given the fact that for 2011 the amount of the standard deduction, $5,800, and the tax at petitioner’s income level were the same for both “single” and “married filing separately” filing status, the inconsistency in the statutory notice is moot.
For the time that they were together in 2011, which was most of the year, Mr. Duncan had provided the bulk of the family’s support. Ms. Arbogast’s earnings were below the filing threshold. So the Tax Court determined that he was entitled to Head of Household status.
The dependency exemption for B.E. and H.A. is where things get interesting. In order to claim an exemption for a “qualifying child”, among other requirements, the taxpayer must “bear a specified relationship” to the child. Step-child is among the specified relationships, but given the divorce, do B.E. and H.A. still count as step-children?
As it turns out the regulations provide that
“he relationship of affinity once existing will not terminate by divorce or death of a spouse .”
So the Tax Court ruled that
Therefore, petitioner’s divorce did not terminate his stepparent-stepchild relationships with B.E. and H.A. Accordingly, they are petitioner’s stepchildren, thus satisfying the relationship test. We therefore hold that B.E. and H.A. are petitioner’s qualifying children for purposes of the dependency exemption deductions for 2011.
Mr. Duncan still got hit with an accuracy penalty. Apparently, that was mainly due to some unreported income that had been conceded. I think the Tax Court should have cut him a break on the accuracy penalty as it related to the personal exemption for his ex-spouse, since the IRS could not get his filing status right either, but no such luck.
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