Originally published on Forbes.com Sept 15th, 2014
I always love it when regular taxpayers beat the IRS in Tax Court without using lawyers. Of course, then I get annoyed with the IRS for chasing the wrong people. The most recent case of that sort I have noted is that of James Edwards Roberts. Mr. Roberts was in Tax Court over a deficiency notice of $8,274. The case was about the ordinary taxpayer trifecta – dependency deductions, earned income credit and head of household status. The wrinkle that might have thrown the IRS off is that Mr. Roberts was the children’s grandfather. Here is the story.
Sometime in January 2012 Mr. Roberts’s daughter and her two children became homeless. A third grandchild was on the way and was born in 2012. Mr. Roberts responded to the emergency by entering into an agreement with Tammy Moody. Mr. Roberts agreed:
….to pay 75% rent and utilities and bear full cost of meals, etc. Both petitioner and Ms. Moody signed and dated the agreement. Petitioner and his two grandchildren, J.A.S. and B.M.S., moved into the apartment in January 2012. J.Z.S. began living in the apartment after March 28, 2012. Petitioner complied with the agreement to provide rent, utilities, and meals. Petitioner and his three grandchildren lived in the apartment until October 2012. During the period between January 16, 2012, and October 2012 petitioner’s daughter also sometimes lived in the apartment and provided nonmonetary care for the three children. Ms. Moody also provided care for the three children when petitioner and petitioner’s daughter were not at the apartment. Expenses that Ms. Moody incurred in caring for the grandchildren were reimbursed by petitioner.
Conceivably the IRS computers were perturbed by a man moving to a new address and all of a sudden having three children as dependents. Also Mr. Roberts might have been hurt in the eyes of an agent by the fact that the arrangement was temporary – beginning and ending within the same year. Nonetheless, the IRS seems to have conceded from the outset that their case was a little weak. The deficiency notice had asserted the accuracy penalty, which is pretty much routine, but they dropped that at the beginning of trial.
The Tax Court went through the requirements for a dependency deduction all of which Mr. Roberts met with respect to his grandchildren.
In order for an individual to be a qualifying child of a taxpayer, section 152(c) requires that the individual: (1) bear a specified relationship to the taxpayer; (2) share the same abode as the taxpayer for more than one-half of the taxable year; (3) meet specified age requirements; and (4) not have provided over one-half of his or her own support for the tax year.
They mystery to me is why when the IRS decided to drop the penalty, they did not drop the case entirely, since, by dropping the penalty, they were indicating that they did not think Mr. Roberts was lying and, given that, it’s pretty clear that he wins. That the deficiency notice got issued in the first place is perhaps not that surprising given the amount of fraud there is surrounding the earned income credit. That may have turned the people working those cases into a bunch of cynical bastards. It wouldn’t take me long. It is worth noting that it was very wise for Mr. Roberts to have entered into the written agreement with Ms. Moody rather than having the arrangement be informal. That extra piece of evidence may have been what won the case for him.