Originally published on Forbes.com April 25th, 2014
I usually like it when people win in Tax Court without using attorneys. It doesn’t happen that often. The latest I’ve noted is the case of Rodney Harris. Mr. Harris was facing tax and penalty just over $10,000 for the years 2010 and 2011. The sole issue was whether he was entitled to dependency exemption (and resulting credits, etc) for minor child K.H. The Tax Court does not put the names of minors in its decisions.
System Can Be Tough On Dads
We really don’t want the IRS getting deeply involved in parenting questions. There are, however, tax benefits associated with having a child. For those purposes, they have to be able to determine “Whose child is this?” definitively, at least for a particular year. Congress figured out a neat way to simplify the issue. The dependency exemption, by default, goes to the custodial parent, who is usually a Mom. The custodial parent either voluntarily or by order of a probate court can release the exemption. (There is a form for that purpose Form 8332.) The non-custodial parent has to attach the release to his return. What happens if the non-custodial parent defies a state court order to release the exemption? At least as far as the IRS and the Tax Court are concerned, the non-custodial parent is out of luck.
That rule has been litigated numerous times with close to uniform results. The Tax Court will sometimes commiserate with the non-custodial parents, but almost always gives them the same bad news. The Tax Court will not help them. They will have to go back to state court if they want to be made whole.
That rather harsh and unfair result at least has the virtue of simplicity. Unfortunately, there is a social development that Congress failed to consider. That development would be a joint parenting model that does not define one of the parents as being custodial. The other development is the greater acceptance of co-parenting arrangements between couples who were never married. That is what the Tax Court was facing in its recent decision in the case of Rodney Harris.
Conciliation Agreement
Mr. Harris is the biological father of K.H. He was never married to K.H.’s mother Alvanisha McFall. They lived separately in 2010 and 2011. Not ever having been married, they did not have a divorce agreement. Rather they had a “conciliation agreement”.
In 2003 when K.H. was two years old a conciliation court agreement and stipulated order (conciliation agreement) was filed in the Superior Court of California, County of Los Angeles, whereby Ms. McFall and petitioner agreed to share joint legal custody of K.H. The conciliation agreement does not award the dependency exemption to either parent. The conciliation agreement does set out detailed guidelines as to how K.H.’s time should be split between the parents throughout the year. For example, it specifies that K.H. shall be in petitioner’s care on the first, third, and fifth weekends of every month from 7 p.m. Friday until 8 p.m. Sunday and that Ms. McFall shall have the care and responsibility of K.H. during all other times. Moreover, the conciliation agreement describes, in detail, how K.H.’s time should be spent during holidays and school vacation.
K.H. Becomes A Football Star
Although the parents never formally modified the agreement, they shifted how K.H.’s time was spent. Much of it had to do with the now 9- year old developing into a budding star athlete.
As of 2010 and 2011 more than seven years had passed since the conciliation agreement allocating parental responsibilities was filed. K.H. was 9 and 10 years old in years 2010 and 2011, respectively, and had grown to make his family proud as a budding athlete, playing both football and basketball. K.H. earned trophies for his efforts and was awarded the Most Valuable Player award for his participation on the football team.
Achieving such success clearly required a high level of investment from both K.H. and his family. Football season typically lasted from August through November, and basketball season was from January through March. During these months K.H. had a rigorous daily schedule which usually involved a full day of school from 7:45 a.m. through 2:15 p.m., followed by his participation in an after-school program called L.A.’s Best, which started immediately after classes ended and ran through 5:30 p.m. or 6 p.m. K.H. would then have to change from his school clothes to his football or basketball uniform so that he would be ready for football or basketball practice, which typically lasted from 6 p.m. or 6:30 p.m. to 8 p.m. or 8:30 p.m.
What a schedule! Almost seems like they are prepping him for a career in public accounting. Mr. Harris had been on the very same football team – The LA Demos – starting from when he was seven.
The case gets into somewhat excruciating detail on K.H.’s schedule.
Football and basketball practice would take place several days a week, generally Tuesdays through Thursdays, and full games were usually played on Saturdays. Football and basketball practice would take place at a park, which was a five-to-seven-minute drive from school. Saturday football games would often be “away games” relatively far from the park. There would be some “away games” for basketball as well. K.H.’s athletic success and active lifestyle would not have been possible without the care and commitment of his family.
The Ruling
There’s more, but that is probably enough of a sample. Mr. Harris had both his mother and his great-aunt testify. Since both he and Ms. McFall had claimed the exemption, the Tax Court had to determine which of them K.H. had spent the most time with.
The conciliation agreement suggests, by its terms, that Ms. McFall should be treated as the custodial parent as K.H. is to spend the greater part of the calendar year with her. However, the testimony presented at trial has convinced this Court that the conciliation agreement did not reflect the time K.H. spent with each of his parents in 2010 and 2011. Nor does the conciliation agreement reflect where, and in which parent’s company, K.H. likely sleeps at night. On the basis of the testimony provided, petitioner played an instrumental role in K.H.’s life in the years at issue. Given petitioner’s involvement in K.H.’s active lifestyle, particularly during football and basketball seasons, we find that K.H. slept either at petitioner’s residence or in the company of petitioner at petitioner’s great aunt’s house a greater number of nights during the 2010 and 2011 years than K.H. slept at Ms. McFall’s residence or in her company.
I really like it when somebody wins a case pro se based on common sense. I don’t really care that much that the IRS probably got whipsawed on this one possibly because of a reflexive assumption that the Mom must be the main parent. It does, however, point out a weakness in the dependency exemption system that the Form 8332 was supposed to solve. The system is based on the assumption that there will be a custodial parent designated, but that is not necessarily the case. I’ve seen in practice that it can be a rather murky question. It will be interesting if we begin to see more cases like this one.
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