Originally published on Forbes.com.
The Tax Court dealt with a messy family situation last week and, as is usual, the results are not pretty. The names of the players in TCS 2017-62 are public record now, but I will not contribute further to their fame. There are two couples involved. I will call the first couple, the petitioners, Robin and Terry. The other couple comes in later and I’ll call them Blynne and Ashley. Then there are three minor children who even the Tax Court does not name. We’ll call them the kids. Everybody lived in Texas, which is important.
Grandparents To The Rescue
Robin and Terry are married. Ashley is their daughter. The kids are Ashley’s kids. During 2012 Ashley was in rehab dealing with substance problems. If you think that is something that would never happen in your family, you should read Dreamland: The True Tale of America’s Opiate Epidemic by Sam Quinones and be thankful that you have been spared till now. Actually Ashley may have been in for something else. There is always alcohol. Regardless, that left Robin and Terry doing for their grandchildren. On their 2012 return they claimed Ashley, who did not have any income to speak of, and the three kids as dependents. They also claimed child tax credits for the three kids.
Then in 2014, Robin and Terry got a notice from the IRS looking for almost $7,500 ($6,232 in tax and $1,246 in accuracy penalty). At issue were the child credits and the dependency exemptions.
Until September 2012 Ashley and the kids had lived with Robin and Terry. Then Robin and Terry bought a mobile home for daughter and grandchildren to live in. That’s when Blynne comes into the picture. Blynne, who is not the biological father of the kids, moved in with Ashley.
Enter Romance
Robin and Terry did not realize that Blynne and Ashley filed a joint return which is the source of Robin and Terry’s troubles with the IRS. The decision goes into some detail on the rules, but the joint return means Ashley can’t be claimed as a dependent regardless of how much of her support was provided by her parents. When it comes to the kids, there is an argument for the kids to be claimed by Robin and Terry and an argument for them to be claimed by Blynne and Ashley. Code Section 152(c)(4) provides a “tie-breaker rule”. An actual parent (i.e. Ashley) wins.
Robin and Terry argued that Blynne and Ashley weren’t really married, so the joint return was phony. It was a common-law marriage. There are three requirements for a common-law marriage in Texas – an agreement to be married, cohabitation, and representation to others that the parties are married. Now it seems that Ashley did not tell her parents she was married, but by signing a joint return she did tell the IRS, which was good enough for the Tax Court.
In making their case Robin and Terry were hampered by Ashley not being available to testify because she was in the hospital. Pro bono counsel had gone for a continuance on March 21, 2017 when the trial was first called advising that Ashley was an important witness, but did not go for a second continuance in January 2017. Remember that in tax matters, the burden is on the taxpayer.
On the bright side, Judge Armen did let them go on the accuracy penalty so their trip to Tax Court was not entirely fruitless.
Accountants Should Not Be Sorting This Out
Stories like this, which are quite familiar to fanatics like me who at least look at every single Tax Court decision, make me think that we should have a different system. The individual income tax should be a tax on, you know, individuals and not as it is, in effect, on families. The IRS is ill-equipped to figure out who constitutes the actual family unit and Tax Court is a less than ideal place to try to sort these things out.
A lot of the complexity of the income tax is inherent in trying to tax income, but that sort of complexity does not really impact regular people all that much. You are probably not running a bank or a life insurance company, maintaining inventories or mining. Some of the complexity introduced by using the income tax as the Swiss utility knife of social policy also does not create complexity that regular people have to deal with. You are probably not developing affordable housing, preserving historic buildings or building golf courses, because you feel so strongly about conservation as seems to be the case with President Trump.
The complexity introduced by using the income tax code to subsidize the working poor, or perhaps their low-wage employers, does impact ordinary people who end up having to pay to have income tax returns prepared that really could otherwise be on a postcard. And it sucks up a good bit of scarce compliance resources and involves the IRS in sorting out matters that would be better handled by social workers rather than accountants.
I doubt that the next round of tax reform will do anything about it, since throwing benefits into the tax code is one of the few things that the left and the right agree on.
Other Coverage
Lew Taishoff covered the case with Coming In From The Bullpen – Redivivus. Mr. Taishoff gives a really colorful summary of the facts:
“This is another of those TX heartbreakers (sans Tom Petty) where Papa and Nana supported daughter’s three young’uns for nine months of year at issue. Then Papa and Nana bought a mobile home for daughter and said young’uns, whereupon daughter’s no-account boyfriend moves in for the last three, and daughter and boyfriend file MFJ without benefit of clergy, judge, clerk or ship’s captain, and take the young’uns as dependents.”
Mr. Taishoff cautions us to not be hard on the pro bono attorneys who are probably doing their best with what they have to work with.
Tax Notes has Couple Denied Exemption Deductions for Daughter, Grandchildren. Of course, that is behind a paywall and if you follow me you know I am not a big spender.