Married individuals were not entitled to dependency exemptions where their children were not U.S. citizens during the relevant tax years, and were not entitled to the child care credit, the child tax credit, or the additional child tax credit for the same reason. Accuracy-related penalties and additions to tax for late filing were applicable. The taxpayers lived in Israel with their children; one parent was a U.S. citizen, the other was not, and the children did not become U.S. citizens until after the tax years at issue.
The dependency exemption requires that the subject child be a U.S. citizen at some time during the relevant tax year, pursuant to Reg. §1.152-2(a)(1) . First, the taxpayers argued that the regulation was invalid because it was inconsistent with Code Sec. 152(b)(3)(A) , which omits the requirement that the child be a citizen during the tax year, and the children had become citizens by the time that the relevant returns were filed. However, in the context of the remainder of the statute, Code Sec. 152(b)(3)(A) was reasonably read as consistent with the regulation, and so the regulation was not invalid.
Next, the taxpayers argued that the children were citizens during the tax years by virtue of “derivative citizenship.” Although, by virtue of the parent who was a U.S. citizen, the children were entitled to become citizens, they did not do so until they met the requirements of 8 U.S.C. §1433 through application and approval and through being furnished with a certificate of citizenship by the Attorney General following a physical appearance in the U.S.
The taxpayers claimed, for some of the years at issue, the child care credit under Code Sec. 21 and the child tax credit and additional child tax credits under Code Sec. 24 . These credits all require that the child be a U.S. citizen during the tax year. Therefore, the taxpayers were denied the credits for years prior to those in which the children attained U.S. citizenship.
For one year, the children all met the citizenship requirement, but the taxpayer wife was not entitled to the child care credit because she did not file a joint return, as required by Code Sec. 21(e) . The fact that the IRS did not raise this ground for denial of the credit until late in the proceedings did not deprive the taxpayers of notice or disadvantage them in any way requiring a remedy. Code Sec. 7522(a) , which requires that a notice of deficiency describe the basis for the claim that taxes are due, does not require that the IRS lay out the factual basis for its determination in the notice.
The taxpayers were subject to accuracy-related penalties under Code Sec. 6662 based on both negligence and substantial understatement of tax. In claiming deductions and credits for noncitizen children, the taxpayers disregarded the applicable regulation and were negligent. They failed to establish that they met the exception under Code Sec. 6664(c) for reasonable cause and good faith. They failed to seek advice from a tax professional, and their ignorance of the law was not an excuse for noncompliance.
The parties stipulated that the taxpayers filed their returns for the relevant tax years after the due dates. No extensions were obtained. While the taxpayers were correct in maintaining that there is no penalty if a return is filed within the allowed time period for claiming a refund, the taxpayers had no valid claim for a refund for the relevant years. The mistaken claims for refund did not establish reasonable cause or the absence of willful neglect. Therefore, the taxpayers were liable for additions to tax for late filing under Code Sec. 6651(a)(1) .
L.M. Carlebach, 139 TC No. 1, Dec. 59,127
Other References:
Code Sec. 21
CCH Reference – 2012FED ¶3507.17
CCH Reference – 2012FED ¶3507.25
Code Sec. 24
CCH Reference – 2012FED ¶3770.30
Code Sec. 152
CCH Reference – 2012FED ¶8250.58
Code Sec. 6651
CCH Reference – 2012FED ¶39,475.31
CCH Reference – 2012FED ¶39,475.34
Code Sec. 6662
CCH Reference – 2012FED ¶39,651G.14
CCH Reference – 2012FED ¶39,651G.305
Code Sec. 6664
CCH Reference – 2012FED ¶39,661.654
Tax Research Consultant
CCH Reference – TRC INDIV: 57,054
CCH Reference – TRC INDIV: 57,452
CCH Reference – TRC FILEIND: 6,156
CCH Reference – TRC FILEIND: 15,208
CCH Reference – TRC PENALTY: 3,106
CCH Reference – TRC PENALTY: 3,116
