Santos v. Commissioner, TC Summ. Op. 2011-108 (September 12, 2011)
Ada Santos lived in Utah with her 30-year-old disabled adult son, Walter. Ada paid the mortgage, as well as the property taxes, homeowner’s insurance premiums, and the gas and electric bills. She paid any costs associated with maintaining the home and bought all of the groceries for the two of them. Walter received both Social Security and Medicaid benefits.
Ada filed her tax return as head-of-household and claimed Walter as her dependent. Because of her low income, she also claimed the Earned Income Tax Credit (“EITC”), using Walter as a qualifying child to increase the amount of the credit. The IRS asserted that Walter was not Ada’s “qualifying child” and therefore that she was not entitled to the EITC. The IRS based its determination on the fact that Ada had not been able to show the total amount of support received by Walter, and therefore could not prove that he hadn’t provided more than half of his own support. This is the support test for a qualifying child described in tax preparer courses. Ada brought the case to the Tax Court on her own, without the aid of representation. In part because it found Ada’s testimony to be credible, the court ruled in her favor and allowed the EITC.
The definition of “qualifying child”, as described for tax preparation training, is an individual who: (1) is the natural or adopted descendant of the taxpayer; (2) has the same principal place of abode as the taxpayer for more than one-half of the taxable year; (3) is under 19, under 24 and a full-time student, or is disabled (4) has not provided over one-half of his or her own support for the taxable year; and (5) has not filed a joint return with his or her spouse, if any. IRC §152(c)(1). In the past, a parent had to provide over one-half of the total support for the child. The current rule, however, only requires that the child not provide more than one-half of his or her own support.
In calculating the total cost of support, all sources of support are generally included. Treas. Regs. §1.152-1(a)(2)(i). “Support” for this purpose includes food, shelter, clothing, medical and dental care, education, and the like.
Although government benefits like Social Security and Medicaid are normally excluded from the taxable income of the recipient, the value of these may be included in “support.” See Turecamo v. Commissioner, 554 F.2d 564, 569 (2d Cir. 1977), aff’g. 64 T.C. 720 (1975); Treas. Regs. §1.1521(a)(2)(ii). This is not necessarily the case, however, as pointed out in Registered Tax Return Preparer continuing education courses. In exercising its judicial discretion, the Tax Court has on occasion refused to include the value of government benefits in the support calculation on the basis of fundamental fairness. “To require that Medicaid payments be included in the support equation,” the court has stated, “means that those individuals whose parents are the neediest will be the least likely to get a dependency exemption . . . which seems exceedingly unfair and contrary to the basic thrust of the Medicaid program itself.” Archer v. Commissioner, 73 T.C. 963, 971 (1980).
Government benefits may be received by children, of course, for reasons other than the impoverishment of the parents. Social Security benefits, for example, may be provided after one parent has died. What the court seems to be saying is that, when government benefits are being provided based on the family’s need, they should not be included in the support calculation. This determination complicates the work of a tax professional with an RTRP license.
Medicaid is a needs-based healthcare program, and Walter was receiving those benefits due to the low income level of the household. The court therefore concluded that it was appropriate to exclude those benefits from Walter’s support for the purpose of determining Ada’s entitlement to the dependency exemption.
The IRS nonetheless persisted in its argument that Walter’s total support was unknown. It’s rationale was that the proper measure of the housing, food, and clothing petitioner provided to Walter by Ada was the “value” of those items, not necessarily what Ada actually paid. Significantly, for Ada and professional tax preparers, the court held that the inability to conclusively prove the total cost of support was not a bar to establishing qualifying child status. In support of its conclusion, the court cited a case decided under the old dependency exemption rules, when a parent had to prove that they paid for more than half of the child’s support (Stafford v. Commissioner, 46 T.C. 515, 517 (1966)).
Finding that Ada proved that she paid all of the costs of maintaining the home and that, disregarding his Medicaid benefits, Walter paid little of his own support, the court concluded that Ada met the support test to make Walter her qualifying child. As such, not only was she entitled to the dependency exemption, but the head-of-household filing status and the EITC as well.
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