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Parents Who Lost Custody of Children Could Not Claim Them as Dependents or Take Child Tax Credit or EITC

(Parker Tax Publishing August 2018)

The Tax Court held that the biological parents of two children who were adopted by, resided with and received primary financial support from their maternal aunt during the entire year at issue were not entitled to claim the children as dependents and, as a result, could not take the child tax credit or the earned income credit. The Tax Court reasoned that, although the children visited with their parents when not in school, the children did not share a principal place of abode with their parents, making the parents ineligible to claim the children as dependents or take the credits. Jusino v. Comm'r, T.C. Memo. 2018-112.

Miguel Jusino and Elizabeth Ezcurra are the biological parents of two children who were nine years old and four years old, respectively, at the end of 2015. Jusino's and Ezcurra's parental rights were terminated by a court order in January 2015. In September 2015, the children were adopted by their maternal aunt with whom they had resided since 2014. The children lived with their aunt during all of 2015, although they visited their parents some weekends during the summer. Jusino and Ezcurra bought gifts for the children and took them to restaurants during the visits, but the aunt provided the primary financial support for the children.

Jusino and Ezcurra claimed the children as their dependents on their 2015 Form 1040A. They also claimed a $5,360 earned income credit, a $103 child tax credit, and a $1,897 additional child tax credit. In claiming the earned income credit, Jusino and Ezcurra falsely reported that the children lived with them 12 months during 2015. They reported over $24,352 in wages earned by Mr. Jusino during 2015. The IRS determined a deficiency of $8,250 and a $1,650 accuracy related penalty with respect to Jusino's and Ezcurra's 2015 return. The IRS later conceded that the taxpayers were not liable for the penalty. Jusino and Ezcurra challenged the deficiency in the Tax Court.

For tax years before 2018 and after 2025, Code Sec. 151 allows an exemption for each dependent of a taxpayer in computing taxable income. In addition to other requirements, Code Sec. 152(c) provides that for a child to qualify as a dependent, the child must have the same principal place of abode as the taxpayer for more than half of the year. Code Sec. 24(a) generally allows a child tax credit for a qualifying child as described in Code Sec. 152(c). A portion of the credit, the additional child tax credit, is refundable if certain conditions are met. Under Code Sec. 32(b), an earned income credit may apply; the income limitation amount depends in part on whether the taxpayer has any qualifying children under Code Sec. 152(c), as modified by Code Sec. 32(c)(3)(A).

The Tax Court found that Jusino and Ezcurra were not entitled to claim their children as dependents and therefore denied the claimed credits and upheld the deficiency. The court found that the children did not share a principal place of abode with Jusino and Ezcurra in 2015 because the children were placed with their aunt in 2014 and had lived with her ever since. Moreover, the taxpayers did not dispute that the children visited only when they were not in school. The Tax Court found that because the children were not dependents under Code Sec. 152(c), Jusino and Ezcurra were not entitled to take the child tax credit.

The Tax Court also held that Jusino and Ezcurra did not qualify for the earned income credit because their income for 2015 exceeded the applicable limitation amount. The court explained that to be eligible to claim a higher earned income credit with respect to the children, Jusino and Ezcurra had to establish that the children were qualifying children. However, because the children were not qualifying children, Jusino and Ezcurra were eligible for the credit only on the basis of their earned income. The court concluded that the earned income credit did not apply because the income of over $24,000 that Jusino and Ezcurra reported for 2015 exceeded the applicable limitation for that year.

For a discussion of the exemption or dependents, see Parker Tax ¶10,720. For a discussion of the definition of a qualifying child, see Parker Tax ¶102,110.10. For a discussion of the child tax credit, see Parker Tax ¶100,701. For a discussion of the earned income credit, see Parker Tax ¶102,101.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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