Prison Time Considered an "Absence Due to Special Circumstances" in Determining Dependency Exemption

(Parker Tax Publishing January 2017)

The Tax Court held that a taxpayer's incarceration for more than 10 months during the tax year did not prevent him from satisfying the residency requirement of Code Sec. 152(c)(1)(B) and claiming a dependency exemption deduction, earned income credit, and child tax credit for his child. The court cited Reg. Sec. 1.152-1(b) in concluding that the taxpayer's incarceration was a temporary absence due to special circumstances that was not counted for purposes of determining whether he lived with the child in the same home for more than half of the tax year. Binns v. Comm'r, T.C. Summary 2016-90.

Facts

In March 2012, Daniel Binns and Lisa Hinkle, two unmarried taxpayers, rented an apartment in Columbus, Ohio, which served as a home for them and their child, C.B. In 2013, Binns was incarcerated at an Ohio prison from January 16 to November 6, and thus was not living with Hinkle. Except for Binns's confinement period when he was absent from the home, the couple remained at the Columbus apartment throughout 2013.

Binns worked for an event rental business starting in March 2011 until he was incarcerated. He paid January rent for his and Hinkle's apartment and then pre-paid the $555 monthly rent for the next six months (through July 2013) as he expected to be released from prison at the end of July. After he filed his 2012 federal income tax return, Binns had his refund of $4,511 issued to a checking account controlled by Hinkle's uncle. The tax refund was then dispersed to Hinkle by her uncle for bills, food, clothing, etc. for herself and C.B. Binns also set up a budget plan with Columbia Gas of Ohio, under which he paid a set amount of $40 per month for gas regardless of use. At the end of the year Columbia Gas of Ohio billed Binns an accrued balance to reflect actual use or issued a credit for any overpayment. The electric bill for the apartment was approximately $1,470 for the entire year. Hinkle used funds that Binns provided to pay $480 to the gas company and $1,470 to the electric company during 2013. During this period, Hinkle stayed home with the child and did not work.

Neither Binns nor Hinkle incurred any school or significant child care expenses in 2013. When Binns realized he would not be released in July as he had previously thought, he contacted his landlord, Ms. Chan. She agreed to allow Hinkle (and C.B.) to remain in the apartment until Binns was released from prison when he would pay off or work off any unpaid balance. Upon his release, Binns worked as a handyman in some of Ms. Chan's other apartment units. She credited an agreed amount for his work against the rent owed. From his release on November 6, 2013, to the end of 2013, he earned $11,000 from Ms. Chan which he reported on Schedule C, Profit or Loss from Business, of his 2013 Form 1040. In addition, Hinkle received benefits from the Supplemental Nutrition Assistance Program (SNAP), commonly referred to as food stamps, for most or all of 2013. For a household of two people, the maximum monthly SNAP benefits were $367 per month for most of 2013. C.B. received medical care in December 2013, but there was no indication that such costs were significant; nor was there any indication how these visits were paid for.

Binns filed his 2013 federal income tax return with the filing status of head of household and claimed (1) a dependency exemption deduction for Hinkle and C.B., (2) an earned income tax credit, and (3) a child tax credit. The IRS disallowed the head of household filing status, the dependency exemption deduction, the earned income credit, the child tax credit, and assessed a tax deficiency. Binns filed suit in Tax Court.

Tax Court's Analysis

Before the Tax Court, Binns' testimony indicated that Hinkle's parents likely provided some additional financial assistance to C.B. and Hinkle for 2013 and that Hinkle's parents may have claimed C.B. and Hinkle as dependents on their 2013 tax return. The Tax Court found that the transcripts of Binns' prior years returns reflected a course of conduct showing that Binns provided for C.B.'s support during these years. While Binns did not provide any evidence with respect to the amount of support Hinkle's parents provided or, by extension, the total amount of support received by Hinkle during 2013, the court found that Binns paid the rent and utilities related to the apartment where he, Hinkle, and C.B. lived in 2013, and that these amounts represented more than one-half of the expenses incurred to maintain the household for the year.

The court held that Binns was not entitled to a dependency exemption deduction for Hinkle because he failed to carry his burden of showing that he provided more than half of Hinkle's support during 2013. However, the court held that Binns was entitled to head of household filing status, the dependency exemption deduction for C.B., the earned income credit, and the child tax credit.

Under Code Sec. 152(c)(1)(B), the court said, a residency test must be satisfied in order for a taxpayer to take a dependency exemption deduction for a dependent. That test is satisfied if the taxpayer has the same principal place of abode as the dependent for more than one-half of the tax year. With respect to Binns' incarceration and the fact that he did not live with C.B. in the same home for more than one-half of the tax year, the court noted that Reg. Sec. 1.152-1(b) provides that temporary absences due to special circumstances are not treated as absences for purposes of determining whether the residency test is satisfied. The court concluded that Binns' incarceration did not prevent him from satisfying the residency requirement of Code Sec. 152(c)(1)(B) and thus he was entitled to the dependency exemption deduction for C.B.

The court noted that because C.B. satisfied the four tests under Code Sec. 152(c)(1) to be a qualifying child and could be a dependent of either Binns or Hinkle, the tie-breaker rules of Code Sec. 152(c)(4) had to be applied to determine which of them could claim a dependency exemption deduction for C.B. Because Binns had the higher adjusted gross income for 2013, the court concluded that Binns was entitled to the dependency exemption deduction.

With respect to filing as head of household, the court found that Binns established that he paid more than one-half of the expenses associated with the household, even considering the government assistance for food expenses, and thus was entitled to head of household filing status.

With respect to the child tax credit and earned income credit, the court concluded that because C.B. was a qualifying child for purposes of the dependency exemption deduction, he was a qualifying child for purposes of the two credits.

For a discussion of the exceptions to the residency test for taking a dependency exemption deduction, see Parker Tax ¶10,720.

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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