Big Brother Gets Little Sister as Dependent

Originally Published on forbes.com on July 5th,2011

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I always love it when pro-se taxpayers beat the IRS in Tax Court.  The case of Badri N. Abdi  is particularly heartening because it contains a clever idea that might help some hard strapped families.  Mr. Abdi seems to have a strong work ethic and a devotion to his family:

During 2008 Petitioner was a student at San Diego State University and worked three jobs—as a cashier and jeweler at Mervyns, a retail store; as a caretaker for his grandmother;  and as a telemarketer for the San Diego State University Foundation. After cashing each paycheck, petitioner would give most of the money to his mother. Petitioner paid for the family’s cable television and Internet subscriptions and bought clothes and games for FM. Petitioner retained only a limited amount of money for himself to purchase “some clothes”, to occasionally eat out, and for entertainment. Petitioner did not own an automobile. Either his mother or his friends would drive him to school and to his workplaces.

FM is Mr. Abdi’s kid sister.  The Tax Court does not give out the full name of minors. Mr. Abdi lived with his mother, two younger brothers and FM.

So what was the clever idea?

His mother did not claim him as a dependent.  She claimed his two younger brothers as dependents.  FM was claimed by Mr. Abdi.  The IRS did not like that.  They assessed him $3,332 denying him the dependency deduction, earned income credit and child tax credit.

The Tax Court noted that FM met the four critical tests to be a ”qualifying child”:

 First, FM is petitioner’s sister, thus satisfying the relationship test. Second, petitioner and FM had the same principal place of abode throughout 2008, thus satisfying the principal place of abode test. Third, FM was 11 years old in 2008, thus satisfying the age test. Fourth, and finally, the record establishes that FM did not provide more than one-half of her own support for 2008, thus satisfying the self-support test.

Of course she also met the test with respect to her mother, which complicates the situation.  According to the rules, if Mom had claimed FM, Mr. Abdi would have been out of luck, but the Court noted:

The record shows that petitioner and his mother carefully arranged their tax affairs; petitioner’s mother claimed her other two sons as her qualifying children and petitioner claimed FM. Therefore, we believe and thus find that petitioner’s mother did not claim FM as a dependent for 2008.

 I have to say that I never thought of this one, but it is definitely a strategy worth considering for families with multiple children some of whom are working adults.  Unfortunately, changes in the Code from the Adoption Act of 2008 limit the circumstances in which the strategy will work as a helpful commentator has pointed out.