Definition of Dependent

This paper will discuss the topic of the citizenship requirement in determining dependents for the child tax credit as per IRC section 152(b)(3). According to the IRC, in order to be a dependent one needs to be a citizen or a national of the United States of America or a resident of the United States or of a country contiguous to the United States (Canada or Mexico).
Recently, there has been a court case that challenged the IRS’ definition of dependent with regards to the child tax credit. The case was Leah M. Carlebach and Uriel Fried, petitioners v. Commissioner of Internal Revenue, respondent. The Petitioners and their children live in Israel and were filing American tax returns. In 2007, the petitioners filed tax returns for 2004, 2005, and 2006 where they listed their children as dependents. The issue at hand is that the children didn’t receive American citizenship until 2007 and the parents claimed a dependency deduction for their children from 2004 through 2006, before they received their American citizenship. The respondent (the IRS) claimed that as long as the children weren’t citizens of the United States during that tax year, then they can’t be claimed as dependents to qualify for the child tax credit. The IRS assessed approximately $39,308 in owed taxes and additional penalties because of the improper tax deductions.
The IRC code in question is IRC Sec. 152 (b)(3)(a) which is the source for the citizenship test for dependents. It says that the dependent must be a citizen of the United States or a resident of the United States or a resident in a country contiguous to the United States (Mexico or Canada). The Petitioners claimed that this section did not clearly state when the dependents must be citizens of the Unites States. They argue that the children just need to be citizens when the return is filled and they do not need to be citizens at any point during that particular tax year. They claim that Congress omitted the time requirement intentionally from the code, as opposed to other sections which state explicitly that the requirements need to be in effect during that tax year. They also claim that the children had derivative citizenship from the parents during the years in question, since the children were granted citizenship because their mother is a United States citizen. The respondent’s position is simply that the taxpayer failed the citizenship requirement of dependency. The children were not citizens during the tax year for which the taxpayers are filing their taxes. The fact that they are currently citizens is irrelevant.
The court ruled against the taxpayers on both these arguments. With regard to derived citizenship, even though the basis of their citizenship was derived from their mother, since they had to swear an oath of allegiance before receiving their certificate of citizenship, the court ruled that they didn’t become citizens until they received their certificate of citizenship. With regard to the other argument, the court did agree that the ruling was ambiguous. However, the court also said that the taxpayers failed to take that section in context. Since every other requirement was for that tax year, so was the citizenship test. In addition, since the IRS’ interpretation of that statute was reasonable, and therefore their interpretation of the statute is also acceptable.
In “Dependency Exemption Requirement for Children Born Abroad” from the Tax Adviser, Patrick B. Roxas discusses how citizenship, in a variety of topics, has always been subject to much debate. Taxation is no different, and now with more United States citizens living outside of the country, this debate has become much stronger with more concrete ramifications. Roxas than proceeds to summarize this very court case how the family (which has been discussed earlier) misunderstood the citizenship requirement, and they lost out on a lot of exemptions. The purpose of this is to advise readers about the importance of knowing the details about the dependency exemption when filing for taxes internationally. The author concludes that based on this court case, attaining US citizenship for a dependent is crucial in qualifying for this exemption. As seen from the court case, a delay can be very expensive.
In my opinion, I never thought the tax payers had an argument in their court case. To me, it seems obvious that in order to qualify for the citizenship requirement, one has to be a citizen in the year for when they are filing. If that’s true for all of the other dependency requirements, why would citizenship be any different? While I admit, some of their arguments were very creative, their arguments were not really sound. I don’t know why they delayed in applying for citizenship for their children, but once they did, it seems like they were willing to try anything to get those exemptions to stand. Unfortunately for them, the court ruled against them and in my opinion, there is no question that that was the correct decision. As the article said, people who live internationally have to take this very seriously. If they aren’t careful about the citizenship requirement, they will most likely regret it in the future.