When does a dependent meet the citizenship test?
Taxpayer Says: The children were citizens at the time the return was filed, or via derivative citizenship during the tax year of the return, and can be claimed as dependents.
Internal Revenue Service Says: None of the children meet the citizenship test for a qualified dependent during the tax year, and they cannot be claimed as dependents.
From Internal Revenue Code Section 151(a) and (c): Allows a taxpayer an exemption deduction for each “dependent” as defined in section 152.
From Internal Revenue Code Section 152(b)(3)(A): “The term ‘dependent’ does not include an individual who is not a citizen or national of the United States unless such individual is a resident of the United States or a country contiguous to the United States.” (citizenship test).
From Federal Tax Regulation 1.152-2(a)(1): “to qualify as a dependent an individual must be a citizen or resident of the United States * * * at some time during the calendar year in which the taxable year of the taxpayer begins.”
THE CAUSE OF THE DISPUTE
In order to claim a dependency exemption on your personal income tax return, the person for whom you’re claiming the exemption must be a qualifying child or qualifying relative. Among other tests to determine the dependent’s status, you can only claim someone as a dependent when they are a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico. This statutory requirement is called the citizenship test.
There are two ways to be a US citizen: Either you’re born within the US, or you are naturalized, which is a legal process governed by treaty or by the authority of congress. US citizens whose children are born outside the US and who do not regularly reside in the US use an Application for Certificate of Citizenship to apply for citizenship for their children when certain conditions are met. In addition, both the citizen parent and the child must appear at an interview with an immigration officer in the United States, and the child must meet all of the required conditions at the time the Oath of Allegiance is taken.
In this case, the dispute centers on when the citizenship test must be satisfied; that is, does the child have to be a citizen during the tax year in question, or does becoming a citizen in a later year make the child eligible for the dependency exemption?
In December 2007, the taxpayers, a married couple living in Israel, filed joint tax returns for 2004, 2005, and 2006, and claimed dependency exemptions for their minor children. The mother was a US citizen, the father was not, and none of the children ever lived in the United States. The mother applied for naturalization for the children. The children fulfilled all of the required conditions and received certificates of citizenship when they personally appeared before an authorized authority in the US in 2007 and 2008.
The taxpayers present two arguments for claiming the dependency deductions. First, they argue Regulation 1.152-2(a)(1) is invalid because congress specifically did not require that dependents must be citizens “at some time during the calendar year in which the taxable year of the taxpayer begins in order to be a dependent.” That line was added by the IRS, which does not have the authority to write tax law. Congress did specifically state that other tests of dependency, such as principal place of abode, age, and support, had to be met during the tax year, so if congress had meant for the citizenship test to meet the same requirement, that intent would have been specifically stated. Under this argument, since the children were citizens at the time the tax returns were filed in 2007, they are eligible dependents.
Alternatively, the taxpayers argue the children were citizens for the years in question because, by virtue of their mother’s status as a US citizen, each child had derivative citizenship, ‘at some time’ during the tax years in which he or she was claimed as a dependent.
The IRS says none of the children met the citizenship test for 2004, 2005, or 2006, because the children did not become citizens until they received their certificates of citizenship. The IRS contends that, without the children’s having satisfied the citizenship test in the years in question, the taxpayers are not entitled to the dependency exemption deductions.
WHAT WOULD YOU DECIDE?
Make your selection, then see “The Court’s Decision” below for a full explanation
THE COURT’S DECISION
HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.
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Conclusion re second argument: Despite the taxpayer’s having made application on behalf of the children for naturalization, and the children’s having fulfilled all of the required conditions, the children could not receive their certificates of citizenship until they personally appeared in the United States in 2007 and 2008. No matter how insignificant the appearance and subsequent oath may seem, those elements are mandated by Congress, which, except in cases governed by treaty, has the sole authority to govern the process by which those born abroad may become naturalized citizens. Thus, while the children may have derived their citizenship from the status of their mother and grandparents as citizens, they did not become citizens until they were in the United States in 2007 and 2008 and fulfilled all of the conditions.