IN THE COURTS

I subscribe to email alerts on tax issues from former NATP Research Director Dave Mellem of Ashwaubenon Tax Professionals in Wisconsin. A recent email reported on an interesting Tax Court case (Cynthia Rowe, 128 TC No 2) in which a person who spent more than half of the year in jail and yet was still able to claim the Earned Income Tax Credit.

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Here are the facts, as summarized by Dave:

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“Cynthia Rowe and her two children lived together during 2002, first on Marcum Lane and then with her mother-in-law. Cynthia was arrested in June 2002 and spent the rest of the year in jail. She was convicted of murder in 2003 and is serving a life sentence, but the case is on appeal. She continued to support the children until early July 2002 and claimed them on her 2002 income tax return for purposes of the Earned Income Tax Credit (EITC). Tax Court gave Cynthia the credit stating Cynthia’s principal place of abode for the rest of the year was the mother-in-law’s home. Under IRC Section 32 a taxpayer’s principal place of abode is basically the place they live on a permanent basis and temporary absences, generally out of necessity, are not counted against this. Illness, education, business, vacation, military service, and a custody agreement are examples used in IRS regulations for Head of Household status.

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Tax Court determined the rules for the Head of Household status and the EITC were similar for this purpose. Although spending time in jail is not included in the list in the IRS regulation, the Committee Reports show Congress intended similar issues to be temporary absences. Tax Court ruled Cynthia’s stay in jail after an arrest and before a conviction was a “temporary” absence. It further stated Cynthia’s jail status for 2002 controlled the temporary nature of her 'principal place of abode' and not the fact that she was convicted during 2003.”

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I am not familiar with the dollar amounts of income reported on the return – but it would seem to me possible that the reason her income fell within the Earned Income Credit requirements was because she spent more than 6 months in jail!

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I am not the biggest supporter of the Earned Income Credit as it now exists. It is in reality a federal welfare program – one of the largest. It is also one of the prime sources of tax fraud. You can read my comments on the program from the NATP quarterly publication TAX PRO JOURNAL by clicking here.

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So what do you think about the case, and about the Earned Income Credit in general?

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TTFN