On 12/18/07 I started a thread on the new guidance that was in IRS Notice 2008-05. Basically, this notice redefined the term taxpayer to exclude someone who has no filing requirement and does not file in order to receive a tax benefit, e.g. filing for the EITC. As such, that person's child would no longer be a qualifying child of that person and could then be a qualifying relative of another taxpayer.
All the examples in the notice, as well as discussion of this issue have addressed how this relates to unrelated children of the taxpayer. In fact, this change in the rules also may affect children of divorced, separated or never married parents. Any parent who is the custodial parent (parent who has physical custody of the child for the greater part of the year) and does not have a filing requirement and does not file a tax return to obtain a tax benefit is no longer a taxpayer and does not have a qualifying child. Therefore, the noncustodial parent would not require the custodial parent to release the dependency exemption if the child meets the definition of being a qualifying relative of the noncustodial parent.
So the parent makes less than 3400$ and doesn't have to file a return. However he/she makes 3100$ and decides to file a tax return, namely in order to qualify for the free 600$ rebate upcoming in May, June, whenever.
Suddenly we do have a taxpayer! Oh boy, this is going to be FUN!
children of divorced, separated or never married parents. Any parent who is the custodial parent (parent who has physical custody of the child for the greater part of the year) and does not have a filing requirement and does not file a tax return to obtain a tax benefit is no longer a taxpayer and does not have a qualifying child.
I agree that Notice 2008-05 leaves important questions unanswered but I don't think the law supports your conclusions.
The thrust of Not. 2008-05 is solely to clarify that an individual will not fail to meet the definition of a qualifying relative because of an overly inclusive interpretation of the language in IRC § 152(d)(1)(D) which reads in relevant part "is not a qualifying child...of any other taxpayer." In fact, this is precisly what Not. 2008-05 says on pages 3 - 4:
"The Service, therefore, concludes that a taxpayer otherwise eligible to claim a dependency exemption deduction for an unrelated child is not prohibited by section 152(d)(1)(D) from claiming the deduction if the child's parent (or other person with respect to whom the child is defined as a qualifying child) is not required by section 6012 to file an income tax return and (i) does not file an income tax return, or (ii) files an income tax return solely to obtain a refund of withheld income taxes."
Nothing in Not. 2008-05 alters the statutory requirement that a qualifying relative must satisfy all 4 conditions listed in §§ 152(d)(1)(A) - (D). The notice makes it clear that the construction of subsection (D) is the only issue being addressed.
The special rule for divorced/separated parents is covered in § 152(e), which starts out with "Notwithstanding subsection (c)(1)(B), (c)(4), or (d)(1)(C), if."
Subsection (d)(1)(C) reads:
"(C) with respect to whom the taxpayer provides over one-half of the individual's support for the calendar year in which such taxable year begins, and"
A child cannot meet the definition of a qualifying relative, which includes meeting all 4 conditions listed under § 152(d)(1), when subsection (C) is trumped by § 152(e), as the language of that section plainly makes clear. Thus if a child fails to meet the qualifying relative tests, § 152(d) doesn't apply, making subsection (d)(1)(D) necessarily moot. Nothing in Not. 2008-05 supports the fast and loose interpretation that the non-custodial parent is eligible to claim his or her child's dependency exemption without a signed Form 8332 from the custodial parent because that parent does not file (and is not required to file) a tax return.
From the Notice: =============================================================APPLICATION For purposes of section 152(d)(1)(D), an individual is not a qualifying child of ?any other taxpayer? if the individual?s parent (or other person with respect to whom the individual is defined as a qualifying child) is not required by section 6012 to file an income tax return and (i) does not file an income tax return, or (ii) files an income tax return solely to obtain a refund of withheld income taxes. ============================================================= Very explicit especially if you read Sec. 152(d)(1)(D). In addition, they can't use the rationale they used just for unrelated children. The rationale only holds up when it is applied exactly as they state it should be applied.
The current agreement by our pals on the Potomac have the rebate going to taxpayers who don't file but have earnings in excess of $3000 and paid social security and medicare taxes. No mention as to how those folks are going to get their rebates. However, your point is well taken.
Or almost three years later the custodial parent files to claim EIC and suddenly the noncustodial parent, having never received an 8332, is in a very bad way.
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