Does Imprisonment Constitute a Temporary Absence When Applying the EIC Residency Rules?

Editor: Michael D. Koppel, CPA, PFS

Should a person’s imprisonment be considered a temporary absence from home for purposes of the residency requirement for the earned income credit (EIC)? The Tax Court recently held that a taxpayer’s jail confinement after her arrest but before her conviction was a temporary absence that did not disqualify her eligibility for the EIC (Rowe, 128 TC 13 (2007)).

Facts

At the beginning of 2002, Cynthia Rowe maintained a home in Eugene, Oregon, where she and her two children lived. Rowe and the children later moved in with Rowe’s mother-in-law, where they lived together until Rowe’s arrest on June 5, 2002. After Rowe’s arrest, the children’s father moved into his mother’s home to care for the children, but Rowe continued to provide support for the children. In fact, Rowe supported her children with wages, unemployment benefits, food stamps, and welfare medical assistance until July 2, 2002, when the Oregon Children’s Services Division began providing the children with financial and medical assistance. On April 26, 2003, Rowe was convicted of murder and began serving a life sentence at the Coffee Creek Correctional Facility in Wilsonville, Oregon. She was appealing her conviction when this case was submitted to the Tax Court.

Rowe filed a timely 2002 tax return claiming head-of-household status, her children as dependents, and the EIC. She reported on the Form 1040, Schedule EIC, Earned Income Credit, that she had lived with her children for more than six months but less than seven months; as a result, she eventually received $1,070 for the EIC. After Rowe received her refund, the IRS issued a deficiency notice and contested three claims on Rowe’s tax return: the head-of-household status, the dependency exemptions, and the EIC. The IRS disallowance of the head-of-household status did not have any economic effect on the return, and the Service eventually conceded that Rowe was entitled to claim the children as dependents. Thus, the sole issue in the case involved Rowe’s eligibility to claim the EIC, even though she did not physically share the same place of abode with her children for more than half of 2002.

EIC Residency Requirements

The general rules for the EIC are found in Sec. 32, but most of the specificrequirements that must be fulfilled for a taxpayer to claim the EIC with qualifying children are listed in Secs. 32(c)(3) and 152(c). The Service conceded that Rowe had met the age, identification, support, and relationship tests to claim the EIC. Thus, the issue of the case was whether Rowe met the residency requirement in Sec. 152(c)(1)(B), which requires the qualifying child to have the same principal place of abode as the taxpayer for more than half of the tax year. Rowe contended that her mother-in-law’s home was her residence from the day she moved in through the end of the year. She argued that the time of her incarceration was a temporary absence from the residence. Neither Sec. 32 nor Sec. 152 addresses temporary absences from the principal place of abode, but the Tax Court found within the conference report to the Revenue Reconciliation Act of 1990, P.L. 101-382 (H.R. Conf. Rep’t No. 101-964, 101st Cong., 2d Sess., at 1037 (1990), 1991-2 CB 560, 564), that Congress intended to allow temporary absences within the scope of the EIC using the residency rules required for head-of-household filing status.

Sec. 2(b)(1)(A), defining head-of-household status, requires the taxpayer to maintain a household that is the principal place of abode for a qualifying child or other qualifying dependents for more than half of the tax year. Regs. Sec. 1.2-2(c)(1) stipulates that the taxpayer must live in the home, as well as maintain it, to qualify for head-of-household filing status. However, this regulation provides for temporary absences by either the taxpayer or his or her qualifying dependent due to “special circumstances” such as illness, education, business, vacation, military service, or certain custody agreements. Furthermore, the regulation states that a temporary absence will not disqualify a taxpayer from providing the principal place of abode if it is reasonable to assume that the taxpayer will return to the household and if he or she continues to maintain the household during the absence.

Precedents

Although the Tax Court has considered the issue of temporary absences in previous cases (see, e.g., Prendergast, 57 TC 475 (1972), aff’d 483 F2d 970 (9th Cir. 1973)), the majority regarded Hein, 28 TC 826 (1957), as the most relevant precedent. In 1952, Walter Hein claimed that he had maintained a household for himself and his four sisters for approximately 30 years. However, six years earlier one sister had been diagnosed with schizophrenia, and from that time she was continuously confined in mental institutions and nursing homes. The medical treatments she had received did not provide a cure. Her confinement to a mental institution was not mandatory, but she did require a residence with 24-hour nursing care. By 1952, she was 72 years old, and her doctors believed that she had little, if any, chance of recovery. In filing his 1952 tax return, Hein claimed the head-of-household filing status and stated that he could not advise the Service if “her confinement in a sanatorium is or is not of a temporary nature.” However, he also asserted that if she ever left the sanatorium, she would live in his home again.

The Service contended that, given the sister’s age, length of confinement, particular affliction, the type of treatment she was receiving, and the doctor’s slight hope for her recovery, it was unreasonable to assume that she would return to the Hein residence. Hence, the taxpayer could not reasonably regard his household as her principal place of abode. The Tax Court, however, held that Hein’s sister retained her status as a member of the household for two reasons. First, the evidence indicatedthat she (and her brother) did intend for her to return to the household if she was released from the sanatorium. Second, the court refused to apply a reasonable-assumption-of-return standard, but instead chose to seek evidence indicating that a new permanent home had been chosen by the dependent. Finding an absence of intent to change the sister’s home and that a new home had not been chosen, the court ruled that Hein could rightfully claim his home as his sister’s principal place of abode.

After acquiescing in the Hein decision (1958-2 CB 3), the Service incorporated the facts of Hein into Rev. Rul. 66-28 to clarify its position on long-term absences from the home by ill dependents. In the revenue ruling, the Service noted the similarity in the temporary absence requirements for both dependent and head-of-household status. The majority of the Tax Court held that the same standard should be applied in Rowe, while the dissenting judges believed that the revenue ruling should be limited to dependents qualifying for temporary absences and that the court’s judgment for Rowe should rely on the Regs. Sec. 1.2-2(c)(1) reasonable-assumption-of-return test. Finally, the court acknowledged that the Service relied on Hein and Rev. Rul. 66-28 in Service Center Advice 200002043. In that advice, the Service concluded that a child’s pretrial and post-conviction incarceration is a temporary absence if there is no intent on the part of the taxpayer and the child to change the juvenile’s principal place of abode. The length of the incarceration does not matter for the absence to be considered temporary within the meaning of Regs. Sec. 1.2-2(c)(1). The court also noted that the IRS and Congress have agreed with the Hein case through the years—despite some of the perceived flaws of the case. Congress has incorporated the principles of the Hein case into several statements of present law (see, e.g., H.R. Conf. Rep’t No. 108-696, 108th Cong., 2d Sess., at 56, 58 (2004)), while the Service has agreed with the Hein case in 1958 (acq. 1958-2 CB 3), 1966 (Rev. Rul. 66-28), and
2000 (Service Center Advice 200002043).

Analysis and Conclusion

Applying the principles set forth in Hein and Rev. Rul. 66-28, the Tax Court ruled that Rowe’s imprisonment should be considered a temporary absence. Thus, Rowe qualified for the EIC. (Five judges agreed with the majority opinion, five other judges agreed with only the result in two separate concurring opinions, and six judges joined in a dissenting opinion.) The court found that in Rowe, as was the case in Hein, the absence was involuntary. Furthermore, both situations create great difficulty in applying the reasonable-assumption-of-return test of the regulations. In the case of illness, the tax authorities would be required to forecast a medical prognosis. In the case of pretrial incarceration, the tax authorities (or in this case the Tax Court) would have to assess the strength of the criminal case, whether bail could be procured, and the likelihood of a plea bargain and to estimate the length of a jail sentence or the probability of a successful appeal. Most important, the court concluded that a presumption of innocence should be retained; if Rowe were acquitted, it was reasonable to assume that she would return to her children’s home.

Although the ruling was built on Rowe’s qualifying as sharing the same principal place of abode with her children for more than six months, one interesting aspect of the case is that the ruling could be applied to cases in which taxpayers are attempting to claim head-of-household status but not the EIC. In addition, the authors of the majority and concurring opinions stressedthat the scope of the decision was limitedto taxpayers who are incarcerated for part of a year but not convicted. Sec. 32(c)(2)(B)(iv) states that inmates in a penal institution are not allowed to claim any amounts received for services while imprisoned as qualifying income for the EIC. However, the opinion did not address the situation of an inmate released from prison during a tax year who may be trying to claim the head-of-household filing status and/or the EIC. Perhaps the principles of Hein and Rev. Rul. 66-28 could be applied in such a case.

Possible Unintended Consequences of Rowe

The Rowe dissenters noted that this case might have unintended negative consequences for taxpayers that may be more “deserving of our sympathy” than the plaintiff. For example, the father of Rowe’s dependents moved into the home and took care of his two children for seven months. However, he is not eligible to receive the EIC because the court ruled that Cynthia Rowe “resided” with the children for 12 months.

In Rowe, a single-parent mother livedwith her children and the children’s paternal grandmother. What if the mother had been institutionalized with no chance of returning home instead of incarcerated? Under the Rowe and Hein decisions, the grandmother would not be allowed to take the EIC under the tiebreaking provisions of Sec. 152(c)
(4)(A)(i), and the EIC would go to the mother—even though the grandmother lived with the children for the entire year and provided for virtually all of their support.

If you would like additional information about these items, contact Mr. Koppel at (781) 407-0300 or mkoppel@gggcpas.com.