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“No Good Deed Goes Unpunished” : Non-Marital Relationships and Qualifying Dependents

Sharp v. Comm’r, T.C. Memo. 2017‑208, 2017 WL 4973234 (2017)


(a) Facts:    A woman lived with a man in California.  The couple was not married.  The man had a child by a prior relationship, and the child had two minor children.  The man was, therefore, the children’s biological grandfather.

The mother of the two children signed a guardianship agreement giving temporary custody of the children to the man (the children’s biological grandfather) and the woman.  She did this because she did not believe she was capable of caring for the children.  The agreement was valid from July 16, 2013, to July 16, 2014.  The children returned briefly to the mother in September of 2013; she concluded that she was still not ready to care for them, and she returned them to the man and woman.


The children returned to the mother on August 18, 2014.  In October of 2014, one of the children, MLS, returned to the custody of the man and woman because he was having behavioral problems at school that his mother could not handle.  No formal extension of the guardianship agreement was signed.


Legal custody of the children remained with the mother during the entire period at issue.  No court ever issued a temporary or permanent custody order; no abuse and neglect action was ever filed; all changes in de facto custody were made by private agreement.


On her 2014 federal tax return, the woman claimed a dependency exemption for each of the two children.  The IRS disallowed the deduction, and the woman sought relief in the Tax Court.


(b) Issue: Was the woman entitled to claim the dependency exemption?


(c) Answer to Issue: No.


(d) Summary of Rationale: The exemption is available only for a “qualifying child.”  To be a “qualifying child,” the dependent must first be a “child.”  A “child” is defined as either “a son, daughter, stepson, or stepdaughter of the taxpayer,” or “an eligible foster child of the taxpayer.”  I.R.C. § 152(f)(1)(A).


The children at issue were not biologically related to the woman, and they were therefore not sons or daughters.  They could not be her stepsons or stepdaughters, despite their blood relationship with the man, because the man and the woman had no ceremonial marriage, and California has abolished common-law marriage.  The descendant of a stepson can be a “qualifying relative,” but, again, the man’s son was not the woman’s stepson, because the man and the woman were never married.


Finally, the statute defines an “eligible foster child” as “an individual who is placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.” Id. § 152(f)(1)(C).  The woman was given rights only by a private agreement, not by a court order or by the action of an authorized placement agency.  Thus, the children were not eligible foster children.


Lesson: You cannot take a dependency exemption for a child unless the child is either your biological descendant, the biological descendant of your spouse, or a child placed in your custody by a court order or a placement agency.  An informal private placement is not sufficient, even if done by written agreement.


Observation: The woman in Sharp did a good thing, accepting the custody of two children whose parents were unable to care for them.  She incurred substantial expenses for their benefit. In return, she received no tax deduction and incurred significant unexpected tax liability.  As a cynic might observe, “no good deed goes unpunished.”


Practical Concern: It is easy to say after the fact that the woman in Sharp should have obtained a custody order.  But informal placements of the sort that occurred in Sharp are extremely common among low-income individuals, who often cannot afford to pay attorneys to obtain court orders.  Also, it is possible that the mother, who was willing to make a temporary placement by private agreement, would have refused to agree to a court order.  To insist upon a court order in every case might well make unqualified parents less willing to agree to informal custody placements that are in the best interests of children generally.


Sharp applied the statute correctly as written, but there is a policy argument that the statute is too strict.  Where a taxpayer proves custody by reason of a written placement agreement signed by a child’s parent, and the taxpayer has provided more than 50% of the child’s support, there is a reasonable argument that the child should be a “qualifying child” under federal tax law.  But that is not the law at present.