TAX COURT OPINION

Case: Joseph Robert McGonegal
Docket Number: 5336-13S
Judge: Guy
Opinion Type: bench
Filed: 11/04/2013
Pages: 12

JRN UNITED STATES TAX COURT WASHINGTON, DC 20217 JOSEPH ROBERT MCGONEGAL, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 5336-13S. ) ) ) ) OR D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the trial in the abovecaptioned case before Special Trial Judge Daniel A. Guy, Jr., at Cleveland, Ohio, on October 22, 2013, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, an appropriate decision will be entered. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. November 4, 2013 SERVED Nov 04 2013 Capital Reporting Company 3 1 2 Bench Opinion by Special Trial Judge Daniel A. Guy, Jr. 3 October 22, 2013 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Joseph Robert McGonegal Docket No. 5336-13S THE COURT: The Court :has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This proceeding for the redetermination of a deficiency is a small tax case conducted pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 174 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. 22 Hereinafter in this bench opinion, section references 23 24 25 are to the Internal Revenue Code of 1986, as amended, in effect for 2010, and Rule references are to the Tax Court Rules of Practice and Procedure. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company e oner resrded à Cho d de EmeMe 4 1 petition was filed. When this case was called at the 2 Court's small tax case trial session in Cleveland, 3 Ohio, on October 21, 2013, petitioner appeared pro 4 5 6 7 8 9 se. Nancy P. Klingshirn appeared on behalf of respondent. The parties submitted to the Court a stipulation of facts and related exhibits which were filed and made a part of the record in this case and are incorporated herein by this reference. Respondent determined a deficiency of $3,592 in 10 Petitioner's Federal income tax for 2010 and an 11 12 13 14 15 16 17 18 addition to tax of $74.10 pursuant to section 6651(a) (1). Petitioner filed a timely petition for redetermination with the Court pursuant to section 6213(a). The issues for decision are whether the petitioner is (1) entitled to dependency exemption deductions and child tax credits for two of his children under section 151(c), and (2) liable for an addition to tax under section 6651(a) (1). Consistent 19 with the Court's policy not to use the names of minor 20 21 22 23 children, the Court will refer to the children in question as JPM and DJM, or simply as the two children. See Rule 27(a) (3). Petitioner was divorced from his former spouse, 24 Heidi McGonegal, in 2004. The relevant terms of the 25 divorce were set forth in an Agreed Judgment Entry of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 Divorce entered in the Court of Common Pleas for Cuyahoga County, Ohio, on December 22, 2004, a shared parenting plan, and a Separation and Property Settlement Agreement (separation agreement). 5 Petitioner and his ex-wife signed the separation 6 7 8 9 10 11 12 13 14 15 16 17 18 agreement. The aforementioned documents, in combination, provided a relevant part that petitioner's ex-wife . would have primary residential custody of the couple's three minor children, and that commencing January 1, 2005, petitioner would pay child support to his ex-wife for a specified period of time. Paragraph 7.B. of the separation agreement states in pertinent part: "So long as he is not in default of any support obligation hereunder,***[petitioner) shall have the right to claim each of the minor children***[JPM and DJM] as dependents for tax purposes, whether federal, state or local, and the 19 Wife shall execute Form 3886 or any form required by 20 21 22 23 24 25 federal tax laws to effect this provision." The separation agreement further provided that petitioner's ex-wife would be entitled to claim the couple's third child as a dependent for tax purposes. Petitioner testified that he claimed JPM and DJM as dependents on his Federal income tax returns 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 during the years 2005 through 2009 without encountering any resistance by the Internal Revenue Service (IRS). However, when he attempted to file his 2010 tax return electronically, shortly before 5 April 15, 2011, the return was rejected and the IRS 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 informed him that he would not be able to file the return claiming the two children as dependents unless he attached a copy of the aforementioned separation agreement. On April 26, 2011, petitioner mailed his 2010 tax return to the IRS, claiming dependency exemptions and child tax credits for JPM and DJM. The IRS received and filed the return on May 2, 2011. Although petitioner believed that he sent a copy of the separation agreement with his tax return, respondent's records indicate that the separation agreement was received by the IRS in June 2011. Petitioner testified that he did not include a Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, with his 2010 return because he was not instructed to do so and he had not been required to do so in the staxable years preceding 2010. Petitioner believes that his ex-wife claimed all three of their children as dependents on her tax return for 2010, so that JPM and DJM were claimed as dependents on both parents' 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 returns. Respondent disallowed the dependency exemptions and child tax credits petitioner claimed for JPM and DJM. Petitioner asserts that because he was current 5 with all of his support obligations throughout 2010, 6 7 8 9 he should be permitted to claim the two children as dependents consistent with the terms of the separation agreement. We begin our analysis with the fundamental 10 principle of Federal tax litigation that the 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Commissioner's determinations normally are presumed correct. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In conjunction with this principle, tax deductions and credits are a matter of legislative grace, and the taxpayer bears the burden of proving that he or she is entitled to any deduction or credit claimed. Rule 142(a); Deputy v. duPont, 308 U.S. 488, 493 (1940). An individual is allowed a deduction for an exemption for "each individual who is a dependent (as defined in section 152) of the taxpayer for the taxable year." Sec. 151(c). Section 152 (a) (1) defines the term "dependent" to include "a qualifying child" and the latter term is in turn defined by way of a number of tests prescribed in section 152(c). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 Petitioner concedes that JPM and DJM do not meet the 2 3 4 definition of a qualifying child as set forth in section 152(c) because they did not live with him (i.e., share the same principal place of abode) for 5 more than one-half of 2010. 6 7 8 9 10 11 12 13 14 15 16 17 18 In the case of divorced parents, however, special rules determine which parent is entitled to a dependency exemption deduction for a child. See sec. 152 (e); Espinoza v. Commissioner, T.C. Memo. 2011- 108. Pursuant to section 152(e), when certain criteria are met, a child may be treated as a qualifying child of the noncustodial parent (petitioner), rather than of the custodial parent (petitioner's ex-wife). For a child to be the qualifying child of the noncustodial parent, the custodial parent must sign "a written declaration (in such manner and form as the Secretary may by regulations prescribe) that such custodial parent 19 will not claim such child as a dependent" for a 20 21 22 23 24 25 particular taxable year. Sec. 152(e) (2) (A). The noncustodial parent must then attach the written declaration to his or her Federal income tax return. Sec. 152(e) (2) (B). The IRS's prescribed form for the declaration required by section 152(e) (2) (A) is Form 8332 which 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 requires, inter alia, an unconditional statement by the custodial parent that he or she agrees not to claim the child named therein as a dependent. See sec. 1.152-4 (e) (1) (ii), Income Tax Regs. In the absence of a Form 8332, a noncustodial parent may rely on an equivalent document provided that it conforms to the substance of Form 8332. Id. The narrow question presented in this case is 9 whether the separation agreement, which spells out 10 11 12 13 14 15 16 17 18 19 how petitioner and his ex-wife were to proceed in respect of the dependency exemptions for their three children, serves as the equivalent of a Form 8332. We conclude that it does not. Although petitioner and his ex-wife signed the separation agreement, it does not contain an unconditional declaration by petitioner's ex-wife that she "will not claim" JPM and DJM as dependents for the taxable year 2010. See Shenk v. Commissioner, 140 T.C. No. 10, filed May 6, 2013, 20 slip op. at 9-10 (holding that a custodial parent 21 must declare, in the words of section 152(e) (2) (A), 22 23 24 25 that she "will not claim" the child as a dependent for a taxable year). The separation agreement that petitioner relies upon does not include the necessary language indicating that his ex-wife is relinquishing 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company her claim to the dependency exemptions. Indeed, petitioner believes that his ex-wife claimed all three of their children as dependents on her 2010 tax 10 return. Moreover, the separation agreement in this case, like the judgment of divorce at issue in Shenk, provides that petitioner's entitlement to the dependency exemptions for the two children is conditional, i.e., he must not be in default of any support obligation. In this respect, the separation agreement does not conform to the substance of Form 8332. See Shenk v. Commissioner, slip op. at 10 n.3, citing Armstrong v. Commissioner, 139 T.C. 468, 473- 474 (2012), for the proposition that only a written declaration that is unconditional conforms with the substance of Form 8332. Consistent with the preceding discussion, we hold that JPM and DJM are not petitioner's qualifying children for 2010 under section 152(c) or (e). It follows that he is not entitled to the dependency exemptions that he claimed. A taxpayer is entitled to a child tax credit for "each qualifying child", as defined in section 152, who has not reached the age of 17. Sec. 24 (a), (c) (1). Given our determination that neither JPM nor 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 DJM is a "qualifying child" of petitioner under section 152 for the year at issue, it follows that petitioner is not entitled to a child tax credit for either of the two children for that year. Section 6651(a) (1) imposes an addition to tax for the failure to file a return by its due date. The addition equals 5 percent for each month or fraction thereof that the return is late, not to exceed 25 percent. In the absence of an extension, the last date for petitioner to have timely filed his Federal income tax return for 2010 was Friday, April 15, 2011. See sec. 6072 (a). Respondent has proven that petitioner's 2010 Federal income tax return was not received and filed until May 2, 2011, 17 days after it was due. Therefore, respondent has discharged his burden of production under section 7491(c). "A failure to file a tax return on the date prescribed leads to a mandatory penalty unless the taxpayer shows that such failure was due to reasonable cause and not due to willful neglect." McMahan v. Commissioner, 114 F.3d 366, 368 (2d Cir. 1997), aff'g T.C. Memo. 1995-547. A showing of reasonable cause requires a taxpayer to show that he or she exercised "ordinary business care and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 9 10 11 prudence" but was nevertheless unable to file the return within the prescribed time. United States v. Boyle, 469 U.S. 241, 246 (1985); sec. 301.6651- 1(c) (1), Proced. & Admin. Regs. Petitioner testified credibly that he attempted to timely file his tax return electronically, but the IRS rejected it because he failed to include the documentation necessary to support the dependency exemptions he claimed for JPM and DJM. Although he was surprised by this development, he promptly obtained a copy of the separation agreement and 12 mailed his tax return to the IRS on April 26, 2011. 13 14 15 16 17 18 19 20 21 22 23 24 25 We are persuaded, considering all the facts and circumstances, that petitioner made an honest and good faith effort to file his tax return on time. On the record presented, we conclude that petitioner exercised "ordinary business care and prudence" but was nevertheless unable to file the return by the due date. Therefore, he is not liable for the addition to tax in dispute. Consistent with the preceding discussion, an appropriate decision will be entered. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 3:23 p.m., the above-entitled 866.488.DEPO www.CapitalReportingCompany.com 1 2 3 4 5 6 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Capital Reporting Company 13 matter was concluded.) 866.488.DEPO www.CapitalReportingCompany.com