IRS Will Not Follow Case That Allowed Taxpayer Filing Married Filing Separate to Claim Earned Income Tax Credit

In the case of Tsehay v. Commissioner, TC Memo 2016-200, the Tax Court held that a taxpayer with a filing status of married filing separately nevertheless was eligible to claim an earned income tax credit under IRC §32.  However, the IRS in Action on Decision 2017-05 (AOD 2017-05) announced that the agency will not acquiesce in this decision.

The original case involved an individual who filed a return with a married filing separate status.  The IRS had challenged whether he was married in asking that he produce a Form 8332 signed by what the IRS viewed as his former spouse.  However, the Court found Mr. Tsehay was married:

Although the record in this case is meager, we found petitioner to be a credible witness. See Diaz v. Commissioner, 58 T.C. 560, 564 (1972) (stating that the process of distilling truth from the testimony of witnesses, whose demeanor we observe and whose credibility we evaluate, is the daily grist of judicial life). Petitioner testified that although he and his wife had previously been separated and he had at times been ordered to pay child support, for 2013 he was married and living in public housing with his wife and their children.

From the case, it appears the IRS was totally focused on the question of whether Mr. Tsehay could claim dependency exemptions for his children and did not argue for any alternative reason why Mr. Tsehay should not be allowed an earned income tax credit.  Thus, the opinion held:

Section 32(a)(1) provides an eligible individual with an earned income credit against the individual’s income tax liability, subject to a phaseout explained in section 32(a)(2). The amount of the credit to which an eligible individual is entitled increases if the individual has a qualifying child. Sec. 32(b), (c)(3). Because he had “three or more” qualifying children for tax year 2013, petitioner is entitled to the earned income credit. Sec. 32(b).

However, the Court did not address a provision found at IRC §32(d) which provides:

(d) Married individuals

In the case of an individual who is married (within the meaning of section 7703), this section shall apply only if a joint return is filed for the taxable year under section 6013.

The IRS decided that they needed to address this holding even though they apparently hadn’t raised an objection at trial (and, thus, were likely barred from raising that issue on appeal from the decision).  The AOD simply provides that the IRS will not follow this decision—and, frankly, it is doubtful any other court will accept the holding if the IRS raises the obvious objection.