UNITED STATES TAX COURT

139 T.C. No. 1

UNITED STATES TAX COURT

LEAH M. CARLEBACH AND URIEL FRIED, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 19291-10.

Filed July 19, 2012.

Ps, calendar year taxpayers, and their children resided in Israel

during the years in issue. R determined that Ps' children may not be

claimed as dependents until they meet the citizenship test specified in

I.R.C. sec. 152, as elaborated in sec. 1.152-2(a)(1), Income Tax Regs.

Ps argue that the regulation, requiring that children be citizens at some

time during the calendar year for which the child is claimed as a

dependent, is invalid and that the children qualify as dependents for

both dependency exemption deductions and accompanying credits

because, at the time the returns were filed, they were citizens.

Alternatively, Ps argue that the children possessed derivative

citizenship during the calendar years in issue and thus qùalified. R

disagrees. R disallowed a child care credit claimed by P-W for one

year because she did not meet the requirement of filing a joint return.

R imposed on Ps accuracy-related penalties and additions to tax for

late filing.

ED JUL J g

-21. Held: Sec. 1.152-2(a)(1), Income Tax Regs., is valid. Ps

could not claim a child as a dependent for calendar years before that

child obtained h s or her certificate of citizenship.

2. Held, further, P-W is not eligible for a child care credit for

2008 because she did not file a joint return.

3. Held, further, penalties and additions to tax are sustained.

Elissa F. Borges, Saul B. Abrams, and Stuart M. Schabes, for petitioners.

Stephen C. Huaes and Jeffrey E. Gold, for respondent.

HALPERN, Judg'e: This case involves two notices of deficiency (together,

notices). By the first n tice, respondent determined deficiencies, additions to tax,

and penalties with respe t to petitioners' joint Federal income tax, as follows:

Year

2004

2005

2006

.

Deficiency

Addition to tax

Sec. 6651(a)(1)

$4,696

6,296

. 5,811

$424

595

527

Penalty

Sec. 6662(a)

.

$939

1,259

1,162

By the second notice, respondent determined deficiencies, additions to tax,

and penalties with respect to petitioner Carlebach's individual Federal income tax, as

follows:

-3Year

Deficiency

Addition to tax

Sec. 6651(a)(1)

2007

2008

$5,168

9,062

$523

-0-

Penalty

Sec. 6662(a)

$1,034

1,812

The issues for decision with respect to petitioners for 2004 through 2006 are

whether, on account of their children, they are entitled to dependency exemption

deductions, child care credits, a child tax credit (for 2005), and additional child tax

credits; also whether they are liable for additions to tax for late filing and accuracyrelated penalties.

After concessions, the issues remaining for decision with respect to petitioner

Carlebach for 2007 and 2008 are whether, for 2007, on account of two of her

children, she is entitled to dependency exemption deductions and an additional child

tax credit; also, for 2007, whether she is liable for an addition to tax for late filing

and an accuracy-related penalty and, for 2008, whether she is entitled to a child care

credit.

Simplifying somewhat, thé denominator common to the deduction and credit

issues is whether a child, to qualify as a dependent for a parent's taxable (calendar)

year, must be a U.S. citizen or a resident at some time during that year. The answer

is "yes".

Unless otherwise indicated, all section references are to the Internal Revenue

Code in effect for the years in issue, and all Rule references are to the Tax Court

Rules of Practice and Procedure.1 We round all dollar amounts to the nearest dollar.

Petitioners bear the burden of proof. See Rule 142(a)(1).2

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of

facts, with accompanying exhibits, is incorporated herein by this reference.

Petitioners resided in Israel at the time they filed the petition.

Petitioners' Family

Petitioners have been married since 1990. Petitioner Carlebach was born in

1968 in the United States and is a U.S. citizen. She has resided in the United States

for less than two years since age 14 and has resided in the United States for less

1Secs. 21, 24, 151 and 152, sections important to this case, were different as

applicable to 2004 and as applicable to 2005 through 2008. The differences are not

important to resolution of the issues here presented, and we shall refer only to the

provisions of those sections applicable to the latter years.

2The burden of proof plays little role in our analysis. Nevertheless,

petitioners have not raised the issue of sec. 7491(a), which shifts the burden of proof

to the Commissioner in certain situations. We conclude that sec. 7491(a) does not

apply because petitioners have not produced any evidence that they have satisfied

the preconditions for its application. See sec. 7491(a)(2).

-5than five years in total. Her parents were also born in the United States and are U.S.

citizens. Her mother has resided in the United States for more than five years in total

and, since reaching the age of 14, has resided in the United States for more than two

years in total. Petitioner Fried was born in Israel in 1968 and is not a citizen of the

United States, nor has he ever resided in the United States.

Petitioners have six children--by initials, C.B.F., R.F., S.F., E.A.F., Y.F., and

N.F. (collectively, children)--all of whom were born in Israel. During the years in

issue, petitioners and the children resided in Israel. The children have never resided

in the United States. The oldest of the children, C.B.F., was born in 1993. In June

2007, the Director of the United States Citizen and Immigration Services,

Department of Homeland Security (director), granted certificates of citizenship to

four of the children, R.F., E.A.F., Y.F., and N.F., who were then in the United States

and who applied for, and were issued, Social Security cards. In April 2008, the

director granted certificates of citizenship to the remaining two children, C.B.F. and

S.F., who were then in the United States and who applied for, and were issued,

Social Security cards.

Petitioners' Joint Federal Income Tax Returns

In December 2007, petitioners filed three Forms 1040A, U.S. Individual

Income Tax Return, one each for 2004, 2005, and 2006, showing on each their filing

-6status to be "married fil ng jointly". On each, they claimed dependency exemption

deductions--three for 2004 (for R.F., E.A.F., and Y.F.) and four for 2005 and 2006

(adding N.F.)--a child care credit and an additional child tax credit. They also

claimed a child tax credit for 2005.3 On each return, they reported an overpayment

of tax and claimed a re

d.

Petitioner Carlebach's Federal Income.Tax Returns

In October 2008, petitioner Carlebach filed a Form 1040A for 2007, showing

her filing status to be ''single". On that return, she claimed six dependency 042

exemption deductions and an additional child tax credit of $2,555. She also reported

an overpayment of tax and claimed a refund.

In June 2009, petitioner Carlebach filed a Form 1040A for 2008, showing her

filing status to be "marri d filing separately". On that return, she claimed six

dependency exemption d ductions, a child care credit, an additional child tax credit,

and a recovery rebate credit. She also reported an overpayment of tax and claimed a

refund.

3The stipulation of facts erroneously states that the child tax credit was

claimed for 2006; it is contradicted by the 2005 and 2006 Forms 1040A.

-7Refunds

In January 2008, the Internal Revenue Service (IRS) made refunds to

petitioners for 2004, 2005, and 2006. In March 2009, the IRS made a refund to

petitioner Carlebach for 2007.. Because of this litigation, the IRS has made no refund

to her for 2008.

Notices

In each notice, respondent disallowed the claimed dependency exemption

deductions and credits described above on the basis that none of the children met the

definition of "qualifying child" under section 152. Respondent also determined

section 6651(a)(1) additions to tax and section 6662(a) penalties with respect to

petitioners for 2004-06 and with respect to petitioner Carlebach for 2007 and 2008

(since conceding the addition to tax and penalty for 2008).

OPINION

I. Dependency Exemption Deductions

A. Applicable Law

Section 151(a) and (c) allows a taxpayer an exemption deduction for each

"dependent" as defined in section 152. "The term 'dependent' does not include an

individual who is not a citizen or national of the United States unless such individual

is a resident of the United States or a country contiguous to the United States." Sec.

152(b)(3)(A) (citizensh p test). In pertinent part, section 1.152-2(a)(1), Income Tax

Regs., provides: "to qualify as a dependent an individual must be a citizen or

resident of the United States * * * at some time during the calendar year in which the

taxable year of the taxpayer begins." The parties dispute only when the citizenship

test must be satisfied in order that petitioners may claim the children as dependents.

B. Respondent's Position

Respondent argues that petitioners are not entitled to the dependency

exemption deductions claimed for 2004-07, because some or all of the children were

not U.S. citizens in the t

(calendar) years for which they were claimed as

dependents. More specifically, he asserts that none of the children met the

citizenship test for 2004, 2005, or 2006, and only four of the six met the citizenship

test for 2007, because th children did not become citizens until they received their

certificates of citizenship. He contends that, without the children's having satisfied

the citizenship test, petitioners are not entitled to the dependency exemption

deductions, nor are they allowed the child-related credits, which require that the

children satisfy the same statutory test.

-9C. Petitioners' Position4

Petitioners argue that they are entitled to the dependency exemption

deductions for 2004-07 because the children were citizens at the time petitioners

filed tax returns for those years. They claim that section 1.152-2(a)(1), Income Tax

Regs., which requires that an individual be a citizen at some time during the calendar

year in which begins the taxable year of the taxpayer claiming the individual as a

dependent, is invalid. Employing the analysis set out in Chevron U.S.A., Inc. v.

Natural Res. Def. Council, Inc., 467 U.S. 837 (1984) (Chevron), petitioners claim

that section 152(b)(3)(A) is unambiguous and that Congress specifically addressed

the temporal requirement of citizenship by declining to require that an individual be a

citizen "at some time during the calendar year in which the taxable year of the

taxpaver begins in order to be a dependent."

Alternatively, petitioners argue that the children satisfied the citizenship test

for 2004-07 because each child "had derivative citizenship 'at some time' during the

tax years in which he or she was claimed as a dependent." Thus, petitioners assert

that the children "satisfied the citizenship test for each of the tax years in question

4Unless otherwise noted, we use the term "petitioners" collectively to refer to

both petitioners to the notice issued to both of them (for 2004-06) and to petitioner

Carlebach, the sole petitioner to the notice issued to her alone (for 2007 and 2008).

- 10 except for the formality of traveling to the United States to receive their certificates

of citizenship." We ad ess their last argument first.

D. Discussion

1. Derivative Citizenship Claim

There are "two sources of citizenship, and two only: birth and naturalization."

United States v. Wong Kim Ark, 169 U.S. 649, 702 (1898).5 Under the Fourteenth

Amendment to the Constitution, "[e]very person born in the United States, and

subject to the jurisdiction thereof, becomes at once a citizen of the United States, and

needs no naturalization." Id. Individuals born outside the United States may "only

become a citizen by being naturalized, either by treaty * * * or by authority of

Congress". Id. at 702-7 3. Congress' authority to "establish a uniform Rule of

Naturalization" is found

U.S. citizenship o

er Article I, Section 8, Clause 4 of the Constitution.

ined by virtue of the status of one's parent or grandparent

as a U.S. citizen is sometimes referred to as derivative citizenship. See, e.g.,

Guzman v. U.S. Dept. of Homeland Sec., 679 F.3d 425 (6th Cir. 2012) ("The Child

5The Immigration d Nationality Act elaborates the rules for at-birth

citizenship, 8 U.S.C. secs. 1401-1409 (2012), and naturalization, id. secs. 14211458.

- 11 Citizenship ActW allows a child to achieve derivative citizenship where only one

parent is a U.S. citizen" (internal quotation mark omitted)).

A child of a U.S. citizen (1) born outside the United States and (2) residing

permanently in the United States becomes a citizen automatically when certain

additional conditions are fulfilled. 8 U.S.C. sec. 1431 (2012). Children who

regularly reside outside the United States may qualify for naturalization under 8

U.S.C. sec. 1433 (2012).7 In pertinent part, 8 U.S.C. sec. 1433 provides:

SEC. 1433. CHILDREN BORN AND RESIDING OUTSIDE THE

UNITED STATES; CONDITIONS FOR ACQUIRING

CERTIFICATE OF CITIZENSHIP.

(a) Application by citizen parents; requirements.

A parent who is a citizen of the United States (or, if the citizen

parent has died during the preceding 5 years, a citizen grandparent or

citizen legal guardian) may apply for naturalization on behalf of a child

born outside of the United States who has not acquired citizenship

automatically under section 1431 of this title. The Attorney General

shall issue a certificate of citizenship to such applicant upon proof, to

6The Child Citizenship Act of 2000 (CCA), Pub. L. No. 106-395, secs. 101

and 102, 114 Stat. at 1631, amended secs. 320 and 322 of the Immigration and

Nationalization Act (8 U.S.C. secs. 1431 and 1433), governing the acquisition of

citizenship by certain children born outside the United States. _S_ee H.R. Rept. No.

106-852, at 3 (2000), 2000 U.S.C.C.A.N. 1499, 1502.

7Since the children, although born outside the United States, have not resided

permanently in the United States, we are concerned only with the provisions of 8

U.S.C. sec. 1433 and not with the provisions of 8 U.S.C. sec. 1431.

- 12 the satisfaction of the Attorney General, that the following conditions

have been fulfilled:

(1) At least one parent (or, at the time of his or her death, was) is W a

citizen of the United States, whether by birth or naturalization.

(2) The United States citizen parent-(A) has (or, at the time of his or her death, had) been physically

present in the United States or its outlying possessions for a period or

periods totaling not less than five years, at least two of.which were after

attaining the age of fourteen years; or

(B) has (or, at the time of his or her death, had) a citizen parent

who has been physically present in the United States or its outlying

possessions for a period or periods totaling not less than five years, at

least two of whichl were after attaining the age of fourteen years.

(3) The child is under the age of eighteen years.

(4) The child is residing outside of the United States in the legal

and physical custo y of the applicant (or, if the citizen parent is

deceased, an individual who does not object to the application).

(5) The chil is temporarily present in the United States pursuant

to a lawful admission, and is maintaining such lawful status.

(b) Attainment of citizenship status; receipt of certificate.

Upon approval of the application (which may be filed from

abroad) and, except as provided in the last sentence of section 1448(a)

of this title, upon taking and subscribing before an officer of the Service

within the United States to the oath of allegiance required by this

chapter of an applicant for naturalization, the child shall become a

- 13 citizen of the United States and shall be furnished by the Attorney

General with a certificate of citizenship.

1So in the original.

As is apparent from the statute, citizenship acquired pursuant to 8 U.S.C. sec.

1433 is not acquired automatically, but pursuant to application. See H.R. Rept. No.

106-852, at 5 (2000), 2000 U.S.C.C.A.N. 1499, 1502 ("The bill [which became the

CCA] further provides that foreign-born children of U.S. parents who are temporarily

present in the United States but intend to reside abroad will continue to be eligible to

apply for citizenship as they do under current law."). An application for citizenship

made under 8 U.S.C. sec. 1433 must be approved by the Attorney General, and the

applicant must appear in the United States and, unless the requirement is waived

(e.g., because of the age of the child), take an oath of allegiance before the certificate

of citizenship may be conferred. 8 U.S.C. secs. 1433(b), 1448. Despite petitioner

Carlebach's having pursuant to 8 U.S.C. sec. 1433(a) made application on behalf of

her children for naturalization, and the children's having fulfilled all of the conditions

set forth in 8 U.S.C. sec. 1433(a)(1) through (5), the children could not receive their

certificates of citizenship until they personally appeared before the Attorney General

(or his duly appointed representative) in the United States in 2007 and 2008. Other

- 14 courts have recognized that the conferral of a certificate of citizenship is "ministerial

rather than discretion

." Harriott v. Ashcroft, 277 F. Supp. 2d 538, 543 (E.D. Pa.

2003). However, no matter how insignificant the appearance and subsequent oath

may seem, those elements are mandated by Congress, which, except in cases

governed by treaty, has the sole authority to govern the process by which those born

abroad may become nat ralized citizens. See Wona Kim Ark, 169 U.S. at 702-703.

Finally, as illustrated by the children's certificates, which are in evidence, the actual

certificate itself recognizes that citizenship is conferred only at the time the

certificate is bestowed. Thus,

hile the children may have derived their citizenship

from the status of their mother and grandparents as citizens, they did not become

citizens until they were i the United States in 2007 and 2008 and fulfilled all of the

conditions of 8 U.S.C. s . 1433.

2. Chevron

alysis

Petitioners princip 11y argue that section 1.152-2(a)(1), Income Tax Regs., is

invalid. They contend tl1 section 152(b)(3)(A) simply provides that a dependent

"does not include an indi idual who is not a citizen or national of the United States"

and that it includes no requirement that a child be a citizen at some time during the

calendar year in which begins the taxable year of the taxpayer claiming the individual

as a dependent. They argue, therefore, that, because the children were citizens at the

- 15 time petitioners filed their returns, they are entitled to the claimed dependency

exemption deductions, and that any additional requirement imposed by the regulations

is invalid.8

Last year, the U.S. Supreme Court confirmed that courts apply Chevron

deference to Treasury regulations. See Mayo Found. for Med. Educ. and Research v.

United States, 562 U.S. __, ____, 131 S. Ct. 704, 711-713 (2011). Determining

whether a Treasury regulation merits Chevron deference often involves a two-step

process: We first determine whether Congress has directly spoken to the precise

question at issue. Chevron, 467 U.S. at 842. If the answer is yes, we must give

effect to congressional intent. Id. at 842-843. We make the determination as to

whether Congress has directly spoken "employing traditional tools of statutory

construction". United States v. Home Concrete & Supply, LLC, 566 U.S. _, _, 132

S. Ct. 1836, 1844 (2012) (citing Chevron, 467 U.S. at 843 n.9). If, employing those

tools, we determine that Congress has not directly spoken to the precise question at

issue, we proceed to the second Chevron step, to determine whether the agency's

8While petitioners appear to restrict themselves to arguing that the children

can be claimed as dependents if they are citizens at the time petitioners filed their

returns, their logic (based on the absence of a time constraint on citizenship in sec.

152(b)(3)(A)) is not so restricted, and it would seem to allow the retroactive

qualification of a dependent (as a citizen) at any time within the period of limitations

(to file an amended return).

- 16 chosen interpretation is a "reasonable interpretation" of the enacted statutory text.

Chevron, 467 U.S. at 843-844. If it is a reasonable interpretation, the regulation will

stand. It will be ruled invalid only if it is found to be "'arbitrary or capricious in

substance, or manifestly contrary to the statute.'" Mayo Found., 562 U.S. at __, 131

S. Ct. at 711 (quoting Household Credit Servs., Inc. v. Pfennig, 541 U.S. 232, 242

(2004)).

Petitioners claim that section 152(b)(3)(A) unambiguously does not require that

an individual be a citizen at some time during the calendar year in which begins the

taxable year of the taxpayer claiming the individual as a dependent. They cite as

dispositive the omission om section 152(b)(3)(A) of that requirement by pointing out

that Congress expressly required that many other elements of section 152 be fulfilled

within the taxable year (e.g., the principal place of abode, age, and support tests) but

did not similarly extend at requirement to the citizenship test. In support of their

contention, petitioners ci Russello v. United States, 464 U.S. 16, 23 (1983), in

which the U.S. Supreme Court stated: "[W]here Congress includes particular

language in one section of a statute but omits it in another section of the same Act, it

is generally presumed that Congress acts intentionally and purposely in the disparate

inclusion or exclusion." Therefore, they claim that section 1.152-2(a)(1), Income Tax

- 17 Regs., which imposes that similar temporal requirement on section 152(b)(3)(A), is an

invalid agency interpretation of the statute.

Arguably, section 152(b)(3)(A) is, as petitioners claim, unambiguous. In our

view, however, the statute can only be read as being consistent with, not contrary to,

section 1.152-2(a)(1), Income Tax Regs. Petitioners' argument is based on context

(the omission of a temporal requirement with respect to citizenship is significant

because Congress included the requirement in other elements of section 152). Indeed,

context is critical. In determining statutory meaning, the U.S. Supreme Court has

cautioned against confining the examination to the particular language in isolation.

FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 132 (2000). It

explained: "The meaning-or ambiguity-ofcertain words or phrases may only

become evident when placed in context." E It added: '"It is a fundamental canon of

statutory construction that the words of a statute must be read in their context and

with a view to their place in the overall statutory scheme.'" E at 133 (quoting Davis

v. Mich. Dept. of Treasury, 489 U.S. 803, 809 (1989). Applying a contextual

analysis, we think it plain that Congress did not intend section 152(b)(3)(A) to be

read in a manner inconsistent with section 1.152-2(a)(1), Income Tax Regs..

We must interpret section 152(b)(3)(A) in the context of subtitle A of the

Internal Revenue Code, which deals with income taxes, and in which the concept of

- 18 an annual accounting system is deeply embedded. See secs. 441(a), 451(a), 461(a).9

The U.S. Supreme Court has emphasized the role of an annual accounting system in

Federal income tax:

Congress has enacted an annual accounting system under which

income is count up at the end of each year. It would be disruptive of

an orderly colle ion ofthe revenue to rule that the accounting must be

done over again to reflect events occurring after the year for which the

accounting is ma e, .and would violate the spirit of the annual

accounting system. This basic principle cannot be changed simply

because it is of vantage to a taxpayer or to the Government in a

particular case th a different rule be followed.

Healy v. Commissioner, 345 U.S. 278, 284-285 (1953). In the narrower context of

section 152 and its immediate environs (part V, subchapter B, chapter 1, subtitle A

of the Internal Revenue Code), the allowance as deductions of additional

exemptions for depende s (including qua ified children) is cast in terms of an

additional exemption "for each individual who is a dependent * * * of the taxpayer

for the taxable year." See. 151(c) (emphasis added). Likewise, the qualification

"taxable year" appears o er 30 times in section 152 (2008), and it is anomalous to

think that the determination of whether a qualifying child or relative is, on account of

the citizenship test, a dependent of a taxpayer for a taxable year of that individual

9See also sec. 11 ( posing a tax "for each taxable year on the taxable income

of every corporation"); sec. 162 (allowing "as a deduction all the ordinary and

necessary expenses paid or incurred during the taxable year in carrying on any trade

or business").

- 19 could be unknown for, at least in theory, an indefinite period.1° Generally, a Federal

income tax return reflects the events that affect income during the taxable yeai. for

which it is filed." Four of petitioners' children were naturalized and became U.S.

citizens in 2007, and yet petitioners claimed them as dependents on their 2004

through 2006 income tax returns, despite the fact that those children had not yet

become citizens. The other two children became citizens in 2008 and yet were

claimed as dependents in 2007. Allowing petitioners dependency exemption

deductions with accompanying credits for children failing to meet the citizenship

test--as construed in section 1.152-2(a)(1), Income Tax Regs.--would be violative of

Congress' expressed preference in the income tax provisions of the Internal Revenue

Code for a system of annual accounting.

Even if we concede that section 152(b)(3)(A) is ambiguous regarding the

time at which the alleged dependent must achieve citizenship, we reach the same

result under Chevron step 2. In the light of the Federal income tax law's

1°See supra note 8.

"See also Burnet v. Sanford & Brooks Co., 282 U.S. 359, 363-366 (1931)

(confirming that the income tax acts enacted by Congress imposed annual, rather

than transactional, accounting for income). When the strict application of the annual

accounting system results in what may be perceived as an inequitable result,

Congress can act to remedy any inequity, as evidenced by the net operating loss

carryback and carryover rules found in sec. 172 and the capital loss carryback and

carryover rules found in sec. 1212.

- 20 embodiment of a systenh of annual accounting, it is beyond dispute that section 1.1522(a)(1), Income Tax Regs., is reasonable and "based on a permissible construction of

the statute." Chevron, 467 U.S. at 843. And while "'neither antiquity nor

contemporaneity with [a] statute is a condition of [a regulation's] validity'", Mayo

Found., 562 U.S. at _, 131 S. Ct. at 712 (quoting Smiley v. Citibank (South Dakota),

N.A., 517 U.S. 735, 740 (1996)), "To be sure, agency interpretations that are of long

standing come before us with a certain credential of reasonableness, since it is rare

that error would long persist", Smiley, 517 U.S. at 740. Section 1.152-2(a)(1),

Income Tax Regs., gains legitimacy from the fact that the*temporal requirement

contained therein is longstanding, having been in the regulations since 1944. See sec.

29.25-3(b), Regs. 111 (1944). In 1949, following notice and comment procedures,

the Secretary amended section 29.25-3, Regs. 111, to restate much of the language

from the 1944 regulations, including the temporal requirement contained therein.

Income Tax; Taxable Years Beginning After Dec. 31, 1947, 13 Fed. Reg. 6289

(proposed Oct. 27, 1948); T.D. 5687, 1949-1 C.B. 9, 21.

We hold that section 1.152-2(a)(1), Income Tax Regs., is valid.

-213. Conclusion

We find that, for failure to satisfy the citizenship test, none of the children

qualified as petitioners' dependents for 2004-06, and two of the six children did not

qualify as petitioner Carlebach's dependents for 2007. The remaining four children

qualified as petitioner Carlebach's dependents for 2007. Therefore, petitioners are

entitled to no dependency exemption deductions for 2004-06, and petitioner

Carlebach is entitled to four dependency exemption deductions for 2007."

II. Child Care Credit, Child Tax Credit, and Additional Child Tax Credit

In order for a taxpayer to claim a section 21 credit for expenses for household

and dependent care services necessary for gainful employment (child care credit), a

taxpayer must incur employment-related expenses on behalf of, as pertinent to this

case, a dependent of the taxpayer as defined in section 152(a)(1)? Sec. 21(b)(1)(A).

Additionally, married taxpayers must file a joint return. Sec. 21(e)(2).

"We today decide another citizenship test case consistently. Stern v.

Commissioner, T.C. Memo. 2012-204.

"Petitioners apparently concede that, in determining whether the children

were qualifying children and, thus, dependents under sec. 152(a)(1), we take into

account the citizenship test in sec. 152(b)(3)(A).

- 22 In order to claim the child tax credit and additional child tax credits, section 24,

in relevant part, requires that a child be a "qualifying child", applying a modified

version of the citizenship test. See.sec. 24(a), (c).

Because we have determined that the children only met the citizenship test for

the year in which they received their certificates of citizenship (2007 for R.F., E.A.F.,

Y.F., and N.F., and 2008 for C.B.F. and S.F.), we sustain respondent's disallowance

of those credits relating to R.F., E.A.F., Y.F., and N.F. for 2004, 2005, and 2006 and

the disallowance of those credits relating to C.B.F. and S.F. for 2007.

For 2008, respondent concedes that each child satisfied the citizenship test but

argues that petitioner Carlebach is not entitled to the child care credit because,

although married at the tinie, she did not file a joint return. See sec. 21(e). Petitioner

Carlebach claims that she is so entitled. She argues that, in contravention of section

7522, which requires that a notice of deficiency "describe the basis for, and identify

the amounts (if any) of, the tax due, interest" and other items included in the notice,

respondent changed the basis for the disallowance of the 2008 child care credit from a

section 152 violation in the second notice to a section 21(e) violation in his posttrial

brief. She further argues that respondent's reliance on section 21(e) as an alternative

basis for the disallowance is forbidden as "late-in-the-day maneuvering."

- 23 While the first sentence of section 7522(a) does indeed require that a notice of

deficiency give notice as described by petitioner Carlebach, the second sentence of

that section adds: "An inadequate description under the preceding sentence shall not

invalidate such notice." Moreover, we have held that section 7522(a) does not

require the Commissioner to identify the specific statutory provision supporting each

adjustment in the notice of deficiency, nor is he required to lay out the factual basis

for his determination in that notice. E.g, Cadwell v. Commissioner, 136 T.C. 38, 49

(2011), affd, _ Fed. Appx. _ (4th Cir. June 20, 2012).

In pertinent part, Rule 142(a)(1) provides that, in respect to any new matter

pleaded in the answer, the burden of proof shall be on respondent. Even if we were

to consider respondent's argument a new matter (which we do not), the burden of

proof would not be determinative, since petitioner Carlebach's 2008 Form 1040A,

showing her filing status as married filing separately, is stipulated.

At worst, respondent has a new theory, and "A 'new theory' is just a new

argument about the existing evidence and is thus allowed." Hurst v. Commissioner,

124 T.C. 16, 29 (2005). Although respondent's new theory was first advanced on

brief, petitioner Carlebach has had (and indeed took advantage of) the opportunity to

address it in her answering brief. We see no disadvantage to petitioners requiring any

remedy.

- 24 Because petitioner Carlebach did not file a joint return with her husband for

2008, she is not entitled to a child care credit for that year. See sec. 21(e)(2).

Accordingly, we sustain respondent's disallowance of that credit for 2008.

III. Additions to Tax and Penalties

.

A. Accuracy-Related Penalties

1. Applicable Law

Section 6662(a)

.

. .

d (b) provides for the imposition of an accuracy-related

penalty equal to 20% of any portion of an:underpayment attributable to, among other

things, negligence or disregard of rules or regulations (without distinction,

negligence), or any substantial understatement of income tax.

In general, an understatement is the excess of the amount of the tax required to

be shown on the return f r the taxable year over the amount of the tax imposed that is

shown on the return reduced by any rebate. Sec. 6662(d)(2)(A). For an individual,

such an understatement i "substantial" when it exceeds the greater of (1) 10% of the

tax required to be shown or (2) $5,000. Sec. 6662(d)(1)(A). "The term 'negligence'

includes any failure to make a reasonable attempt to comply with the provisions of

* * * [the Internal Revenue Code], and the term 'disregard' includes any careless,

reckless, or intentional disregard." Sec. 6662(c). Negligence has.been generally

defined as lack of due care or failure to do what a reasonably prudent person would

- 25 do under like circumstances. See, e.g., Hofstetter v. Commissioner, 98 T.C. 695, 704

(1992).

Section 6664(c)(1) provides that the accuracy-related penalty shall.not be

imposed with respect to any portion of an underpayment if it is shown that there was

reasonable cause for that portion and the taxpayer acted in good faith with respect to

that portion.

The determination of whether a taxpayer acted with reasonable cause

and in good faith is made on a case-by-case basis, taking into account all

pertinent facts and circumstances. * * * Circumstances that may

indicate reasonable cause and good faith include an honest

misunderstanding of * * * law that is reasonable in light of all of the facts

and circumstances, including the experience, knowledge, and education

of the taxpayer. * * *

Sec. 1.6664-4(b)(1), Income Tax Regs.

Respondent determined that petitioners are liable for accuracy-related penalties

on the basis of negligence for 2004 and on the basis of negligence and substantial

understatement for 2005 and 2006. He also determined that petitioner Carlebach is

liable for accuracy-related penalties on the basis of negligence for 2007 and 2008 but

subsequently conceded the penalty for 2008.

Only one accuracy-related penalty may be applied with respect to any given

portion of an underpayment, even if that portion is subject to the penalty on more than

- 26 one of the grounds set out in section 6662(b). Sec. 1.6662-2(c), Income Tax

Regs.

Under section 7491(c), the Commissioner bears the burden of production with

regard to penalties, additions to tax, or additional amounts and must come forward

with sufficient evidence indicating that it is proper to impose the penalty or addition.

Kaufman v. Commissioner, 136 T.C. 294, 323 (2011). However, once the

Commissioner has met the burden ofproduction, the burden of proof remains with the

taxpayer, including the burden of proving that the penalties or additions are

inappropriate because of reasonable cause. Id.

2. Analysis

a. E idence of Negligence

Respondent has met his burden with respect to the ground of negligence for

2004-07 by establishing t at petitioners; in claiming exemption deductions and credits

for children who did not meet the citizenship test; were negligent and disregarded the

applicable regulation. Ac ordingly, petitioners are liable for the section 6662(a)

penalty on the ground of egligence for tax years 2004-07 unless they meet the

section 6664(c) exception for reasonable cause and good-faith. Because of section

1.6662-2(c), Income Tax Regs., we need not address the applicability of the penalty

- 27 based upon the ground of substantial understatement of income tax for 2005 and

2006.

b. Reasonable Cause and Good Faith Defense

Petitioners failed to prove that they acted with reasonable cause and good faith

in claiming the deductions and credits at issue herein. They claim that they "were

acting in good faith. * * * [They] had no familiarity with United States Income Tax

and acted in accordance with what they believed the law to be." However, petitioners

claimed deductions in violation of a valid regulation. Petitioners have offered no

evidence to demonstrate reasonable cause for their position. Their argument

regarding the invalidity of the regulation did not surface until litigation commenced,

and they presented no evidence of reliance on a tax professional for the decision to

claim those dependency exemption deductions and accompanying credits. A

taxpayer's ignorance of the law is no excuse for failure to comply with it. ,,

McGehee Family Clinic, P.A. v. Commissioner, T.C. Memo. 2010-202; see also

United States v. Int'l Minerals & Chem. Corp., 402 U.S. 558, 563 (1971) ("The

principle that ignorance of the law is no defense applies whether the law be a statute

or a duly promulgated and published regulation."); Barlow v. United States, 32 U.S.

404, 411 (1833) (ignorance of the law is no excuse in either civil or criminal cases).

-283. Conclusion

We find no credi le evidence that petitioners acted in good faith in claiming

dependency exemption deductions and accompanying credits for children who had yet

to meet the citizenship t st. We therefore (1) find petitioners liable for accuracyrelated penalties for 2004-06 and (2) find petitioner Carlebach liable for an accuracyrelated penalty for 2007. Subject to adjustments to reflect certain concessions,

respondent's determinations of penalties under section 6662(a) are sustained.

B. Additions to Tax

.

1. Applicable Law

.

Section 6651(a)(1 provides that, in the case of a failure to file an income tax

return by the due date, there shall be imposed an addition to tax for such failure of 5%

of the amount oftax required to be shown on the return, reduced by timely payments

and credits under section 6651(b)(1), for each month or portion thereof during which

the failure continues, not exceeding 25% in the aggregate, unless such failure is due to

reasonable cause and not due to willful neglect.

In the notices, resp ndent determined a section 6651(a)(1) addition to tax for

2004-07. The parties have stipulated that petitioners' 2004, 2005, and 2006 Forms

- 29 1040A were all filed in December 2007. They have also stipulated that petitioner

Carlebach's 2007 Form 1040A was filed in October 2008.

2. Analysis

Petitioners were calendar year taxpayers during the years in issue.

Accordingly, unless extensions of time to file had been granted, petitioners' 2004-07

returns were due on April 15 of the following year. See secs. 6072(a), 6081(a).

There is no evidence of any such extensions. Petitioners' 2004-07 returns were,

therefore, late.

Petitioners claim that their returns were not filed late because they were "filed

within the allowed time period for claiming a refund." We acknowledge that there is

no penalty for late filing when a refund is due. However, as discussed supra,

petitioners' children did not satisfy the citizenship test for 2004-06 and thus were not

eligible to be claimed as dependents. Additionally, two of the children did not satisfy

the citizenship test in 2007. As a result, petitioners had no valid claim for refund for

those years. Their mistaken claims for refund do not establish reasonable cause and

the absence of willful neglect. See Calloway v. Commissioner, 135 T.C. 26, 45

(2010) ("Petitioners' explanation [that, if deficiency had not been sustained, they

would have been entitled to a refund] establishes neither reasonable cause nor the

absence of willful neglect.").

-303. Conclusion

.

Petitioners failed o timely file their 2004-07 Forms 1040A, and they have not

shown that those failures were due to reasonable cause and lack of willful neglect.

Respondent's determinations of additions to tax under section 6651(a)(1) are

sustained.

IV. Conclusion

Decision will be entered

under Rule 155.