Dependency exemption requirement for children born abroad.

• Author: Roxas, Patrick B.

Issues surrounding citizenship in the United States have been the subject of a long-standing debate. Issues on citizenship are found across a wide range of subjects, especially in tax. With a more global economy, more U.S. citizens live outside the country. Many marry noncitizens and have children who have not yet filed for U.S. citizenship. U.S. citizens living outside of the country are still required to file annual income tax returns, and most look to dependent exemptions and credits to lower their tax liability. These tax benefits require a taxpayer's dependent to be a U.S. citizen. However, issues can arise as to when the citizenship test of Sec. 152(b)(3)(A) must be satisfied to claim children as dependents. This is true in a recent case (Carlebach, 139 T.C. No. 1 (2012)), where taxpayers Leah M. Carlebach and Uriel Fried, who were living outside the United States, claimed dependency exemption deductions, the child care credit, child tax credit, and additional child tax credit.

The taxpayers have six children. Carlebach, the mother, is a U.S. citizen, and Fried, the father, was born in Israel and is not a U.S. citizen. The father and children have always lived in Israel. In June 2007, four of the children were granted U.S. citizenship. The other two children were granted citizenship in April 2008. In December 2007, the taxpayers filed their Forms 1040A, U.S. Individual Income Tax Return, for 2004, 2005, and 2006. The taxpayers claimed dependency exemption deductions, child care credits, and additional child tax credits from 2004 through 2007, claiming three of the children in 2004, four in 2005 and 2006, and all six in 2007.

The citizenship or residency test of Sec. 152(b)(3)(A) says that "[t]he 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." Relevant to this discussion is Regs. Sec. 1.152-2(a)(1), which states that "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 IRS argued that the taxpayers were not entitled to the dependency exemption deductions from 2004 through 2007. The IRS argued that because the children did not become citizens until they received their certificates of citizenship, none of the children met the citizenship test for...