Last fall, the Tax Court issued several unusual related memorandum decisions on the earned income tax credit (EITC)—a refundable credit available to taxpayers with income below a specific threshold.
The cases involved five prisoners who attempted to claim the EITC on money they had obtained from “begging.” The Florida inmates claimed that money they solicited from family and friends was earned income from begging. In each case, the prisoner’s taxable income was insufficient to result in a tax liability. Also, the inmate had not made any estimated payments or any withholdings during the years in question.
The prisoners claimed EITC refunds in amounts from $17 to $90. Two claimed the credit for two years (1996 and 1997). The others claimed it for only one year.
The court found the amounts received by the inmates were gifts and not income. In its decision, the court determined that friends and family gave the money to the prisoners out of charity with no expectation of repayment. It said the money was not earned and therefore could not be considered income. The EITCs were not allowed.
In its deliberations, however, the court ignored a provision in the Internal Revenue Code that already disallowed the credits. Any income earned for services provided by an inmate in a penal institution is not “earned income” for the purposes of the EITC, according to IRC section 32(c)(2)(B)(iv).
Observation. The Tax Court may have been trying to answer a broader question in these cases—can money begged from family and friends be considered income and therefore qualify as earned income for EITC purposes? In its rulings the court addressed the begging issue for all taxpayers—in or out of prison.
- ( Pradel Lucas v. Commissioner, TC Memo 1999-321; John Walter Wolf, 1999-320; Alfredo Dominquez, 1999-319; Floyd Daniel, Jr., 1999-318; Miguel A. Bauta, 1999-317.
—Cheryl Metrejean, CPA, assistant professor of the
E.H. Patterson School of Accountancy at the
University of Mississippi, Oxford, Mississippi.