(1) You: The Court did not believe that the kids really did anything. Maybe she was just trying to deduct their allowances.
Me: The tax law becomes skeptical when related parties are involved, and you cannot get much more related than a mother and her children. It was heightened in this case as the children were so young. For the most part, though, the Court believed her when she described what the children did.
(2) You: Mom used the money she “paid” the kids for their support – like paying their school tuition, for example.
Me: The tax law disallows a deduction if the money is disguised support, which tax law expects to be provided a dependent child. In this case, the Court saw the children buying books, games and normal kid items; some money also went to Section 529 plans. The Court did not believe that mom was trying to deduct support expenses.
(3) You: She could not provide paperwork to back-up her deductions. What if she paid the kids in cash, for example?
Me: Good job. One reads that the Court wanted to believe her, but she presented no records. She did not provide bank statements showing the kids depositing their paychecks, presumably because the children did not have bank accounts.
She did not provide copies of the Section 529 plans. That was so easy to do that I found the failure odd.
At least she could show the Court a Form W-2.
Mom had not even issued W-2s.