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Saturday, March 15, 2003


Everyone knows multinational financial corporations like Merrill Lynch structure every move of their business so as to take advantage of aggressive tax positions. The same is true for the way poor Mexican farm workers structure their family living arrangements. At least, that is what Tax Court Special Trail Judge Powell seems to think.

The Summary: Maria G. Pelayo and Jorge Pelayo �allegedly� (Powell�s word) separated in May. There was no formal separation agreement. Maria stayed in the family home on Fifth Street. Jorge spent a few weeks with his sister, then moved to employer-provided housing near his agricultural work site. When the job ended in July or August, he move back in with his sister. In December, he moved into a new home on Second Street. The whole time, Jorge paid most of the expenses of the Fifth Street house. The two youngest kids stayed with Maria, and the oldest child moved back and forth between households. In January, the Pelayos reconciled and Maria and the kids moved in with Jorge at Second Street. For their taxes, they filed separately, each claiming Head of Household and Earned Income Credit.

Held: Maria could not be Head of Household because she did not pay the expenses of her house, and Jorge could not be Head of Household because his qualifying child only stayed with him a total of approximately 4 months. To claim the Earned Income Credit, married folks must file jointly, which the Pelayos did not. All of which Powell gets right.

So why didn�t the Pelayos file jointly if they had reconciled? If I had guess what was going on, I would say this aggressive of position was cooked up by a sleazy low-rent tax preparer, the only kind people who financially qualify for the Earned Income Credit can afford. The goal was to sell the Pelayos two tax returns, two electronic filings, and two refund anticipation loans at usury rates. The preparer was either too incompetent to know how aggressive this position was, or he didn�t care, because the Pelayos would not be caught for a couple of years, by which time he plans to have a better job. Either is equally likely. At least, that�s how I see it.

Judge Powell suspects differently. At least you can not accuse him of discriminating against poor Mexican farm workers. He treats them exactly the same as he would treat a financially sophisticated business executive who hires creative CPAs. He states of their living arrangements, �While it is not totally clear, we suspect that this structuring was prompted by an attempt to obtain greater earned income credits by a connived separation.�

I could be wrong here. My own in-laws are Mexican former farm workers who are now real estate millionaires, and I suppose it is possible that Jorge had to return to farm work after he lost his fortune in derivatives speculation. But unless Judge Powell has left out a lot of relevant information, my best guess is that he lacks a great deal of familiarity with the lives and motivations of the people who harvest the food he eats.

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