The IRS has ruled that an individual will no be treated as the qualifying child of a person if that person doesn't make enough to file a return and either does not file a return or files a return solely to obtain a complete refund of withheld income taxes. The code provides that the term "dependent" means a "qualifying child" or a "qualifying relative." Among other requirements, a qualifying relative cannot be the qualifying child of any other taxpayer.
So, to put it into an example. Jennifer supports as members of her household an unrelated friend, Rick, and Rick's four-year-old child, Lisa. Rick has no gross income and is not required to file a return. Jennifer can claim both Rick and Lisa as qualifying relatives, provided all other requirements are met (provide more than one-half of their support, etc.).
IRS Publication 501 provides more detail if you need some lite nighttime reading.
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