Dependency Exemptions: Tax Court Is Strict on Noncustodial Parents

Another Tax Court case has made it clear that noncustodial parents must adhere to the letter of the law when claiming dependency exemptions. In Miller, 114 TC 184 (2000), the court upheld past rulings that a divorce decree awarding the exemption to the noncustodial parent has no validity unless it conforms to the substance of Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents.

Facts

In Miller, the taxpayer and her husband were divorced; the state court issued Permanent Orders on Jan. 24, 1994, granting Ms. Miller sole custody of the children. The orders also provided that her ex-husband (Mr. Lovejoy) "shall claim both of [the] children on his tax returns as exemptions." The Permanent Orders were not signed by Ms. Miller, but were signed by attorneys for Ms. Miller and Mr. Lovejoy under a caption that stated "APPROVED AS TO FORM."

As provided for in the Permanent Orders, Mr. Lovejoy claimed his children as dependents on his 1993 and 1994 Federal income tax returns. Instead of attaching a completed Form 8332, Mr. Lovejoy attached a copy of the Permanent Orders that awarded the dependency exemptions to him. Ms. Miller did not claim the exemptions on her returns.

Issue

Special rules apply when a divorced parent wishes to claim a minor child as a dependent. Assuming the other dependency tests are met, Sec. 152(e) determines which parent will be allowed to claim the dependency exemption. The general rule of Sec. 152(e) is that:

1. If a child receives more than one-half of the support during a calendar year from his parents, and

2. The parents are divorced or legally separated, or

3. Lived apart at all times for the last six months of the year and

4. The child is in the custody of his parents for more than half the year, the child is treated as receiving more than half his support from the parent who had custody for the greater portion of the calendar year.

That parent is known as the "custodial parent." Sec. 152(e) provides three exceptions to the general rule that the custodial parent is deemed to meet the support test.

First, the custodial parent may choose to release the claim to the exemption to the noncustodial parent. To effect the transfer, the custodial parent signs a written declaration, either Form 8332 or a document that conforms to the substance of that form. Form 8332 states that the custodial parent will not claim the child as a dependent for the current tax year and the custodial parent can indicate future years as well. Form 8332 provides blanks for the names and Social Security numbers of the parents, the child's name, the tax year and the signature of the custodial parent who releases the claim. The noncustodial parent must attach this declaration to his return.

A second option is that, under Sec. 152(e)(3), a multiple-support agreement exists. If the parents sign an agreement that meets Sec. 152(c)'s requirements and the noncustodial parent is a party to that agreement, he may claim the exemption in accordance with the agreement.

A final option is that a qualified pre-1985 divorce decree or separate maintenance agreement exists, specifying that the noncustodial parent is entitled to the dependency exemption and must provide at least $600 of the support received by the child during the calendar year.

The issue for the Tax Court was whether the Permanent Orders of divorce were sufficient to allow Mr. Lovejoy to claim the dependency exemptions on his Federal returns.

Prior Decisions

White. In White, TC Memo 1996-438, the taxpayer was divorced from his wife in 1989. The divorce decree granted joint custody of the two children, with primary residence to be with their mother. However, the decree provided that Mr. White was entitled to claim the children as his dependents and that Ms. White "shall execute whatever documents may be required to enable the Defendant [Mr. White] to claim the children as his exemptions." Ms. White signed a document that stated in part:

 The Defendant (Mr. White) shall be entitled to claim the two (2) children of the marriage as his beneficiaries for income tax purposes. The Plaintiff (Ms. White) shall execute whatever document may be required to enable the Defendant to claim the children as his exemptions.

 Mr. White subsequently remarried and, on his 1992 joint return, claimed his two children as dependents. He attached the 1989 letter signed by his ex-wife. (Tax years 1990 and 1991 are not mentioned in the opinion.) The IRS disallowed the dependency deductions, because the letter did not state the years the taxpayer was allowed to claim the deductions.

The court's ruling was even more critical of the letter. The court declined to accept the letter, because it not only omitted the years affected, but also lacked the Social Security numbers of the relevant taxpayers, and "[m]ost importantly, the letter fails to explicitly state that Ms. White would not claim Christopher and Allison as dependents...The letter relied on by petitioner is essentially nothing more than a restatement of the divorce decree. It has no other meaning or significance."

Paulson. In Paulson, TC Memo 1996-560, the taxpayer was divorced from his wife in 1990. They had one child. The court gave the ex-wife sole legal and physical custody of the child, and required Mr. Paulson to pay child support. The divorce decree stated that Mr. Paulson "shall have the right to claim the minor child of the parties on his federal and state tax returns provided that he has been current in his child support payments throughout the calendar year and is current at the time of filing his tax return." In addition, the decree required his ex-wife to execute Form 8332.

For the years in question, the taxpayer did not attach either Form 8332 or any document containing the required information to his return. The opinion did not explain whether the taxpayer ever requested Form 8332 from his ex-wife. The taxpayer complained that the right to the deduction given to him by the state court was now being denied by the Federal court. The court explained that to take the deduction, he simply needed to submit the correct form or an acceptable substitute. State courts have no jurisdiction over Federal income tax. If his wife refused to sign the proper form, he should return to the state court that issued the divorce decree.

Neal. In Neal, TC Memo 1997-97, Neal fathered two children (Adam and Amanda) before he married his wife (Ms. Mosely) and then fathered an additional child (Nathan). Neal was divorced in 1992; the divorce decree gave custody of Nathan to his mother, but made no provision for the custody of Adam and Amanda. All three children lived with Ms. Mosely. The court also issued a Dependency Exemption Order that entitled Neal to claim Nathan as a dependent for Federal, state and local tax purposes. Neal attached Form 8332 to his return for the years in question for each child; however, the forms did not contain Ms. Mosley's signature. The taxpayer said he could not obtain her signature because he did not know her whereabouts when he filed the returns.

The Service denied the deductions because Neal did not file a valid Form 8332 with his return. The divorce decree named Ms. Mosley as the custodial parent for Nathan. When no written decree or agreement awards custody, Regs. Sec. 1.152-4(b) states that custody will be deemed to be with the parent who has "physical custody of the child for the greater portion of the year." Therefore, without physical custody of the children, the only way Neal could claim the exemptions was by filing Form 8332 with his Federal return.

The Miller Opinion

In Miller, the ex-husband, Mr. Lovejoy, attached the Permanent Orders to his return. Those orders stated that he "shall claim both of the children on his tax returns as exemptions." He did not ask Ms. Miller to sign Form 8332. The opinion states that "unless the Permanent Orders qualify as a statement conforming to the substance of Form 8332...Mr. Lovejoy has not satisfied the requirements of either section 152(e)(2) or the applicable regulation."

As the court compared the Permanent Orders with Form 8332, it pointed out the differences between the two documents. Form 8332 requires:

1. Specification of the years affected by the release.

2. The signature of the custodial parent.

3. Date of the signature.

4. Social Security number of the custodial parent.

None of these elements were present in the Permanent Orders attached to the taxpayer's return.

The court did not accept Ms. Miller's attorney's signature as sufficient. The signature requirement does more than just acknowledge the form of the document, which was the intent of the attorney's signature under the notation: "APPROVED AS TO FORM." The signature requirement is to confirm that the custodial parent will not claim the dependency exemption.

Mr. Lovejoy's principal argument was that the Permanent Orders gave him the right to claim the exemption. The Tax Court, with numerous citations, confirmed that a state court cannot determine issues of Federal tax law. Because Mr. Lovejoy failed to attach Form 8332 or a document that conformed in substance to that form, he failed to meet the Sec. 152(e) requirements and was not entitled to the dependency exemptions.

Ancillary Issues

Minor child. Many divorce or maintenance decrees cover only the period of time until a child reaches the age of majority (usually 18 or 21, depending on state law). If parental control terminates and the divorce and maintenance decrees are silent, Sec. 152(e) is no longer applicable. The support test will revert back to Sec. 152(a), which looks to the parent who provides more than one-half the support. In Rownd, TC Memo 1994-465, the noncustodial parent paid for tuition, books and living expenses while his son was attending college. The custodial parent's absence for educational purposes does not affect "member of household" status (Regs. Sec. 1.152-1(b)). Therefore, the court awarded the dependency exemption to the noncustodial parent.

Revoking Form 8332. It is common for a divorce decree to state that the custodial parent will sign Form 8332 if the noncustodial parent has fulfilled the child support obligation specified in the decree. Each year, the custodial parent will sign a new form. In Part II, the form provides a Release of Claim for Future Years; the years can be specified or the custodial parent can indicate "all future years."

If the custodial parent has specified several or "all future" years and the noncustodial parent fails to fulfill an obligation required in the decree, the custodial parent may want to revoke Form 8332. Unfortunately, there is no section or statement that provides for revocation. In Chief Counsel Advice (CCA) 200007031, the IRS stated its position on revocation of Form 8332.

The Service will honor the custodial parent's claim to the exemption only if the noncustodial parent does not claim the child as a dependent. In a situation in which a duplicate Social Security number arises (i.e., two returns claim the same dependent), the IRS will audit the returns in an effort to determine which parent is entitled to the exemption. That is probably a result neither parent would want. Practitioners should caution custodial parents against releasing their claims for future years if there is a possibility that the noncustodial parent may not fulfill the obligation required in the divorce decree.

Summary

In the last several decisions, the Tax Court has held firmly to the requirements stated in Sec. 152(e): if a noncustodial parent intends to claim a dependent exemption, the rules of Sec. 152(e) should be followed to the letter. If there is no multiple-support agreement and the divorce decree does not qualify as a pre-1985 instrument, the noncustodial parent must have a written release from the custodial parent to claim the exemption.

To document that consent, the noncustodial parent must attach Form 8332 or a declaration "that conforms to the substance of such form." Form 8332 is a simple one-page form requiring very little information. However, this information is critical to success in court.

From Charles E. Price, Ph.D., CPA, Auburn University, Auburn, AL, and Leonard G. Weld, Ph.D., Troy State University, Troy, AL (neither affiliated with Summit International Associates, Inc)