Family law judges and lawyers beware that in assigning the dependency exemption to a noncustodial parent, Form 8332 releasing the exemption must be secured from the custodial parent. In Shenk v. Commissioner of Internal Revenue, 140 T.C. 10, filed May 6, the U.S. Tax Court disallowed a noncustodial father's dependency exemption claim because of the mother's failure to sign Form 8332, despite a state court's divorce decree providing the dependency exemption would be divided between the parents.
Assignment of the dependency exemption is a useful tool for courts and lawyers in structuring support orders, divorce orders and, overall, effectuating equitable relief. For more than a decade, Pennsylvania courts have been specifically authorized to assign the dependency exemption. Under Pa.R.C.P. 1910.16-2(f), to maximize the total income available to a family, the court is permitted to award the federal child dependency tax exemption to the noncustodial parent or to either parent in a shared custody arrangement. Further under this rule, the court can require a parent to sign Form 8332.
The U.S. Tax Court's recent opinion emphasizes the importance of courts utilizing the second part of this rule by specifically ordering a custodial parent to sign and deliver to the noncustodial parent Form 8332 releasing the dependency exemption. Although not decided in Pennsylvania, had the family court in Shenk done just that, the terms of its divorce decree related to the assignment of dependency exemptions would not have been essentially overturned by the U.S. Tax Court.
The family court in Shenk issued a judgment of absolute divorce in 2003 that awarded the mother primary physical custody of the parties' three minor children. The judgment went on to provide that in odd years, if the mother was employed, she could claim the two younger children and, if father was current on his child support, he could claim the oldest child. This scheme was to reverse in even years. The court did not include terms requiring the mother to sign and deliver to the father Form 8332.
In 2009, the father claimed two children on his tax return because the mother was unemployed. He also claimed the child tax credit and filed as head of household. The mother claimed two children as well because it was an odd year. The IRS examined both returns because one of the children was claimed by both parents. The IRS approved the mother's return because the children had lived with her more than 50 percent of the time. The IRS disallowed the father's dependency exemption and, consequently, also his child tax credit and head of household status, and assessed more than $3,000 of tax against him.
The father filed a petition with the U.S. Tax Court for relief in 2012. When the case was called for trial a year later, the father sought a continuance so he could apply to the family court for an order requiring the mother to sign Form 8332 to perfect his claim for the dependency exemption. His continuance request was denied. The IRS has a three-year period of limitations to assess taxes. As such, the delay would put the IRS out of time for the assessment period against the mother and, therefore, it would not be able to collect the necessary tax.
At trial, the father asserted that he was entitled to a dependency exemption for all three children because the mother was not employed in 2009. The mother's 2009 tax return did not show any earned income. The father further contended that although the mother did not sign Form 8332, she should have signed it.
A taxpayer is entitled to one exemption for each person who can be claimed as a qualified dependent. Under Section 152 of the Internal Revenue Code, the five-part test for a qualified child is: (1) the child must be the taxpayer's son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister or a descendant of any of them; (2) the child must be (a) under age 19 at the end of the year and younger than the taxpayer (or the taxpayer's spouse, if filing jointly), (b) under age 24 at the end of the year, a full-time student and younger than the taxpayer (or the taxpayer's spouse, if filing jointly), or (c) any age if permanently and totally disabled; (3) the child must have lived with the taxpayer for more than half of the year; (4) the child must not have provided more than half of his or her own support for the year; and (5) the child is not filing a joint return for the year (unless that joint return is filed only as a claim for refund).
In the case of divorced parents, there are special rules that determine which parent can claim the dependency exemption. Typically, because of the 50 percent or more residency requirement, a child of divorced or separated parents is the
qualifying child of the custodial parent. However, the child will be treated as the qualifying child of the noncustodial parent if the parents: (1) are divorced or legally separated under a decree of divorce or separate maintenance; (2) are separated under a written separation agreement or lived apart at all times during the last six months of the year, whether or not they are or were married; (3) the child received over half of his or her support for the year from the parents; (4) the child is in the custody of one or both parents for more than half of the year; and (5) the custodial parent signs a written declaration that he or she will not claim the child as a dependent for the year, and the noncustodial parent attaches this written declaration to his or her return.
The father in Shenk failed to meet not only the residency requirement but also the requirement for the written declaration. As a result, his dependency exemptions were disallowed. As the child tax credit and head of household filing status are contingent on having at least one dependency exemption, those claims were also disallowed. Clearly, this result was contrary to the family court's judgment, but as set forth by the U.S. Tax Court, "ultimately it is the Internal Revenue Code and not state court orders that determine one's eligibility to claim a deduction for federal income tax purposes, and Mr. Shenk does not meet the criteria of the code for claiming the disputed dependency exemption deduction."
The IRS has prescribed Form 8332 to make the necessary declaration, which states in pertinent part that "I agree not to claim" a child as a dependent. Although the form is not specifically required, best practice would be to use this form, which can be downloaded from the IRS website at
www.irs.gov. Another very useful resource for understanding tax rules for divorced
or separated parents is IRS Publication
504, which can be downloaded from the same site.
Julia Swain is a partner at Fox Rothschild, where she focuses her practice on all aspects of family law. She is a fellow of the American Academy of Matrimonial Lawyers and past chair of the Philadelphia family law section. She can be contacted at firstname.lastname@example.org and 215-299-2794.