Lack of Signed Release Costs Noncustodial Parent Dependency Exemption
and Child Tax Credit. (Parker's Federal Tax Bulletin: May 9, 2013)

The Tax Court disregarded the terms of a state court divorce judgment in disallowing a dependency exemption where the noncustodial parent failed to obtain a Form 8332 or an equivalent release from the custodial parent. Shenk v. Comm'r, 140 T.C. No. 10 (5/6/13).

Michael Shenk was divorced from his wife, Julie Phillips, and their 2003 Judgment of Absolute Divorce provided that Julie would have primary residential custody of their three minor children. The judgment also provided that the dependency exemption deductions for the three children would be divided between Michael and Julie according to various conditions.

Specifically, in odd numbered years, Julie would be entitled to claim the two younger children as dependency exemptions on her income tax returns, provided that Julie was employed and earning income. Michael would be entitled in odd numbered years to claim oldest son as a dependency exemption on his income tax returns, provided that Michael was current with his child support payments as of the end of the year. In even numbered years, Michael's and Julie's entitlement to the these dependency exemptions would be reversed, with Michael having two exemptions and Julie having one, again providing that Julie was employed and earning income and Michael was current with his child support payments at the end of the year. The judgment did not, however, provide that Julie had to execute in Michael's favor a Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents.

The three children resided with Julie for more than half of 2009, and Julie did not execute Form 8332 or equivalent document for any year. As of the end of 2009, Michael was up to date on his child support payments. Julie was not employed in 2009.

For 2009 Michael timely filed a federal income tax return on which he claimed dependency exemption deductions and the child tax credit for two of the children, consistent with his understanding of the terms of the judgment, but he did not attach any Form 8332 to his return. Julie, the custodial parent, timely filed a federal income tax return for 2009 on-which she also claimed two dependency exemption deductions, so that one child was claimed on both parents' returns.

Because one of the children was claimed as a dependent on two returns, the IRS became aware of the dueling claims. The IRS allowed Michael the dependency exemption deduction for one of the children but disallowed his claim for the dependency exemption deduction for the child who had also been claimed by Julie. The IRS issued to Michael a deficiency notice for 2009, determining additional tax attributable in part to its denial of the second dependency exemption deduction. Michael timely filed a Tax Court petition, contending he was entitled to a dependency exemption deduction for all three children.

The Tax Court held that since Julie, the custodial parent, did not execute Form 8332 or an equivalent release, Michael was not entitled to claim the disputed dependency exemption deductions or the child tax credit. The court pointed out that under the general rules on dependency exemptions, Michael could not have claimed his children as dependents for 2009 because they did not share the same place of abode with him for more than one-half of the year. However, in the case of divorced parents, special rules determine which parent may claim a dependency exemption deduction for a child. Under Code Sec. 152(e), a child may be treated as a qualifying child of the noncustodial parent (here, Michael) rather than of the custodial parent provided that certain requirements are met. Among the requirements that must be met, the custodial parent must sign a written declaration that the custodial parent will not claim the child as a dependent; and the noncustodial parent must attach that written declaration to his or her return for the tax year.

OBSERVATION: Form 8332 is the IRS's prescribed means for the custodial parent to make this declaration. As an alternative, taxpayers may attach a written declaration which conforms to the substance of Form 8332 and has been properly executed by the custodial parent for the sole purpose of releasing the exemption(s). For taxable years beginning after July 2, 2008, however, taxpayers are specifically precluded from using a court order or decree or a separation agreement in lieu of Form 8332 (Reg. Sec. 1.152-4(e)(1)(ii)).

Even if Julie did not meet the condition imposed on her by the judgment, 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 Michael did not meet the criteria of the Code for claiming the disputed dependency exemption deduction. He was the noncustodial parent, and the custodial parent did not sign the required declaration. Therefore, neither of the younger children was a qualifying child of Michael for tax year 2009. As a result, Michael was not entitled to the disputed dependency exemption deduction or the corresponding child tax credit for 2009.

Michael then asked the Tax Court to leave open the trial record so that he could move the state court to order Julie to sign a Form 8332 that he could then submit. But the court stated that even if it assumed (without deciding) that a custodial parent's declaration submitted after the custodial parent has filed his or her return could sometimes qualify as being attached to the noncustodial parent's return, any declaration that Michael could now obtain and submit would fail to qualify under Code Sec. 152(e)(2)(A). Julie claimed the dependency exemptions on her 2009 income tax return filed April 15, 2010--i.e., more than three years ago. The general three-year period of limitations for assessing tax against her for 2009 expired on April 15, 2013. Thus, if Julie were now to sign a Form 8332 for that year, that declaration would be both contrary to fact and without legal effect.

For a discussion of the special rules on dependency exemptions for divorced parents, see Parker Tax ¶10,720.10[c].

Staff Editor Parker Tax Publishing

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