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Complying with Court Order Wasn't Good Enough to Get Dependency Deduction.
(Parker Tax Publishing February 27, 2014)

For a noncustodial parent to take a dependency exemption deduction or child tax credit for a child, the parent must jump through numerous hoops. Just having a divorce decree or support order that states that the noncustodial parent is entitled to the deduction or credit is not enough. Several cases have illustrated this and another one was decided this week.

In Swint v. Comm'r, 142 T.C. No. 6 (2/24/14), the Tax Court disregarded the terms of a state court support order that provided that the noncustodial parent was entitled to a dependency exemption deduction and child tax credit as long as he stayed current with his child support obligations. The problem was that the court entry was not signed by either party to the order, and the release of the dependency exemption deduction by the child's custodial parent was conditional. As a result, the Tax Court agreed with the IRS that, because there was no written unconditional declaration from the custodial parent that she would not claim the child as a dependent, the noncustodial parent was precluded from taking the dependency deduction and child tax credit.

Practice Tip: Practitioners with noncustodial parents relying on court orders granting dependency deductions or other tax benefits should inquire as to whether the custodial parent has signed a nonconditional document granting such tax benefits. For tax years beginning on or after July 2, 2008, it's imperative that the noncustodial parent have a Form 8332, or a written statement meeting all of the Form 8332 requirements, signed by the custodial parent.

Background

Lisa Swint was married to Tommy Swint. Before marrying Lisa, Tommy had a child with Tonia Wilson. An agreed entry between Tommy and Tonia was filed in February 1998 by the Juvenile Division of an Ohio court. With respect to the dependency exemption deduction, the agreed entry provided that Tommy would be entitled to the dependency exemption deduction for the child, but that failure to keep current with his support obligations would result in a forfeiture of that right until such time as the arrearages were eliminated. The agreed order was not signed by Tommy or Tonia.

Lisa and Tommy filed a joint federal income tax return for 2009 claiming a dependency exemption deduction and a child tax credit for Tommy's child with Tonia. Tommy subsequently died in 2010. The IRS disallowed the deduction and credit for Tommy's child because, according to the IRS, the child was not a "qualifying" child of Tommy's.

Special Rule for Divorced Parents Claiming Dependency Exemption

In the case of divorced or separated parents, Code Sec. 152(e) provides a special rule to determine which parent is entitled to a dependency exemption deduction for a child. Generally, a child who is in the custody of one or both parents for more than one-half of the calendar year, and who receives more than one-half of his or her support from parents who are divorced or separated or who live apart at all times during the last six months of the calendar year, is considered the qualifying child of the custodial parent. The custodial parent is defined as the parent having custody for the greater portion of the calendar year. The noncustodial parent is defined as the parent who is not the custodial parent. In Tommy's case, his minor child did not live with him and, thus, Tommy was the noncustodial parent.

Under Code Sec. 152(e), a child is treated as a qualifying child of the noncustodial parent rather than of the custodial parent when certain requirements are met. One of the requirements for the child to be the qualifying child of the noncustodial parent is that the custodial parent must sign a written declaration (in such manner and form as IRS regulations prescribe) that the custodial parent will not claim the child as a dependent for any tax year beginning in such calendar year. The declaration must be made either on a completed Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or on a statement conforming to the substance of Form 8332.

For tax years beginning on or after July 2, 2008, Reg. Sec. 1.152-4(e)(1)(ii) provides that a court order signed by the custodial parent does not satisfy the applicable requirements for a noncustodial parent to take a dependency exemption. However, the regulations provide a transition rule that creates a carve-out to this rule. A written declaration executed in a tax year beginning on or before July 2, 2008, that satisfies the requirements for the form of a written declaration in effect at the time the written declaration is executed, will be treated as meeting the applicable requirements.

Form 8332 requires a taxpayer to furnish the name of the child; the name and social security number of the noncustodial parent claiming the dependency exemption deduction; the social security number of the custodial parent; the signature of the custodial parent; the date of the custodial parent's signature; and the years for which the claims were released.

IRS and Taxpayer Positions

Lisa argued that the agreed entry filed February 13, 1998, sufficed as a written declaration conforming to the substance of Form 8332. The IRS countered that divorce decrees, or comparable documents, do not suffice for the purposes of a written waiver by Form 8332 or a substantially conforming document under Code Sec. 152(e).

Tax Court's Analysis

The Tax Court began its analysis by noting that, as February 13, 1998, there was no prohibition on using a court order, decree, or separation agreement as a written declaration for purposes of Code Sec. 152(e). The court noted that a court order or decree or a separation agreement entered before July 2, 2008, could be a written declaration if it satisfied the other requirements in effect at the time of the entry. The agreed entry was filed on February 13, 1998. Therefore, the court had to determine whether the agreed entry satisfied the requirements of a written declaration that were in effect as of February 13, 1998.

As of February 13, 1998, Code Sec. 152(e)(2)(A) provided that the noncustodial parent could claim the dependency exemption deduction if the custodial parent signed a written declaration (in such manner and form as IRS regulations prescribed) that the custodial parent would not claim the child as a dependent for the tax year. Satisfying the signature requirement is critical, the court observed, to the successful release of the dependency exemption within the meaning of Code Sec. 152(e)(2). In the instant situation, the court concluded that because there was no signature on the agreed entry, the signature requirement was not satisfied.

Further, the court noted that the language, "will not claim," is unconditional. As a result, in order for a written declaration to comply with Code Sec. 152(e)(2)(A), the declaration by the custodial parent that he or she "will not claim such child as a dependent" must also be unconditional. The agreed entry provided that Tommy would be entitled to claim the minor child only if he was current in his child support obligations. If Tommy were not current on those obligations, then Tonia would have been entitled to claim the minor child. The release of the dependency exemption deduction by Tonia in the agreed entry was conditional. Accordingly, the Tax Court held that the declaration in the agreed entry did not satisfy the unconditional declaration requirement.

As a result, the Tax Court concluded that, because the written declaration at issue was not signed by the custodial parent and was not unconditional, it did not meet the requirements for a written declaration that were in effect on or before July 2, 2008. Therefore, Lisa was not entitled to a dependency exemption deduction or a child tax credit for the child. (Staff Contributor Parker Tax Publishing)

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Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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