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The IRS and Custody Exemptions

Stapleton v. Comm’r, T.C. Memo. 2015-171, 2015 WL 5049758

Facts: A father and mother had two children. The parents were never married. No court was ever asked to decide custody, but the parents agreed that the father would have the children every Monday and Wednesday night and every other weekend. In 2011, the father had custody of the children for 176 days.

The father claimed the dependency exemption for both children on his 2011 tax return. The IRS disallowed the exemption, and the father appealed to the Tax Court.

Issue: Was the father entitled to claim the dependency exemption?

Answer to Issue: No

Summary of Rationale: The children did not reside with the father more than half the tax year—176 days is less than half of 365 days—so the father was not entitled to claim the exemption in his own

The father could still claim the exemption if the mother transferred it to him. But she signed no written transfer form, and the father did not attach such a form to his tax return. Thus, the exemption was not validly transferred.

Comments:

Stapleton was a straightforward case with an easy answer, and it is hard to see how the father could reasonably have expected to win.

The case is a good reminder that the dependency exemption can be transferred between unmarried parents—but only if the necessary form is signed by the custodial parent and attached to the noncustodial parent’s tax

Be aware that the IRS regulations require that the transfer be done using IRS Form 8332 or its substantial equivalent.  There is a small amount of flexibility in determining a substantial equivalent, but the IRS takes the position that the form must be signed only for the purpose of transferring the exemption and for no other purpose—so that a settlement agreement or divorce decree can never be a substantial equivalent to Form 8332. Treas. Reg. § 1.152-4(e)(1)(ii).

 

Gassoway v. Comm’r, T.C. Memo. 2015-203, 2015 WL 6080288 (2015)

Facts: The taxpayer had three children by a woman, to whom he was not married. He leased an apartment, in which the woman and the children resided. The taxpayer testified that he lived in the apartment. The lease for the apartment listed the taxpayer as “tenant,” and the wife and children as “occupants.”

The taxpayer claimed a dependency exemption for all three children. The IRS disallowed the exemption, and the taxpayer appealed to the Tax Court.

Issue: Was the taxpayer entitled to dependency exemptions for the children?

Answer to Issue: No.

Summary of Rationale: The IRS agreed that all of the requirements for the exemption were met except for the requirement that the taxpayer and the children have the same principal place of abode.

The burden of proof lies with a taxpayer who contests a deficiency assessed by the IRS. Thus, the taxpayer had to prove that he resided in the same place of abode as the children. The court “found petitioner’s testimony to be in certain material respects self-serving and uncorroborated.” 2015 WL 6080288, at *2. It therefore disbelieved both the taxpayer’s own testimony and the lease. Since the taxpayer failed to meet his burden of proof, the exemption was denied.

Comment: The court’s opinion is quite terse on the nature of the credibility problem. The case does stress, however, that where residency is a foreseeable issue, it is prudent to submit evidence of residence other than one’s own testimony.