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Dependency Exemptions and Form 8332

Skitzki v. Comm’r, T.C. Memo. 2019106, 2019 WL 3946102 (2019)

(a) Facts: Husband and wife were divorced. The divorce decree gave the father custody two weekends each month, one weekday per week if the mother was in Ohio, and three (before age four) or four weeks in the summer. It described both parents as “residential parent and legal custodian.” The decree further stated that the father “shall take” the child as a dependent for tax purposes in even-numbered years.

Three years later, the decree was modified so that the father would have the child every other week and every other holiday. Four months later, another modification gave the father custody 6 out of every 14 nights during the school year and every other week in the summer. The father provided more than half of the child’s support; the child resided more than 50% of the time with the mother.

For tax year 2014, both parents claimed the dependency deduction. The mother did not sign Form 8332. The IRS disallowed the father’s deduction and assessed a deficiency. The father appealed to the Tax Court.

(b) Issue: Was the father entitled to the dependency exemption?

(c) Answer to Issue: Clearly not.

(d) Summary of Rationale: The child was not the father’s qualifying child as the child resided with the mother for more than half of 2014. The child was not the father’s qualifying relative as the child was the mother’s qualifying child.

The divorce decree awarded the exemption to the father. But again, the only way to transfer the exemption is to file Form 8332. A state court order alone is not sufficient.

The father argued that the divorce decree was the substantial equivalent of Form 8332. But to be a substantial equivalent of Form 8332, a document “must be a document executed for the sole purpose of serving as a written declaration.” Treas. Reg. ยง 1.1524(e)(1)(i). The divorce decree was not executed for the sole purpose of transferring the exemption. It was therefore not the substantial equivalent of Form 8332.

Observations:

1. Again, Form 8332 is the only way to transfer the exemption. If there is no Form 8332, there is no transfer. The law is as simple as that.

2. The tax regulations have provided for years that a document cannot be the substantial equivalent of Form 8332 unless it is executed for the sole purpose of transferring the exemption. That means that divorce settlement agreements and divorce decrees are never the substantial equivalent of Form 8332. Federal law on this point is completely settled, and yet Tax Court reports are still full of cases in which parties argue to the contrary. Only Form 8332 can transfer the exemption.

3. Given the previous point, the proper procedure is simple. The noncustodial parent should never claim the exemption without Form 8332. If the custodial parent has been ordered to transfer the exemption and will not sign the form, the remedy is a contempt petition in state court. The exemption is not transferred unless the custodial parent signs the form.

4. There is a reasonable argument that federal law on this point is too strict. But that is an argument for changing a very well-settled rule of tax law. The argument must be made in Congress, not in the courts.

5. Skitzki was not a difficult case, and it is hard to see how the taxpayer could reasonably have hoped to prevail.

6. The IRS is very good at detecting situations in which both parties claim the dependency exemption on their tax returns. It is highly likely in this situation that one of the exemptions will be disallowed.