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TAX MATTERS

Release of dependency exemption trumps child support

 

By Karyn Bybee Friske, CPA, Ph.D. and Darlene Pulliam, CPA, Ph.D.
April 2013

In two recent cases, the Tax Court ruled on the validity of a dependency exemption release to a noncustodial parent. Taken together, the cases illustrate how a properly executed and filed Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, is the key to releasing a claim of exemption and outweighs state court orders.

In Armstrong, the court denied the deduction and child tax credit to a noncustodial father who did not attach Form 8332 to his 2007 tax return. The taxpayer, Billy Armstrong, did attach a copy of an “arbitration award” indicating he would be entitled to the dependency exemption for one of his and his ex-wife’s two children if he stayed current with child support. Upon audit, he also provided a 2003 state court order that incorporated the arbitration award and a 2007 state court order signed by the ex-wife that explicitly required the ex-wife to provide him with an executed Form 8332 or its equivalent if his support payments were current, which they were. The IRS rejected his claim because the award and orders were conditioned upon current payment of child support. The majority opinion of the Tax Court agreed that the state court orders did not unconditionally declare that Armstrong’s ex-wife would not claim the exemption and therefore could not substitute for Form 8332.

A taxpayer is allowed a dependency exemption under Sec. 152 for a tax year for a qualifying child, who generally must have lived with the taxpayer for more than half of the year. However, under Sec. 152(e), a child may be treated as the qualifying child of the noncustodial parent when certain criteria are met, including that the custodial parent signs a written declaration (such as Form 8332) releasing claim to the exemption for the tax year, and the noncustodial parent attaches the signed declaration to his or her return. According to the regulations, a noncustodial parent may also rely on an alternative document, provided it conforms to the substance of Form 8332.

The Tax Court concluded that the ex-wife’s signature on the March 2007 state court order was a conditional statement that she would not claim the dependency exemption if the child support payments were current. For a document to comply with the substance of Form 8332 and Sec. 152(e), there must be an unconditional declaration releasing any claim for the deduction for the tax year. However, the court declined to impose an accuracy-related negligence penalty.

A dissenting opinion by Judge Mark V. Holmes joined by two other judges held that because Armstrong fulfilled the state court’s unambiguous condition for the exemption, its order should be considered as conforming to the substance of Form 8332. The dissent acknowledged, however, that the same answer might not hold for taxpayers in subsequent years, because for tax years beginning after July 2, 2008, Regs. Sec. 1.152-4(e)(1)(ii) requires any substitute for Form 8332 to be executed solely to serve as the written declaration and may not be a court order or decree or separation agreement.

In the other case, George, the Tax Court concluded that a signed Form 8332 was valid despite the taxpayer’s contention that her ex-husband was delinquent in his child support obligations that a state court order had required, as in Armstrong, as a condition to execute the form.

Rachel George, the custodial parent, executed a Form 8332 in compliance with the state court order in 2007. She believed the order to be improper, however, and claimed a dependency exemption deduction and a child tax credit for the child covered by the Form 8332 on her 2007 and 2008 tax returns. Her ex-husband also claimed the child as a dependent and attached the signed Form 8332 to his tax returns.

The Tax Court could not invalidate George’s signing of the release. She argued she had been forced to sign under threat of contempt, but that didn’t constitute duress, the court held. The court also stated that it lacked the power to correct the alleged errors of state family courts. According to the Tax Court, George’s position would undermine the intended certainty and clarity of Sec. 152(e) and would add great difficulty to the administration of the dependency exemption. As a result, George was denied the dependency exemption deduction and the child tax credit for the years for which she signed Form 8332.

The rules of Sec. 152 are clear, the court said, adding, “Our obligation to follow the statute as written applies whether the resulting disadvantage is suffered by a custodial parent who executed a Form 8332 but bore an undue and unintended burden of child support, or is instead suffered by a noncustodial parent who bore the burden of child support but did not receive an executed Form 8332.”


By Karyn Bybee Friske, CPA, Ph.D., Schaeffer Professor of Business Ethics and professor of accounting, and Darlene Pulliam, CPA, Ph.D., McCray Professor of Business and professor of accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.
 
 

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