U.S. Tax Court Trumps State Family Court

The U.S. Tax Court's recent opinion emphasizes the importance of requiring one parent to sign and deliver Form 8332 in a timely fashion to the parent who is assigned the dependency exemption. If the family court in Shenk had done just that, then the terms of its divorce decree related to the assignment of dependency exemptions would not have been essentially overturned by the U.S. Tax Court.

The family court in Shenk issued a Judgment of Absolute Divorce in 2003 that awarded the mother primary physical custody of the parties' three minor children. The Judgment went on to provide that in odd years, if mother was employed, she could claim the two younger children; and, if father was current on his child support, he could claim the oldest child. This scheme was to reverse in even years. The court did not include terms requiring the mother to sign and deliver Form 8332 to the father.

In 2009, the father claimed two children on his tax return because the mother was unemployed. He also claimed the child tax credit and filed as head of household. The mother claimed two children as well, because it was an odd year. The IRS examined both returns because one of the children was claimed by both parents. The IRS approved the mother's return because the children had lived with her more than 50% of the time. It disallowed the father's dependency exemption and, consequently, also his child tax credit and head of household status, assessing over $3,000 of tax against him.

The father filed a petition for relief with the U.S. Tax Court in 2012. When the case was called for trial a year later, the father sought a continuance so that he could apply to the family court for an order requiring mother to sign Form 8332 to perfect his claim for the dependency exemption. His continuance request was denied. Because the IRS has a three-year period of limitations to assess taxes, the delay would put it outside the assessment period against the mother and, therefore, it would not be able collect the necessary tax.

At trial, father asserted that he was entitled to a dependency exemption for all three children because mother was not employed in 2009. Mother's 2009 tax return did not show any earned income. Father further contended that although mother did not sign Form 8332, she should have signed it.

Tax Law

A taxpayer is entitled to one exemption for each person that can be claimed as a qualified dependent. Under Section 152 of the IRC, the five part test for a qualified dependent child is: 1) the child must be the taxpayer's son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them; 2) the child must be: (a) under age 19 at the end of the year and younger than the taxpayer (or the taxpayer's spouse, if filing jointly), (b) under age 24 at the end of the year, a full-time student, and younger than the taxpayer (or the taxpayer's spouse, if filing jointly), or (c) any age if permanently and totally disabled; 3) the child must have lived with the taxpayer for more than half of the year; 4) the child must not have provided more than half of his or her own support for the year; and 5) the child is not filing a joint return for the year (unless that joint return is filed only as a claim for refund).

In the case of divorced parents, there are special rules that determine which parent can claim the dependency exemption. Typically, due to the 50% or more residency requirement, a child of divorced or separated parents is the qualifying child of the custodial parent. However, the child will be treated as the qualifying child of the noncustodial parent if the parents: 1) are divorced or legally separated under a decree of divorce or separate maintenance; 2) are separated under a written separation agreement, or lived apart at all times during the last six months of the year, whether or not they are or were married; 3) the child received over half of his or her support for the year from the parents; 4) the child is in the custody of one or both parents for more than half of the year; and 5) the custodial parent signs a written declaration that he or she will not claim the child as a dependent for the year, and the noncustodial parent attaches this written declaration to his or her return.

What Happened in Shenk

The father in Shenk failed to meet not only the residency requirement but also the requirement for the written declaration. As a result, his dependency exemption was disallowed. As the child tax credit and head of household filing status are contingent on having at least one dependency exemption, those claims were also disallowed. Clearly, this result was contrary to the family court's judgment, but as set forth by the U.S. Tax Court ” ' 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 Mr. Shenk does not meet the criteria of the Code for claiming the disputed dependency exemption deduction.”

The IRS has prescribed Form 8332 to make the necessary declaration, which states in pertinent part that “I agree not to claim” a child as my dependent. Although the Form is not specifically required, best practice would be to use this form, which can be downloaded from the IRS website at www.irs.gov. Another very useful resource for understanding tax rules for divorced or separated parents is IRS Publication 504, which can be downloaded from the same site.

Julia Swain, a member of this newsletter's Board of Editors, is a partner at Fox Rothschild LLP. She is a Fellow of the American Academy of Matrimonial Lawyers and past Chair of the Philadelphia Family Law Section. Reach her at [email protected] or 215-299-2794.

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Family law judges and lawyers need to be aware that in assigning the dependency exemption to a non-custodial parent, Form 8332 releasing the exemption must be secured from the custodial parent. In Shenk v. Commissioner , 140 T.C. 10, filed May 6, 2013, the U.S. Tax Court disallowed a non-custodial father's dependency exemption claim due to the mother's failure to sign Form 8332, despite a state court's divorce decree providing the dependency exemption would be divided between the parents.

Background

Assignment of the dependency exemption is a useful tool for courts and lawyers in structuring support orders, divorce orders, and, overall, effectuating equitable relief. Many states specifically authorize courts to award the federal child dependency tax exemption to the non-custodial parent, or to either parent in a shared custody arrangement.

The U.S. Tax Court's recent opinion emphasizes the importance of requiring one parent to sign and deliver Form 8332 in a timely fashion to the parent who is assigned the dependency exemption. If the family court in Shenk had done just that, then the terms of its divorce decree related to the assignment of dependency exemptions would not have been essentially overturned by the U.S. Tax Court.

The family court in Shenk issued a Judgment of Absolute Divorce in 2003 that awarded the mother primary physical custody of the parties' three minor children. The Judgment went on to provide that in odd years, if mother was employed, she could claim the two younger children; and, if father was current on his child support, he could claim the oldest child. This scheme was to reverse in even years. The court did not include terms requiring the mother to sign and deliver Form 8332 to the father.

In 2009, the father claimed two children on his tax return because the mother was unemployed. He also claimed the child tax credit and filed as head of household. The mother claimed two children as well, because it was an odd year. The IRS examined both returns because one of the children was claimed by both parents. The IRS approved the mother's return because the children had lived with her more than 50% of the time. It disallowed the father's dependency exemption and, consequently, also his child tax credit and head of household status, assessing over $3,000 of tax against him.

The father filed a petition for relief with the U.S. Tax Court in 2012. When the case was called for trial a year later, the father sought a continuance so that he could apply to the family court for an order requiring mother to sign Form 8332 to perfect his claim for the dependency exemption. His continuance request was denied. Because the IRS has a three-year period of limitations to assess taxes, the delay would put it outside the assessment period against the mother and, therefore, it would not be able collect the necessary tax.

At trial, father asserted that he was entitled to a dependency exemption for all three children because mother was not employed in 2009. Mother's 2009 tax return did not show any earned income. Father further contended that although mother did not sign Form 8332, she should have signed it.

Tax Law

A taxpayer is entitled to one exemption for each person that can be claimed as a qualified dependent. Under Section 152 of the IRC, the five part test for a qualified dependent child is: 1) the child must be the taxpayer's son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them; 2) the child must be: (a) under age 19 at the end of the year and younger than the taxpayer (or the taxpayer's spouse, if filing jointly), (b) under age 24 at the end of the year, a full-time student, and younger than the taxpayer (or the taxpayer's spouse, if filing jointly), or (c) any age if permanently and totally disabled; 3) the child must have lived with the taxpayer for more than half of the year; 4) the child must not have provided more than half of his or her own support for the year; and 5) the child is not filing a joint return for the year (unless that joint return is filed only as a claim for refund).

In the case of divorced parents, there are special rules that determine which parent can claim the dependency exemption. Typically, due to the 50% or more residency requirement, a child of divorced or separated parents is the qualifying child of the custodial parent. However, the child will be treated as the qualifying child of the noncustodial parent if the parents: 1) are divorced or legally separated under a decree of divorce or separate maintenance; 2) are separated under a written separation agreement, or lived apart at all times during the last six months of the year, whether or not they are or were married; 3) the child received over half of his or her support for the year from the parents; 4) the child is in the custody of one or both parents for more than half of the year; and 5) the custodial parent signs a written declaration that he or she will not claim the child as a dependent for the year, and the noncustodial parent attaches this written declaration to his or her return.

What Happened in Shenk

The father in Shenk failed to meet not only the residency requirement but also the requirement for the written declaration. As a result, his dependency exemption was disallowed. As the child tax credit and head of household filing status are contingent on having at least one dependency exemption, those claims were also disallowed. Clearly, this result was contrary to the family court's judgment, but as set forth by the U.S. Tax Court ” ' 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 Mr. Shenk does not meet the criteria of the Code for claiming the disputed dependency exemption deduction.”

The IRS has prescribed Form 8332 to make the necessary declaration, which states in pertinent part that “I agree not to claim” a child as my dependent. Although the Form is not specifically required, best practice would be to use this form, which can be downloaded from the IRS website at www.irs.gov. Another very useful resource for understanding tax rules for divorced or separated parents is IRS Publication 504, which can be downloaded from the same site.

Julia Swain, a member of this newsletter's Board of Editors, is a partner at Fox Rothschild LLP. She is a Fellow of the American Academy of Matrimonial Lawyers and past Chair of the Philadelphia Family Law Section. Reach her at [email protected] or 215-299-2794.

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