Who gets dependency exemptions for children should not be really hard. They default to the custodial parent, which granted is not always apparent, but usually is.  If the non-custodial parent wants the deduction, he (and it usually is “he”) needs a Form 8332 signed by the custodial parent to attach to his return.

Without the form (or its equivalent, but don’t mess with that), the noncustodial parent is out of luck as far as IRS and the Tax Court is concerned.  Form 8332 allows the custodial parent to release the exemptions for a single year or also for future years.  The release can be revoked, but the revocation is only effective beginning in the year following the delivery of the revocation to the noncustodial parent.

You Need The Form

These rules are pretty hard and fast and decisions about them serve as an illustration of Reilly’s First Law of Tax Planning – “It is what it is. Deal with it.  There were two recent rulings that illustrate both sides of the problem.  The first was the Tax Court decision in the case of Xionghui He.

Mr. He’s situation is pretty typical.  The “Permanent Parenting Plan”, besides naming  Mrs. He as the “Primary Residential Parent” provided:

The *** father may claim the exemptions for the child or children so long as child support payments are current by the claiming parent on January 15 of the year when the return is due. The exemptions may be claimed *** each year. The *** will furnish IRS Form 8332 to the parent entitled to the exemption by February 15 of the year the tax return is due.

According to the decision, Mr. He was current on child support on January 15, 2012.  Nonetheless, his ex-wife refused to provide him with the Form 8332.  He did something that seems reasonable.

Petitioner nevertheless claimed dependency exemption deductions, as well as a child tax credit, for A.H. and J.H. on his 2011 return. In lieu of attaching a Form 8332 to his 2011 return, petitioner attached a letter citing his authority for claiming the children as dependents, with pages from the relevant divorce documents as proof, and explained that his ex-wife had refused to obey the divorce decree and intended to claim the children as dependents.

But you and I both know that that does not work.  What Mr. He needed to do was to take his ex-wife into probate court to enforce the agreement.  Of course, that is easier said than done.

The Tax Court was sympathetic to his plight, but of no help to him.

We sympathize with petitioner’s circumstances: He was up to date on his child support, and under the divorce documents, his ex-wife was obliged to sign Form 8332 and release the exemption deductions to him. We are obligated, however, to follow the statute as written. Accordingly, petitioner is not entitled to dependency exemption deductions for A.H. and J.H. for tax year 2011.

If You Have The Form You Win

The other ruling indicates the other side of the coin.  It is a chief counsel advice (CCA 201602009).  Father  is claiming the exemption for two children and he attached a signed Form 8332 indicating that the release is good for “all future years” and purportedly signed by Mother.  Mother claims that she does not recall ever signing such a thing and does not believe that she would have.

Dad wins, at least this round.

In the present case, the noncustodial parent attached Form 8332 to his ——— return. Although Part I was not completed, Part II was and the “all future years” language used in Part II of the form covers the ——— taxable year. Accordingly, under § 152(e), the two children are treated as qualifying children or qualifying relatives of the Father, the noncustodial parent. Regarding the custodial parent’s claim that she did not execute the Form 8332 attached to the non-custodial parent’s tax return, if the form is completed, signed, and attached to the noncustodial parent’s return, the IRS should allow the dependency exemption for the children named on the form to the noncustodial parent and deny the custodial parent’s claim to the dependency exemption. If the custodial parent did not execute the Form 8332, her remedy is against the noncustodial parent. In addition, if the custodial parent did release the dependency exemption for all future years, the regulations under § 152 allow her to revoke the release for the first calendar year after the year in which she revokes the release. Part III of Form 8332 is used for future year revocations. (Emphasis added)

I have to say that if Father forged Mother’s signature on the Form 8332, he could be in a heap of trouble.  One of my criminal tax law experts suggests Section 7206(1) – Fraud and False Statements – “even independent of the Mom’s signature, Dad has a false return.  The forgery would be a key element of proof of willfulness, required for most Title 26 crimes”.  Also the judge in the divorce case might be a bit upset with Dad and could probably find something nasty to make him regret his creativity.

Is The Game Worth The Candle?

The dependency exemption seems to play a role in divorce negotiations out of proportion to its economic significance.  The focus on Form 8332 by the IRS is probably reasonable tax administration, since they don’t really have the capacity to sort these disputes out.  I understand the trend in some circles, is to have parents take turns claiming the exemption.  My own view is that the smart thing for a noncustodial parent would be to seek some other concession and forget about the exemption , since it is one more thing that there can be future bickering about.