On March 13, 2014, the Eighth Circuit Court of Appeals in a consolidated appeal affirmed two decisions from the United States Tax Court, Armstrong v. Commissioner, 139 T.C. 468 (2012) and Hanson v. Commissioner, T.C. Memo. 2012-352. Armstrong v. Commissioner, No. 13-1235 (8th Cir. 2014), Hanson v. Commissioner, No. 13-2064 (8th Cir. 2014). In both of those cases the Tax Court concluded, and the Eighth Circuit affirmed, that noncustodial parents were not entitled to dependency exemption deductions claimed under IRC section 152, for their noncustodial children because the noncustodial parents did not attach to their tax returns a Form 8332 or another document conforming in substance to Form 8332 declaring that the custodial parent “will not claim” the child as a dependent for the taxable year. The Tax Court and the Eight Circuit reached this conclusion even though the taxpayers had enforceable agreements arising out of divorce proceedings indicating that the noncustodial parents were entitled to the exemption deductions for the tax years in issue.
It is easy to sympathize with the taxpayers in both Armstrong and Hanson, who likely believed they did everything they were supposed to in order to claim a dependency exemption deduction. However, the courts in these cases concluded the bright-line requirements in the Internal Revenue Code must prevail over sympathetic facts and even the legal interest created under state law.
The Facts in Armstrong. In Armstrong, Mr. Armstrong’s former spouse had custody of their two children. Agreements accompanying their divorce provided that Mr. Armstrong may claim the dependency exemption for one child, C.E., and his ex-wife may claim for the other child. The Armstrongs did not attach a Form 8332 signed by Mr. Armstrong’s ex-wife to their joint return for 2007, the tax year in question. Instead, Mr. Armstrong attached a copy of a 2003 arbitration award allocating the exemption for C.E. to him with the proviso that “commencing with the year 2005 in order to claim a child as a tax exemption the father must be current in his payment of child support as of the last day of the filing year.” The parties stipulated that (i) Mr. Armstrong was current in his child support payments in 2007, and (ii) his ex-wife did not provide him a completed Form 8332 or any other document declaring that she “will not claim” C.E. as a dependent for that tax year.
The Facts in Hanson. Similarly, in Hanson, Mr. Hanson’s former spouse had custody of their son, Z.H., in 2008, the calendar tax year in question. The Hansons claimed a dependency exemption for Z.H. but did not attach a completed Form 8332 to their joint return. Instead, they attached a copy of a 1998 stipulation and agreement in which Mr. Hanson’s ex-wife agreed that “[s]o long as [Mr. Hanson] is current on child support payments, [he] shall be entitled to claim [Z.H.] as a dependent on his federal and state income tax returns.” The agreement was signed and dated by Mr. Hanson and his ex-wife and included their Social Security numbers. The parties stipulated that (i) Mr. Hanson was current on his child support payments during tax year 2008, and (ii) his ex-wife did not provide him a completed Form 8332 or any other document declaring that she “will not claim” Z.H. as a dependent for that tax year.
Dependency Exemption Deductions. Internal Revenue Code section 152(c)(1)(B) provides that, to claim a “qualifying child” as a dependent, the child must live with the taxpayer for more than half the taxable year. Thus, under this general rule the custodial parent is entitled to the deduction. Section 152(e)(2) then provides the exception that a noncustodial parent may claim the child as a dependent if he or she attaches to the tax return a “written declaration” signed by the custodial parent declaring that the custodial parent “will not claim such child as a dependent” in that calendar year.
The Eighth Circuit agreed with the IRS’s argument that written declaration that is conditional, e.g., that depends on the noncustodial parent keeping current on support payments, does not meet the statutory requirement:
A conditional declaration simply does not meet [section 152(e)(2)’s] requirement. As the Tax Court noted, when Mr. Armstrong’s exwife declared that she will not claim the exemption if he keeps current with support payments, she “thereby declared that if he does not keep current, then she will claim the child as a dependent.” Armstrong, 139 T.C. at 474. The documents submitted by the taxpayers merely told the IRS that the custodial parents might not claim the exemptions for C.E. and Z.H. in any particular tax year, not that they will not claim the exemptions.
The taxpayers argued that state courts often allocate entitlement federal dependency exemption deductions in divorce proceedings, and that federalism principals require that the IRS honor the state court’s allocations. The Eighth Circuit rejected this argument reasoning “‘The state law creates legal interests but the federal statute determines when and how they shall be taxed.’ United States v. Mitchell, 403 U.S. 190, 197, 91 S.Ct. 1763, 29 L.Ed.2d 406 (1971) (quotation omitted). Determining who is entitled to federal income tax exemptions, deductions, and credits is entirely a matter of federal law, for these are questions of ‘when and how they shall be taxed.’” The Eighth Circuit did mention, however, that “if a violation of a state court order wrongly deprives the intended beneficiary of a federal tax advantage, the state court unquestionably retains authority to remedy that violation.”
New Regulations. Although not applicable in Armstrong or Hanson, the applicable treasury regulations—Treas. Reg. § 1.152-4(e)(1), (h)—have been amended to provide that for tax years after July 2, 2008, the written declaration required under section 152(e) may not be conditioned on any event, including payment of child support, and any substitute for Form 8332 must have been executed for the sole purpose of serving as a written declaration.
The moral of the story. If you’re a non-custodial parent claiming a dependency exemption deduction, make sure you get a signed Form 8332 from the custodial parent.