Although it’s an issue we’ve discussed before, it’s important to remember to remind noncustodial parents of the requirement to submit a signed Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent with their tax return to claim the child as a dependent. In the case of DeMar v. Commissioner, TC Memo 2019-91,[1] the taxpayer was denied such benefits due to his failure to submit the form. And even though the taxpayer did eventually obtain a signed form, he failed to prove that his former spouse had filed an amended return to give up her tax benefit—a condition imposed in proposed regulations when taxpayers attempts to submit Form 8332 after initially filing a return for the year.

Divorces often leave the parties with hard feelings, and the issues surrounding children can be especially sensitive. To keep the Tax Court from getting into the middle of such squabbles between former spouses, the law provides a very mechanical test for which of the divorced parents will be able to claim the child as a dependent.

Note that while the dependency exemption no longer is available temporarily after the Tax Cuts and Jobs, other items, such as the child tax credit, still depend on the party that can claim the child as a dependent.

The law provides special rules for children of divorced parents, found at IRC §152(e). So long as the child receives over ½ of his/her support from the combined contributions of both parents, the parent who is deemed the custodial parent as defined in the IRC by default has the right to claim the child as a dependent.[2] This is true regardless of how much of the support is provided by that parent, since the support test could be fulfilled by contributions solely from the non-custodial parent.

Which parent is the custodial parent does not depend on state law, or what the divorce decree says—this is a matter of federal law, specifically that found in Title 26 of the US Code (the IRC). Reg. §1.152-4 provides the following detailed “count the nights” rule for determining custody:

(d) Custodial parent.

(1) In general.

The custodial parent is the parent with whom the child resides for the greater number of nights during the calendar year, and the noncustodial parent is the parent who is not the custodial parent. A child is treated as residing with neither parent if the child is emancipated under state law. For purposes of this section, a child resides with a parent for a night if the child sleeps --

(i) At the residence of that parent (whether or not the parent is present); or

(ii) In the company of the parent, when the child does not sleep at a parent's residence (for example, the parent and child are on vacation together).

(2) Night straddling taxable years.

A night that extends over two taxable years is allocated to the taxable year in which the night begins.

(3) Absences.

(i) Except as provided in paragraph (d)(3)(ii) of this section, for purposes of this paragraph (d), a child who does not reside (within the meaning of paragraph (d)(1) of this section) with a parent for a night is treated as residing with the parent with whom the child would have resided for the night but for the absence.

(ii) A child who does not reside (within the meaning of paragraph (d)(1) of this section) with a parent for a night is treated as not residing with either parent for that night if it cannot be determined with which parent the child would have resided or if the child would not have resided with either parent for the night.

(4) Special rule for equal number of nights.

If a child is in the custody of one or both parents for more than one-half of the calendar year and the child resides with each parent for an equal number of nights during the calendar year, the parent with the higher adjusted gross income for the calendar year is treated as the custodial parent.

(5) Exception for a parent who works at night.

If, in a calendar year, due to a parent's nighttime work schedule, a child resides for a greater number of days but not nights with the parent who works at night, that parent is treated as the custodial parent. On a school day, the child is treated as residing at the primary residence registered with the school.

Note that nothing in the above rules refers to any language in the divorce decree.

Example

Custodial Parent Based on Nights Test

Paul and Kristie are the parents of Brandon. Paul and Kristie divorced two years ago. The divorce decree provided that Brandon would be in the custody of Kristie and specified that Paul would have Brandon with him one weekend a month, and for two weeks in the summer.

Kristie was offered a new job out of state in April of 202X for substantially higher pay. Brandon, 16, was completing his junior year of high school and did not want to move away. Since Paul resided nearby, the couple and Brandon agreed he would live with Paul until he graduated from high school. From May 1, 202X through December 31, 202X Brandon resided with Paul.

Despite the language in the divorce decree that provided that Kristie had custody of Brandon, Paul is treated as the custodial parent for 202x since Brandon spent more nights at Paul’s residence than he did at Kristie’s.

The law does allow for the custodial to transfer the exemption to the noncustodial parent which is found at IRC §152(e)(2):

(2) Exception where custodial parent releases claim to exemption for the year

For purposes of paragraph (1), the requirements described in this paragraph are met with respect to any calendar year if—

(A) the custodial parent signs a written declaration (in such manner and form as the Secretary may by regulations prescribe) that such custodial parent will not claim such child as a dependent for any taxable year beginning in such calendar year, and

(B) the noncustodial parent attaches such written declaration to the noncustodial parent’s return for the taxable year beginning during such calendar year.

The regulations provide detailed instructions on the nature of such a release, effectively mandating the use of Form 8332 or a form that for all intents in purposes duplicates everything on the IRS form:

(e) Written declaration.

(1) Form of declaration.

(i) In general.

The written declaration under paragraph (b)(3)(i) of this section must be an unconditional release of the custodial parent's claim to the child as a dependent for the year or years for which the declaration is effective. A declaration is not unconditional if the custodial parent's release of the right to claim the child as a dependent requires the satisfaction of any condition, including the noncustodial parent's meeting of an obligation such as the payment of support. A written declaration must name the noncustodial parent to whom the exemption is released. A written declaration must specify the year or years for which it is effective. A written declaration that specifies all future years is treated as specifying the first taxable year after the taxable year of execution and all subsequent taxable years.

(ii) Form designated by IRS.

A written declaration may be made on Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or successor form designated by the IRS. A written declaration not on the form designated by the IRS must conform to the substance of that form and must be a document executed for the sole purpose of serving as a written declaration under this section. A court order or decree or a separation agreement may not serve as a written declaration.

The divorce decree in the case of Mr. DeMar read as follows:

Mr. DeMar is divorced and has one son, TD, with his ex-wife, Amanda Renee DeMar. TD was born in 2008. In 2010 Mr. and Ms. DeMar agreed to custody and child support terms in a consent judgment of divorce. In the judgment they established TD’s primary residence with Ms. DeMar. They also agreed that Mr. DeMar was entitled to claim TD as a dependent for even-numbered years. For odd-numbered years Mr. DeMar was entitled to claim TD only if he stayed current with his child support obligations and Ms. DeMar’s annual gross income was less than $15,000. If these conditions were met, Ms. DeMar agreed to execute Form 8332 or a similar written declaration.[3]

For 2015, an odd-numbered year, Mr. DeMar claimed TD as his dependent. TD resided with Amanda for the year and Mr. DeMar did not attach a signed Form 8332 to his return for the year. Amanda also claimed TD as a dependent on her return. Not surprisingly, this double claim of the dependent brought the DeMars to the attention of the IRS who, after discovering Amanda was the custodial parent, disallowed the dependency exemption on Mr. DeMar’s return.[4]

The Tax Court found that Mr. DeMar did not meet the requirements to claim the exemption, noting:

Mr. DeMar was not entitled to claim TD as a dependent for 2015 because he did not satisfy the requirements established under section 152. For a noncustodial parent to claim a qualifying child as a dependent under section 152, (1) the custodial parent must sign a written declaration stating that he or she will not claim the child as a dependent and (2) the noncustodial parent must attach that declaration to his or her return. Sec. 152(e)(2).[5]

But the story doesn’t quite end here—in this case Mr. DeMar did obtain a signed Form 8332 from Amanda after he received the notice of deficiency (90-day letter).[6] He argued that he and Amanda fulfilled the conditions in their judgment of divorce. And, let’s remember, although late he now had the signed letter.

However the Tax Court did not find that any of these facts changed the results. The Court decided it did not need to determine if a Form 8332 could be submitted after the filing of an original return. The opinion noted that the law does not explicitly allow or prohibit a Form 8332 to be submitted on an amended return or during an examination.

The Court turns to a proposed regulation (Proposed Reg. §1.152(e)(2)(i)) which provides:

(2) Attachment to return -- (i) In general. A noncustodial parent must attach a copy of the written declaration to the parent's original or amended return for each taxable year for which the noncustodial parent claims an exemption for the child. A noncustodial parent may submit a copy of the written declaration to the IRS during an examination to substantiate a claim to a dependency exemption for a child. A copy of a written declaration attached to an amended return, or provided during an examination, will not meet the requirement of this paragraph (e) if the custodial parent signed the written declaration after the custodial parent filed a return claiming a dependency exemption for the child for the year at issue, and the custodial parent has not filed an amended return to remove that claim to a dependency exemption for the child.

These regulations were issued with a note in the preamble that “[p]ending the issuance of the final regulations, taxpayers may choose to apply these proposed regulations in any open taxable years.”[7]

But, as the Tax Court notes, the taxpayer did not show he met the proposed regulations, since he produced no evidence that Amanda had amended her return to remove her claim for an exemption for TD. The Court did not explicitly say so, but most likely the Court felt that the provision was clearly there to prevent a double benefit to the two parents—and that unless Amanda had followed through and relinquished the exemption and paid back the tax benefit, a second benefit would not be granted to Mr. DeMar. As well, since the regulations in force now were silent on the issue, the Court felt comfortable looking to the proposed regulations for guidance on how to handle the matter.

The case highlights the fact that this issue is decided strictly based on conforming to required steps to transfer the exemption to a non-custodial parent. And it also clarifies that a non-custodial who fails to attach the exemption to his/her original return must show that if the custodial parent claimed the child on his/her return, that the custodial parent has filed an amended return to remove the claim for an exemption.

[1] https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=12004, retrieved July 18, 2019

[2] IRC §152(e)(1)(B)

[3] https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=12004, p. 2

[4] Ibid, p. 2-3

[5] Ibid, p. 4

[6] IRC §6212

[7] Preamble to Proposed Regulations, REG-137604-07, January 18, 2017