In a Tax Court case Thomas v. Commissioner released 1-19-2010, petitioner asked the court to determine if he is entitled to a dependency exemption despite the fact that the petitioners ex-wife claimed the dependency exemption in violation of the agreement in the divorce decree.
In the divorce decree, the petitioner and the P's ex-wife had agreed to claim the dependency exemption for their child on alternating years with a caveat that the petitioner remained current on child support. In the tax year at issue petitioners ex-wife claimed the exemption in a year that the petitioner was entitled to the exemption and the petitioner was current on his child support. The petitoner paper filed his return but he attached the divorce decree instead of form 8332
The petitioner doesn't meet any of the ordinary criteria to claim the exemption -- his only hope is Section 152(e). The requirements are that the
-- Taxpayer provides over one half of the support for the child (51%)
-- The parents have to be divorced or separated for at least the last 6 months of the tax year.
-- The dependant is in the custody of one or both parents
-- The custodial parent releases the exemption in writing. The written release must conform to the following and only the following:
The declaration includes the children's names and the years for which the exemption is being released
The custodial parents signature and date
The custodial and noncustodial parents name's and SSN's
The court held that petitioner is not entitled to the exemption because (among other things) the divorce decree contained conditions for the exemptions release. Unfortunately the conditional release of the dependancy exemption is a common componant in divorce decree language, and it is in direct opposition to the requirements proscribed by the Treasury Department.
First, I would encourage attorneys to discuss the dependancy exemption much more thoroughly and (if possible) draft language in the decree that conforms to form 8332 and IRC Section 152(e). This is much easier said than done. Due to that fact that conforming language requires an unconditional release of the exemption, custodial parents who agree to form 8332 conforming language will have to accept losing the ability to use the exemption as a bartering tool. On the other hand non-custodial parents who are only able to get conditional exemption releases in the decree language are left somewhat to the whims of the custodial parents to sign form 8332 each year that they are entitled to the dependancy or to violate the decree and claim the child anyway.
Due the paradox that section 152(e) and form 8332 create for divorcing couples, I would like to suggest that Congress consider a limited (to the exemption amount) adjustment or deduction for child support. Doing so would grant some comparable tax relief to non-custodial parents who are honest in paying child support, and it would eliminate major controversies. The custodial parent maintains the exemption and the child tax credit, and the non custodial parent gets relief for taking part in the care of their children, and the IRS would no longer be burdened with trying to chase down who gets the exemption and who has to pay back taxes and penalties for claiming the exemption when they were not entitled to.