Fact that Taxpayer Clearly Granted Right to Claim Children for Tax Year Not Relevant When Custodial Parent Did Not Sign Form 8332

Beginning with 2016 tax returns those preparing the returns for taxpayers will be charged with meeting “due diligence” requirements when taxpayers claim the child tax credit and the American Opportunity Credit or face a $510 penalty should the taxpayer not qualify for the credits [IRC §6695(g)].  For this reason, advisers must remember just how strict the rules are for a noncustodial parent to be able to claim a child—and that the mere fact the taxpayers ex is in direct violation of the terms of the decree to release the exemption is not sufficient to allow the noncustodial parent to claim the credit.

This problem is perfectly illustrated in the case of Cappel, Sr. v. Commissioner, TC Memo 2016-150.  And the situation is one that, beginning with 2015 returns, could put a preparer who prepared a return claiming these children at risk for the penalty that Congress added in the Protecting Americans from Tax Hikes Act of 2015.

The facts in this case are very straight-forward:

In 2002 a Florida family court entered a child support order in the divorce case between petitioner and his first ex-wife. The court ordered that petitioner "will receive the child dependency exemption for Tiffany and * * * [C.A.C.] each and every year beginning in 2001" but "only if he remains current from this point [*3] forward in his payments of child support." Petitioner credibly testified that he has been current in his child support payments at all relevant times, and respondent does not contend otherwise.

Petitioner timely filed a Federal income tax return for 2011 on which he claimed Tiffany, C.A.C., and P.A.C.J. as dependents. Notwithstanding the Florida court's 2002 order, petitioner's first ex-wife likewise claimed Tiffany and C.A.C. as dependents for 2011. And P.A.C.J.'s mother claimed him as a dependent for that year as well.

The general rule under IRC §152(e)(4) is that, in the case of divorced parents, if a child receives over ½ of his/her support from the divorced parents (that is, counting the contributions of each parent) the child is to be claimed by default as the dependent of the custodial parent.  The custodial parent is the parent with whom the child spent the most nights during the tax year. 

However the noncustodial parent may claim the exemption if the requirements of IRC §152(e)(2) are met:

(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.

Mr. Cappel’s ex-wife did not sign a written declaration for the year in question and, obviously, Mr. Cappel did not attach that to his return.  But he did have a divorce decree that provided he would be able to claim the children if he was current in his child support—and neither the Tax Court nor the IRS suggested that he was not current in his obligations.

The problem, however, is that this is a “bright line” test and, as often happens in bright line tests, the results are easy to determine but wildly unfair in certain situations.  The Court notes:

The “written declaration” by the custodial parent must be made on Form 8332 or in a signed document substantially similar to Form 8332. See sec. 152(e)(2); Armstrong v. Commissioner, 139 T.C. 468 (2012), aff'd, 745 F.3d 890 [*6] (8th Cir. 2014); Miller v. Commissioner, 114 T.C. 184, 190-191 (2000), aff'd on other grounds sub nom. Lovejoy v. Commissioner, 293 F.3d 1208 (10th Cir. 2002). A judicial decree or child custody order, standing alone, does not qualify as a “written declaration” within the meaning of section 152(e). See Miller, 114 T.C. at 193-194; Neal v. Commissioner, T.C. Memo. 1999-97, 77 T.C.M. (CCH) 1610, 1612; sec. 1.152-4(e)(1)(ii), Income Tax Regs. (“A court order or decree or a separation agreement may not serve as a written declaration.”)

Lacking the Form 8332 or another document that contains everything that would be on that form (including the spouse’s signature) that was not the divorce document, he simply could not claim the exemptions—and losing those he also could not claim a child tax credit—as the Court noted in a footnote “To be entitled to the child tax credit, a taxpayer must have a ‘qualifying child * * * for which the taxpayer is allowed a deduction under section 151.’ See sec. 24(a).”

The Court does address the basic unfairness of this result, noting:

This case resembles many that come before our Court. The situation is unfortunate: Petitioner has acted honorably in paying child support for many years, but his ex-wife has apparently claimed two of their children as dependents in violation of a Florida court order. But while the result may seem harsh in these circumstances, the law is unfortunately clear. On the record before us, we have no alternative but to sustain respondent's determinations.

With the arrival of the new due diligence rules that apply to preparers of 2016 returns, advisers must take care to insure that they confirm whether or not a taxpayer is a custodial parent in a situation like this and insist on obtaining a Form 8332 signed by the custodial parent if the taxpayer does not qualify as the custodial parent.  A divorce decree or state court order, no matter how clear, simply is not adequate