Non-Custodial Parents - You Need the Freaking Form 8332

Michael F. Wesner v. Commissioner, TC Summary Opinion 2011-5

Here is some advice for the about to be divorced.  I will preface it with a cautionary note.  It is a minority opinion and the simplest thing is probably to just go with the flow of however your attorney is handing things.  There are two issues that I think they often get wrong, though.  The first is filing a joint return in the final year of the marriage.  It is usually assumed that this is a simple numbers exercise of comparing the total tax of two married filing separate (or head of household) returns and a single joint return.  I have more posts on this subject than just this one, but it will give you the gist of why this is not a good approach.  It ignores the joint and several liability created by a joint return.  That is not the topic of this post though.

The other is the dependency deduction.  The most common solution to this overrated problem is for the couple to divide up the dependency deductions and in the case of a single child take it in alternate years.  Here is my advice on that.  If you are the non-custodial parent and you can get any concession at all in exchange for giving up the dependency deduction entirely, give it up. The case of Michael Wesner is a good illustration of this point, although as you can see here, by no means, the only one.

This was the Court order relative to the child support and dependency deduction :If *** [petitioner] has paid in full all current support and court ordered arrearage payments due for the calendar year by December 31, *** , the Federal tax exemption for the minor child(ren) shall be allocated as follows: *** [petitioner] to claim 2006 & 2007. *** [Ms. Tokar] to claim 2008. Three year pattern to continue. [Ms. Tokar] shall execute the necessary Internal Revenue Service forms to transfer the exemption(s) consistent with the order. Note: The exemptions are not allocated unless the current support obligation is greater than $1,200 per year. Petitioner was also obligated to pay 60 percent of the minor child's unreimbursed medical and dental expenses. In addition to future child support, petitioner was also ordered to pay past care and support of $9,160 for April 1, 2003, through June 30, 2006, at the rate of $76 per month.



Mr. Wesner followed through on his obligations and accordingly thought he was entitled to the dependency deduction.  Things were difficult though.

Petitioner approached Ms. Tokar, the custodial parent, immediately after the entry of the court order and arranged an appointment with her to execute the Internal Revenue Service forms (tax forms) as ordered by the divorce court. Ms. Tokar did not appear at the appointed time and failed to execute the tax forms. After petitioner's attempt to obtain Ms. Tokar's signature failed, he sought enforcement of the court order by service of legal process but he did not know her mailing address. He requested Ms. Tokar's address from the agency to which he made the support payments, and it refused to provide her address. Accordingly, at the time his 2007 income tax return was due, petitioner did not have the required consent form executed by Ms. Tokar; and his income tax return was filed without the form or any other documentation supporting his claim for the dependency exemption deduction.

After more than 6 months of trying to obtain Ms. Tokar's address, petitioner hired a process server during August 2009 to find and serve her. By the time the matter came before the divorce court it was too late for Ms. Tokar to sign the tax forms.


It seems like the IRS or the Tax Court should have cut Mr. Wesner a break.  No such luck.

“The custodial parent signs a written declaration *** that such custodial parent will not claim such child as a dependent *** and *** the noncustodial parent attaches such written declaration to the noncustodial parent's return for the taxable year.”

No such document was executed and/or attached to petitioner's 2007 income tax return and, accordingly, petitioner does not meet the requirements of the statutory exception and is not entitled to claim the minor child as a dependent. This is so even though a State court with jurisdiction over the parties to a divorce proceeding ordered that petitioner was entitled to the dependency exemption deduction for 2007 and even though the custodial parent had been ordered but failed to execute the consent form required by the Federal statute. The consent form requirement is in absolute terms and is unambiguous.

In this case Mr. Wesner did get some relief from the divorce court :

The divorce court, finding that petitioner had made support payments for 2007 and had qualified under the court order for the dependency exemption deduction, credited $2,559 against petitioner's future support payments beginning September 1, 2009. The income tax deficiency respondent determined for 2007 was $2,559.

Presumably, he is still out the interest on the deficiency.

Here is the problem.  The divorce court has a lot of power over you and your ex-spouse, but it takes time, energy and money to get it to use that power to enforce its orders.  The divorce court has no power over the IRS.  The divorce court can order that the dependency deduction be released or, as in many innocent spouse cases, that your ex-spouse is liable for an income tax deficiency, but its determinations are not binding on the IRS.

Here is another way to look at the dependency deduction that might be applicable to those more prosperous than Mr. Wesner, who was working down a child support arrearage of $9,160 at the rate of $76 per month.  If you and your ex-spouse are on the older side and are both prosperous enough that the estate plan of bouncing your last check is improbable (i.e. you are both going to be leaving money to the same kids), does a couple of thousand dollars one way or the other matter at all ?  That is an attitude that probably has limited applicability, but it does have the potential of cutting your stress level.

Cleaning Up For the New Year - Thank You Maam

I still have a good backlog of 2010 material, that isn't blossoming into full length posts so here are a few quickies.

CCA 201048042

I'm involved in doing a lot of partnership returns and I think we do a pretty good job.  One of the trickier parts is the liabilities section on the K-1.  From our individual practice, I get to see a lot of the K-1's that are prepared elsewhere.  Often it is pretty clear that they are wrong.  Frequently it does not matter, but sometimes it does.  A large deficit capital balance with no liability allocation is an example of a likely error. This CCA provides a little bit of a warning in deal with clearly erroneous K-1's.
Section 6222 requires the partners to report the amount and allocation of liabilities consistent with the partnership return unless they file a Notice of Inconsistent Treatment on Form 8082. In the absence of such a filing we are permitted to make an assessment without issuing a FPAA. I.R.C. 6222(c). They filed no such notice here so we do not need to conduct a TEFRA proceeding to make the assessment. Since outside basis is an affected item requiring partner-level determinations, however, we would have to issue an affected item notice of deficiency in order to assess a distribution in excess of basis. In the stat notice proceeding they could arguably rely on Roberts v. Commissioner, 94 T.C. 853, 860 (1990) to allege that the partnership books and records reflect the nonrecourse debt in issue, their reporting is consistent with the actual partnership books and records, and that the Schedule K-1 issued to them was incorrect. Cf. Treas. Reg. 301.6222(b)-3 (incorrect schedule provided to partner).

Private Letter Ruling 201048025, 12/03/2010

Code Sec. 1031(f); won't make benefits of Code Sec. 1031(a); unavailable to corp. under described circumstances provided that taxpayer, related party, and any affiliate undertaking exchange hold their respective replacement property for two years following their respective acquisition of replacement property.

This was a fairly convoluted set of facts.  It involves a sequence of related party exchanges.  I think the point of it was that since there was no ultimate cash out, nobody was getting away with anything.  I'd appreciate any comments that anybody else who has studied this ruling might have.

Lori A. Malchow-Bartlett v. Commissioner, TC Memo 2010-271

Taxpayer was denied deduction for use of home for day care, because she was not properly licensed :

Under section 280A(c)(4)(A), a taxpayer may be allowed business expense deductions relating to use of a residence to conduct child day care services. However, the deductions are allowed only where the taxpayer has obtained, or has applied for and has pending, a license to conduct child daycare services under applicable State law or is exempt from obtaining a license therefor under applicable State law. Sec. 280A(c)(4)(B).

The court concluded that taxpayer acted in good faith so no penalties were assessed.

U.S. v. BEDFORD, Cite as 106 AFTR 2d 2010-7271, 12/09/2010

This case is really outside my area of interest.  It is a criminal appeal.  The thing that got him in trouble was kind of interesting though.



The genesis of this case involved a business called Tower Executive Resources that billed itself as an executive recruitment business. In fact, Tower promoted to its members the opportunity to protect assets and to enjoy tax deferral through an offshore venture. Tower marketed its asset protection services to select clients through seminars at which Defendant and others spoke.

Essentially, clients learned at these seminars how to create bogus corporate entities called “international business corporations,” referred to as IBC-1s and IBC-2s. IBC-1s were domestic corporations that would hire and pay IBC-2s, foreign corporations, to perform services for the IBC-1s. Those services did not actually occur.


Mohamed M. Magan v. Commissioner, TC Summary Opinion 2010-173

In January 2007, petitioner moved from the State of Minnesota to the State of California in order to be closer to his sister and her family. Throughout 2007 petitioner's sister was married and lived with her husband and five children in a single- family home. Petitioner's sister was a stay-at-home mom and her husband was a full-time student who only started working in late 2007.


From January to August 2007, petitioner worked nights. Although petitioner did not live with his sister and her family during this time, he would spend much of his time at their home helping with childcare and doing the family's errands. In addition to assisting with childcare and errands, petitioner also provided his sister's family with financial assistance.


In August 2007, petitioner obtained a job located far away from where his sister and her family lived. For the remainder of 2007, petitioner was unable to help his sister with child care and errands, but he continued to provide financial assistance.

Petitioner claims that he is entitled to dependency exemption deductions for his two nieces because he provided financial assistance, as well as help with child care and the family's errands. We commend petitioner for contributing to the support of his sister's family. However, he has not demonstrated that he and his nieces shared the same principal place of abode for any portion, much less for more than one-half, of the taxable year in issue.

I thought the commendation from the Tax Court was a nice touch, even thought they couldn't help the poor guy, who seems to have deserved a break.

It looks like January will have a few more post like this as I work through my backlog.  If anything really significant develops, I'll be sure to do a bonus post.

Chief Counsel Reiterates Dependency Option for Same Sex Couples

CCA 201040012

I am always on the lookout for anything that might be relevant for my mythical clients Robin and Terry, a couple of indeterminate gender and marital status, whose role in life is to help me avoid awkward pronoun problems.  I introduced them in my post on CCA 201021050, which calls for income splitting for California domestic partners.  They also appear in my post on Gill v OPM, which declared a portion of the Defense of Marriage Act unconstitutional.  Incidentally the Justice Department filed a notice of appeal in Gill.

A CCA, by the way, is a Chief Counsel Advice.  Here is the meat of the latest CCA bearing on Robin and Terry :


The issue raised by the agent was discussed here in the National Office and with Treasury in connection with the development of Notice 2010-38. The conclusion reached at that time is that the FICA and FUTA provisions relating to “dependent” aren't really definitions in the sense of an exclusive meaning. They're instead worded to say “dependents” “include” an employee's family members. They do not preclude the possibility that other individuals could also be dependents for purposes of the FICA and FUTA exclusions.


When the issue was discussed in connection with Notice 2010-38, we viewed the PLRs (e.g., PLR 200339001 and PLR 200108010) as expanding the group of dependents described in the FICA and FUTA regs to include individuals who are dependents under section 152. Therefore, even though the PLRs can't be relied on by taxpayers other than those who got them, it is Counsel's position that a domestic partner who is a dependent of an employee under section 152 is also a dependent for purposes of the FUTA exclusion. Thus, the value of the health coverage for the domestic partner isn't FUTA wages.

In order for someone to be your dependent you must meet three tests - relationship, support and gross income.  One of the possible relationships is "member of your household" (with the quaint caveat that the household composition not violate local law).  So if Robin provides more than 1/2 of Terry's support and Terry's gross income is below the threshold (currently $3,650) Terry can be Robin's dependent.  This will qualify Robin for the more favorable head of household rates and exempt from payroll and withholding the health benefits that Robin's employer provides to Terry.  To be someones dependent for medical purposes, however, does not require that you meet the gross income tax.  So Terry could have substantial income and still be a dependent for purposes of the medical benefit exclusion.

An interesting question is what is going to happen to California domestic partners who have benefited from this technique.  Thanks to CCA 201021050 Terry will now be taxed on 1/2 of Robin's income and presumably will no longer qualify as a dependent.  I can hear somebody howling "That doesn't make any sense."  The answer to that is that making sense is not a requirement.

Need Form for Dependency Deduction

I've told a couple of sad stories of damsels in distress who the Tax Court couldn't help.  Well here's hoping for a little schadenfreude for Caron Riganti  and Laura Brady as they contemplate the fate of Gary Knorad in TCM 2010-179.  I hate the apparent gender stereotyping from having two women going for innocent spouse treatment followed by a guy getting stiffed on a dependency deduction, but I'm stuck with the raw material that I find.  Except by special request, my material is less than a year old and sometimes hot off the press.

The dependency deduction probably absorbs more attention in divorce negotiations than it really deserves.  It it never going to amount to a very large amount of money.  It probably has to do with the emotions involved. What seems to be common nowadays is an every other year deal between the custodial and non-custodial parent.  What is commonly missed though is that in order for the non-custodial parent to take the deduction he or she must have a release signed by the custodial parent. If that detail is neglected, the non-custodial parent is not entitled to the deduction.

By the terms of his divorce decree Mr. Konrad believed he was entitled to a dependency deduction.  He submitted the decree to the tax court.  They noted it was signed by a clerk of the court and the judge, but not the former Mrs. Konrad.  She had refused to sign Form 8332 when it was provided to her.  Accordingly Mr. Konrad did not have a signed copy to attach to his return. 

The stipulation and the judgment petitioner submitted do not conform to the form and substance of Form 8332. Petitioner failed to procure Ms. Konrad's signature on either the stipulation or the judgment. When petitioner later attempted to procure Ms. Konrad's signature on Form 8332, Ms. Konrad refused. The signatures of the judge and the clerk from the divorce proceeding are not adequate substitutes for Ms. Konrad's signature. Thus, without her signature on a form that releases her claim to the dependency exemption deduction, petitioner failed to satisfy section 152(e)(2)(A) and may not claim L.W.K. for the purpose of receiving the exemption.

My response to this is that maybe you shouldn't get all that excited about crafting how the dependency deduction will be shared.  If you are going to be excited about it though remember that the non-custodial parent will need that form.  Custodial parents are unlikely to be willing to sign an unconditional permanent release, which is the only sure solution, but it is unlikely to be worth pursuing them in court if they are uncooperative in the future.  Such are the human dynamics that assure we will read more on this issue in years to come.