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# 59 - Court's authority to award dependent child tax exemption.

Monograph # 59                                                        (Rev. 3.4a)

DEPENDENT CHILD TAX EXEMPTION:
CAN IT BE AWARDED TO A NONCUSTODIAL PARENT?

© Lawrence D. Gorin, Attorney at Law, Beaverton, Oregon

Introduction

        When married parents of minor children divorce, the question of which parent will have the right to claim the federal income tax exemption for a qualifying dependent child is often a disputed issue, particularly when the tax value of the exemption is worth more to one parent than the other.  When the issue is raised in a contested case, it is not infrequent that the trial court judge, often in an effort to balance the equities, will make an "award" of the right to claim the exemption. 

        The premise of this article is that, absent specific federal statutory authorization to do so --- which has not existed since 1985 --- state court judges do not have the authority to award the right to claim the exemption to a noncustodial parent over the objection and without the voluntary written consent of the custodial parent.

Background

        Prior to January 1, 1985, the Internal Revenue Code (IRC), as it applied to divorced and separated parents who provided more than one-half of the child's total support during the year, accorded to the "custodial parent" the right to claim the dependent child tax exemption.  However, the tax code also provided for two exceptions that, if applicable, would allow the exemption to be claimed by "the parent not having custody," i.e., the noncustodial parent.  Specifically, pursuant to 26 USC § 152(e)(2) the noncustodial parent was allowed to claim the exemption if:
       (A)  "a written agreement between the parents * * * provides that the parent not having custody shall be entitled to any deduction allowable under section 151 for such child," OR
       (B)  "the decree of divorce or of separate maintenance * * * provides that the parent not having custody shall be entitled to any deduction allowable under section 151 for such child."
    NOTE:  Prior to January 1, 1985, 26 USC § 152(e)(2)(A) also required the noncustodial parent to have paid at least $600 in support for the child.  Further, as an alternative to section 152(e)(2)(A), section 152(e)(2)(B) allowed the noncustodial parent to claim the exemption if that parent provided $1,200 or more for the child's support and the custodial parent could not prove that he or she provided a greater amount.  These financial requirements were eliminated from the tax code for tax years commencing 1985.

        Major revisions and amendments to the federal income tax code were enacted by Congress through the 1984 Tax Reform Act, aka the Deficit Reduction Act of 1984 (Pub L 98-369, 98 Stat 494).  Included was a significant change in the wording of 26 USC § 152(e)(2), applicable for tax years commencing after December 31, 1984.  As revised, the text of 26 USC § 152(e) deleted and repealed the prior language that had expressly allowed a noncustodial parent to claim the dependency exemption “if the decree of divorce or of separate maintenance * * * [so] provides.” 

        In sum, as a result the 1984 tax code revision, the previously-existing exception that effectively allowed a state court judge through a divorce decree to award to a noncustodial parent the right to claim the dependent child tax exemption
  --- over objection and without the custodial parent's voluntary consent  --- was simply written-out of the federal income tax code for tax years commencing after 1984.  Consequently, since 1985, there is only one statutory exception to the custodial parent's right to claim the exemption, that exception being the custodial parent's voluntarily agreeing in writing to not claim the exemption and releasing it to the noncustodial parent.

Effect of 1984 tax code revision

        The effect of the 1984 Tax Reform Act, was recognized by the Oregon Court of Appeals in Gleason v. Michlitsch, 82 Or App 688, 728 P2d 965 (1986), which reversed the provision of a trial court  judgment that awarded the dependent child tax exemption to the noncustodial father.  Mother appealed.  The Court of Appeals noted that under the pre-1985 version of Internal Revenue Code § 152(e)(2)(A), divorce courts had authority to render orders allowing the dependent child tax exemption to be claimed by a noncustodial parent. The court went on to further note that that section of the federal tax code had been repealed by the 1984 Tax Reform Act.  Consequently, as the court correctly explained:

    “Present IRC § 152 contains no provision recognizing a state court award of a dependency exemption when the parents have been married but later have divorced or separated, except for decrees made before January 1, 1985. There is now no federal statutory basis for a state court to award the dependency exemption.”  82 Or App at 693 fn 6. [Emphasis supplied.]

        The conclusion reached in Gleason was reaffirmed in Vinson and Vinson, 83 Or App 487, 732 P2d 79 (1987), in which the Court of Appeals vacated a trial court judgment that awarded to husband
the right to claim all four of the parties' children as his dependents for income tax purposes.  Citing Gleason, the court said: "[T]here is no federal statutory provision recognizing a state court's authority to award a dependency exemption when the parents have been married but later have divorced or separated.  The entitlement to the Oregon dependency credit depends on who is entitled to the exemption under federal law."

        And in Nishimura and Nishimura, 86 Or App 392, 738 P2d 1018 (1987), the appellate court deleted the provision of the trial court's  dissolution judgment that had awarded to the noncustodial father the tax dependency exemptions for the parties' two children.  Said the court:  “We adhere to our decisions in Gleason v. Michlitsch and Vinson and Vinson, where we stated that trial courts have no authority under present law to award a dependency exemption to a noncustodial parent."  86 Or App at 393.

But see......


        Notwithstanding the definitive conclusion of the Court of Appeals in Gleason v. Michlitsch, there have been several subsequent decisions in which the Court of Appeals upheld a trial court decision awarding the dependent child tax exemption to the noncustodial parent. 

        For example, in
Fincher and Fincher, 118 Or App 109, 845 P2d 1304 (1993), the trial court awarded the right to claim the dependent child tax exemption to the noncustodial father.  Custodial mother appealed, arguing that "[t]he Oregon Court of Appeals has consistently taken the position that the state courts are without authority to allocate the federal dependency" to a noncustodial parent.  In a short per curiam opinion, the trial court decision was affirmed.  The appellate court opinion in Fincher did not cite, discuss or directly overrule Gleason v. Michlitsch.  Instead, the appellate court simply cited three other cases -- Stuart and Stuart, 107 Or App 549, 813 P2d 49 (1991); Morris and Morris, 104 Or App 384, 801 P2d 875 (1990); and Richmond and Richmond, 103 Or App 55, 795 P2d 1104 (1990) --  none of which directly involved or adjudicated the substantive legal issue of the court’s authority vis-à-vis federal law to award the exemption to a noncustodial parent.  Indeed, there has been no Oregon appellate court decision directly citing and overruling the conclusion reached in Gleason as to the authority of a state court to award the dependency exemption to a noncustodial parent.

Tax law since 1985

        Under the federal income tax code since 1985, a noncustodial parent may claim the dependent child tax exemption pursuant to 26 USC § 152(e) ("Special rule for divorced parents, etc.") only if the custodial parent voluntarily waives the right to claim the exemption and consents to the exemption being claimed by the noncustodial parent.  The previously-existing statutory authority of a divorce court judge to independently award to a noncustodial parent the right to claim the exemption no longer exists.

        NOTE:  An award or assignment of  "custody" as set forth in a dissolution judgment or other court order is not binding on the IRS for purposes of applying the tax code's "Special rule for divorced parents, etc."  Rather, for purposes of a parent's right to claim the dependent child tax exemption, 26 USC § 152(e)(4)(A) defines the "custodial parent" as "the parent having custody for the greater portion of the calendar year,"  And just to eliminate any doubt, 26 USC § 152(e)(4)(B) says "The term 'noncustodial parent' means the parent who is not the custodial parent.
        The IRS rules for determining which parent qualifies as the "custodial parent" are set forth in IRS Regulation 1.152-4.  In sum, the custodial parent is the parent with whom the child resides for the greater number of nights during the calendar year (the counting nights rule).  A child resides for a night with a parent if the child sleeps (1) at the parent’s residence (whether or not the parent is present), or (2) in the company of the parent when the child does not sleep at a parent’s residence (for example, if the parent and child are on vacation).  Under this rule, the time that a child goes to sleep is irrelevant. 
        Further, under the counting nights rule, the parent who cares for the child at night is the custodial parent although the other parent may spend more time with the child.  A child who resides with neither 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.  However, if a child would not have resided with either parent (for example, because a court awarded custody of the child to a third party for the period of absence), the child is treated as not residing with either parent for the night of the absence. 
        A special exception is provided for a parent who works at night. Specifically, if the child resides for a greater number of days but not nights with a 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.  A night that extends over two taxable years is allocated to the taxable year when the night begins. Thus, the night that begins on December 31, 2012, is counted for taxable year 2012.  A child is treated as residing with neither parent if the child is emancipated under state law. 
    Lastly, if 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 (the "tie-breaker" rule).

        The current version of the federal income tax code, at 26 USC § 152(e)(1), sets forth the criteria that effectively accords to the custodial parent the right to claim the dependent child tax exemption.  26 USC § 152(e)(2)(A) and (B) ("Exception where custodial parent releases claim to exemption for the year") provides for the only exception.  Specifically, if the custodial parent so agrees, the noncustodial parent will be allowed to claim the exemption 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.

Implementing the custodial parent’s agreement to release the exemption

        For IRS purposes, to implement the custodial parent's agreement releasing the exemption, the custodial parent must use IRS Form 8332 ("Release/Revocation of Claim to Exemption by Custodial Parent") or a similar document containing the same information required by Form 8332 and whose only purpose is to unconditionally release the custodial parent's claim to the exemption.  The noncustodial parent must attach the form to his or her tax return each year the exemption is claimed.  Form 8332 may also be used by the custodial parent to revoke a previously signed release of claim.

        Pursuant to IRS tax regulation 1.152-4(e)(1)(ii), for divorce decrees and agreements that went into effect after 2008, a court order or decree or a separation agreement may not serve as the custodial parent's written declaration. 

    NOTE:  From 1985 through 2008, in lieu of ORS Form 8332, a divorce decree or separation agreement bearing the custodial parent's actual written signature could be used as an alternative to Form 8332 so long as it clearly stated that the noncustodial parent could claim the child as a dependent without regard to any condition, such as payment of support; that the custodial parent would not claim the child as a dependent for the year; and specified the years for which the noncustodial parent, rather than the custodial parent, could claim the child as a dependent.  Use of this alternative method was discontinued commencing 2009.  Under current IRS regulations, IRS requires the use of  IRS Form 8332 or a substantively similar document whose only purpose is to release the custodial parent's claim to the exemption in order for the IRS to implement the parties’ agreement.

Enforcement of custodial parent's agreement to release the right to claim the exemption

        If a custodial parent agrees with the noncustodial parent to release the right to claim the dependent child tax exemption, the agreement, if otherwise qualifying as a contract, is enforceable as such in the event the custodial parent breaches the agreement.

       Further, under Oregon domestic relations law, if the custodial parent voluntarily agrees to waive the right to claim the exemption and the agreement to do so is expressed in a stipulated judgment signed by the parties, or a judgment resulting from a settlement on the record, or a judgment incorporating a marital settlement agreement, ORS 107.104(2)(a) will allow the agreement in the event of a breach to be enforced  through a breach-of-contract legal action within the judicial proceeding in which the agreement was made, doing so "as contract terms using contract remedies." 

        Although a court order or decree or a separation agreement will not be accepted by the IRS in lieu of Form 8332 for purposes of implementing the parties' agreement, a state court enforcement action under
ORS 107.104(2)(a) seeking compensatory damages resulting from a breach of the agreement would not be inconsistent with the federal tax law nor would such an action clearly contravene public policy.

         In an action for breach of contract, an award of money damages to compensate the nonbreaching party for the financial loss resulting from the breach is an appropriate "contract remedy."  Thus, in the event a custodial parent, having agreed to waive the right to claim the tax exemption for the child by signing IRS Form 8332 so as to allow the exemption to be claimed by the noncustodial parent, thereafter breaches the agreement, contractual enforcement under ORS 107.104 would best be accomplished by simply granting to the noncustodial parental a money award for the actual dollar value of the exemption, thereby compensating the noncustodial parent for the increased tax liability resulting from the custodial parent's breach. 


The value of the exemption

        For tax year 2012, claiming the dependent child tax exemption will reduce the noncustodial parent's taxable income by $3,800 (for each exemption claimed).  Accordingly, for a unmarried individual taxpayer in the 15% tax bracket (taxable income between $8,701 and $35,350), the actual value of each exemption is a tax liability reduction of $570 ($3,800 x .15).  In addition, claiming the dependent child tax exemption for a child under age 17 will generally entitle the taxpayer to also claim the federal "child tax credit," thereby directly reducing the taxpayer's actual income tax liability by as much as $1,000

        Consequently, for the 2012 tax year, if a noncustodial parent in the 15% tax bracket with a tax filing status of "single" is able to claim both the dependent child tax exemption and the child tax credit, the tax savings would potentially total $1,570, or $130.83 per month

        For a noncustodial parent in the same situation in 2012 but in the 25% tax bracket (taxable income between $35,351 and $85,650) the tax savings would be $950 ($3,800 x .25).  And when combined with the full $1,000 child tax credit (if available), the total tax savings would be $1,950, or $162.50 per month

        Of course, on the flip-side, for a custodial parent in a comparable financial situation, giving up the right to claim the exemption would result in an increased tax liability in the same amount. 

    NOTE:  The $1,000 child tax credit otherwise available to a "single" or "head of household" tax filer is reduced by $50 for each $1,000 (or fraction thereof) by which the taxpayer's modified adjusted gross income (AGI) exceeds $75,000.  Also, unless extended by Congress, the child tax credit will decrease to $500 per child in 2013 and subsequent years.

State court control over child support amounts

        Although federal law controls which parent will be treated as the child's custodial parent for purposes of claiming the dependent child tax exemption and is not subject to being altered by mandate of a state court judge, federal law has no control over the issue of child support.  State court judges have the authority to determine and establish -- and adjust and modify -- the dollar amounts of child support to be paid by one parent and received by the other.  And in doing so, the state court judge may appropriately recognize which parent has, or will have, the federal right to claim the dependent child tax exemption and may then take into consideration the tax consequences resulting therefrom when formulating and determining child support obligations. 

        Provision for Oregon decision makers to do this is found in ORS 25.280(9) and OAR 137-050-0760(1)(h), allowing for presumptive child support amounts to be rebutted and adjusted upon consideration of "the tax consequences, if any, to both parents resulting from * * * the determination of which parent will name the child as a dependent."  In addition, pursuant to ORS 107.105(2), "In determining the proper amount of support * * * the court may consider evidence of the tax consequences on the parties of its proposed judgment."

        Further, as explained in 
OAR 137-050-0725((9), the scale used by the Oregon Child Support Guidelines for determining child support amounts presumes that the parent with "primary physical custody" will take the tax exemption for the child for whom support is sought for income tax purposes. "When that parent does not take the tax exemption, the rebuttals in OAR 137-050-0760 may be used to adjust the child support obligation."  Primary physical custody is defined in the guidelines as meaning "the parent who provides the primary residence for the child and is responsible for the majority of the day-to-day decisions concerning the child."

Summary and Conclusion

    1.  The Oregon Court of Appeals’ interpretation of the federal tax code as stated in Gleason v. Michlitsch was correct in 1986 and remains correct today:  “There is now no federal statutory basis for a state court to award the dependency exemption.”  82 Or App at 693, fn 6.

    2.   As the IRS explains in the commentary accompanying the revised IRS Regulation on this issue, Treas Reg 1.152-4 (effective 7/2/2008), “A state court may not allocate an exemption because sections 151 and 152 (of the federal Internal Revenue Code), not state law, determine who may claim an exemption for a child for Federal income tax purposes."

    3,  Under the federal income tax code now in effect, a noncustodial parent as now defined in the tax code at 26 USC § 152(e)(4)(B) may claim the dependent child tax exemption only with the consent of the custodial parent, given voluntarily and in writing.  If the custodial parent declines to voluntarily give such consent, the custodial parent's decision cannot be overridden by mandate of a state court judge that purports to "award" the right to claim the exemption to the noncustodial parent.  Nowadays, state court judges do not have such authority.

   4.  Although state court judges lack the authority to award the right to claim the dependent child tax exemption to a noncustodial parent over the objection and without the consent of the custodial parent, state court judges nonetheless may
recognize which parent holds the right to claim the exemption when making child support determinations and may establish, modify and adjust court-ordered support amounts so as to account for the tax consequences resulting from the determination of which parent will name the child as a dependent.

    5.  If the custodial parent has entered into a contractual (or settlement) agreement with the noncustodial parent by which the custodial parent agrees to waive the right to claim the exemption, financial loss incurred as a result of the breach of such agreement is subject to recovery through a legal action for breach of contract.  In particular, under Oregon law, if the agreement is expressed in a stipulated judgment signed by the parties, or a judgment resulting from a settlement on the record, or a judgment incorporating a marital settlement agreement, enforcement of the agreement may be accomplished within the judicial proceeding in which the agreement was made, doing so as contract terms using contract remedies, as allowed by ORS 107.104.

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LAWRENCE D. GORIN
Attorney at Law
6700 S.W. 105th Ave., Suite 320
Beaverton, Oregon  97008
Phone:  503-716-8756
E-mail:  LDGorin@pcez.com
http://ldgorin.justia.net/index.html