Dependency status for a child of divorced or separated parents.

• Author: Gaffney, Dennis J.

EXECUTIVE SUMMARY

* A taxpayer is allowed to claim a dependency exemption for his or her child if the child is a qualifying child (or qualifying relative) of the taxpayer. In the case of parents that are divorced or separated, a child is generally treated for a particular tax year as the qualifying child of the parent with whom the child resides for a greater number of nights during the tax year (the custodial parent).

* Under Sec. 152(e), the noncustodial parent of a child may only claim a dependency exemption for the child if (1) the child's custodial parent signs a written declaration releasing his or her claim to the exemption for the tax year and (2) the noncustodial parent attaches the declaration to his or her return for that tax year.

* In Regs. Sec. 1.152-4, Treasury provides detailed rules on how to determine the amount of time a child spends with each parent, how to properly prepare a written declaration releasing the custodial parent's claim to the dependency exemption, and how to revoke such a declaration.

**********

[ILLUSTRATION OMITTED]

For at least a generation, divorce has been part of the social landscape in the United States, so much so that the conventional wisdom is that 50% of all marriages end in divorce. (1) Because minor children are often involved in divorce or separation, the question of which parent is entitled to any available dependency exemptions can arise. Only one dependency exemption is allowed for a qualifying child and, since a single exemption cannot be shared, only one parent may claim it. (2) As a result, there is often confusion and/or conflict between the parents.

Prior to 1985, Sec. 152(e) provided that the child of divorced or separated parents generally was treated as having received over half her or his support from the custodial parent; thus, the custodial parent was entitled to claim the dependency exemption for the child provided all other requirements were met. However, the noncustodial parent would be entitled to the exemption if he or she provided at least $1,200 of support for the child and the custodial parent could not "clearly establish" that he or she provided more support than the noncustodial parent. (3)

This statutory language often placed the IRS in the middle of emotional conflicts that presented difficulties of proof and substantiation. To ease the administrative burden on the Service and promote consistent enforcement in the area, Sec. 152(e)was amended in 1984 to award the dependency exemption to the custodial parent unless that parent waived the right to the exemption in favor of the noncustodial parent. The Tax Court deemed this amended version of Sec. 152(e) rationally related to the legitimate government interests of resolving factual disputes between former spouses. (4)

For tax years beginning after December 31, 2004, significant changes to Sec. 152(e) were again effected, this time by the Working Families Tax Relief Act of 2004 (WFTRA) (5) and the Gulf Opportunity Zone Act of 2005 (GO Zone Act). (6) These amendments eliminated the general rule that entitled the custodial parent to the dependency exemption for a child when all other requirements were met.

Proposed regulations explaining amended Sec. 152(e) were issued in May 2007. After taking comments from interested parties, Treasury promulgated a final regulation in July 2008. Regs. Sec. 1.152-4 specifies the rules that a custodial parent must follow to grant a noncustodial parent the right to claim the dependency exemption for a child. Regs. Sec. 1.152-4 contains 20 useful examples, and it is generally logical and well written. (7) This article discusses the major features of new Regs. Sec. 1.152-4. (8)

One thing not affected by the WFTRA and GO Zone Act amendments is the need for the custodial parent to cooperate with the uoncustodial parent if the benefits of a dependency exemption for a child are to be transferred to the noncustodial parent. Given the nature of marital discord and dissolution, the necessary cooperation is often not possible. (9) In any event, whatever "power" that surrounds a dependency exemption for a child of divorced or separated parents belongs to the custodial parent.

Special Rule for a Child of Divorced or Separated Parents or Parents Who Live Apart

Simply stated, for tax years that began before January 1, 2005, pre-WFTRA Sec. 152(e) allowed the custodial parent to claim the dependency exemption for a qualifying child and provided an exception to this general rule if the custodial parent released his or her claim to the noncustodial parent. (10) The WFTRA amended Sec. 152(e) for tax years beginning after December 31, 2004, to eliminate the general rule allowing the custodial parent to claim the dependency exemption.

As a result of the WFTRA amendment, Sec. 152(e)(2), the provision involving the release of the exemption's claim to the noncustodial parent, is no longer an exception to a general rule but is instead a condition precedent for the operation of Sec. 152(e)(1). (11) Once Sec. 152(e)(1) controls, the following three provisions are negated and have no significance:

1. Sec 152(c)(1)(B), which involves a dependent's principal place of abode;

2. Sec. 152(c)(4), which sets forth a special rule when two individuals are claiming a qualified child as a dependent; and

3. Sec. 152(d)(1)(C), which specifies the need for an individual to provide over half of a dependent's support.

   It is important to recognize that if Sec. 152(e) does not apply, dependency status is usually determined under Secs. 152(c) and 152(d).

   The final regulation, Regs. Sec. 1.152-4, differs from the proposed version in several ways, so professionals advising former and estranged spouses with minor children need a good working knowledge of post-GO Zone Act Sec. 152(e) and Regs. Sec. 1.152-4. Regs. Sec. 1.152-4 has numerous specific requirements, and a failure to recognize one of them could prove costly. As discussed below, the parents together must meet both a support requirement and a custody requirement. Regs. Sec. 1.152-4 includes:

1. The rules to determine which parent is the custodial parent; (12)

2. A description of how the custodial parent must declare his or her intention to grant the exemption to the noncustodial parent; (13) and

3. The requirements for revoking the original declaration. (14)

   Application of Regs. Sec. 1.152-4

   Regs. Sec. 1.152-4 interprets Sec. 152(e), "Special rule for divorced parents, etc.," and is limited to situations involving a custodial parent's release to the noncustodial parent of the claim for a dependency exemption for a child. Generally, "[a] taxpayer may claim a dependency deduction for a child ... only if the child is the qualifying child of the taxpayer under section 152(c) or the qualifying relative of the taxpayer under section 152(d)." (15) A child is usually treated as the qualifying child of the parent with whom the child resides for the longer period of time. (16) However, the child may be treated as a...