Shared custody and IRS treatment

[FEDUKE404]

Clients are currently organizing paperwork for a divorce that will be finalized in early 2008. They have agreed to shared custody of their only child, who is under age 5.

To simplify matters, they are hoping to have included in the divorce decree verbiage that allows the exemption for the child and the more favorable "head of household" status to apply in an even/odd year scenario. The other (divorced) parent would file as "single" with only his/her personal exemption.

While this is primarily a lawyer question, does anyone know if such a scenario will fly with the IRS? (Any IRS war stories along this line?)

I know the assigned dependent exemption is simple enough, but was unsure of the "automatic" filing status. All things considered, the amount of funds/time in residence for the child will be close to equal for each parent, and record-keeping to "prove" something for HOH could turn into more work than the tax returns themselves!

Thanks.

FE

[solomon]

That will not fly. See Sec. 152 for a qualifying child or relative and Sec. 2b for HOH filing status. Furthermore, under the new proposed regulations which will be effective in 2008, the Code overrides any divorce decree on these matters. Under the new to be regs., the number of nights with a parent determines the custodial parent for the dependency.

[FEDUKE404]

Arggggh on the HOH issue

That will not fly. See Sec. 152 for a qualifying child or relative and Sec. 2b for HOH filing status. Furthermore, under the new proposed regulations which will be effective in 2008, the Code overrides any divorce decree on these matters. Under the new to be regs., the number of nights with a parent determines the custodial parent for the dependency.

WOW.....I have not yet spent a lot of time looking at such issues for 2008.

Will they still be able to alternate the dependency exemption per the divorce decree, or should they hire an (other) accountant to track all of the expenditures for their darling? Child support WILL be paid by the father.

In the meantime, I'll tell the parents to invest in a good-quality 2008 calendar!

Thanks!

FE

[solomon]

Go to legalbitstream.com and click on Proposed Regulations. Then type "divorce" in the search box for the year 2007. The first reg. appearing should be the one you want.

[Bees Knees]

The only thing a calendar is going to do for you is give you evidence when you take IRS to court. It does nothing to prevent a dispute from occurring.

TTB, page 3-16 gives you the following answer to a shared custody arrangement:

• 5-year-old child lives about 50% with each parent
under a split custody arrangement.
• Each parent provides over ½ cost of their own home.
• Each parent provides about 50% of child’s support.
• Neither parent signed over dependency to other;
divorce decree is silent on issue.
• Neither parent has remarried.

Mom..............maybe
Dad...............maybe
Goes to the parent
who can prove over
50% custody.5
If each parent has
equal custody, it
goes to the parent
with the higher AGI.

In McCullar, Tax Court Memo, September 17, 2003, dad had a log detailing
physical custody over 50% of the year and was treated as the custodial
parent under Section 1.152-4(b) even though the divorce decree awarded
mom primary custody and control of their daughter. In contrast, in Mullen, T.C.
Summary Opinion 2006-91, the court said the mother was the custodial parent
because the separation agreement stated “the children shall reside primarily”
with the mother. There was conflicting testimony as to who had the greater
physical custody. Without proof that the children resided with the father for
“a substantially longer portion” of the tax year, custody was determined by
what was stated in the separation agreement.

One way to solve the issue of shared custody is to have the ex-spouse who is not suppose to claim the exemption or HOH during the year sign a Form 8332 for the other ex-spouse to attach to his or her return. The following year, they reverse the procedure, and so on.

Keep in mind none of this is an issue when both spouses cooperate with each other and don’t both try to claim the same child in the same year. The problem always stems from ex-spouses who are at odds with each other. It is only when they don’t cooperate that a shared custody arrangement stated in the divorce decree is going to be worthless.

If I were advising a client where they want shared custody and the divorce papers have not yet been signed, I would tell them to go to court with a dozen blank Form 8332 s and have the ex sign for each year my client is supposed to claim the exemption. The other spouse could then get the same from my client. The Form 8332 will always trump anything written into the divorce decree.

[solomon]

Agree with Bees to get several 8332's executed ahead of time.

[FEDUKE404]

Can that calendar!

Thanks, Bees Knees.

I have already told the clients that they need to discuss this matter fully with their attorneys.

If there is such a thing as an "amicable" divorce, this is one and from what I know of the couple (one is relative of/referral from long-term client) the odd/even year agreement is their idea of fairness.

But I will suggest they print off a few Forms 8332 !!

FE

[New York Enrolled Agent]

Go to the Tax Court website: www.ustaxcourt.gov

Read a decision from yesterday (9/25/07) Norman TC Summary 2007-170. It will illustrate the NECESSITY of Form 8332 (or an equivalent form containing everything required on the 8332). I do disagree slightly with Solomon - the new regs wil clarify some issues but the Courts have already held that state divorce decrees cannot overcome the provisions of §152(e) - See Miller 114 TC 184 as an example.

[Luis Mopeo]

Go to the Tax Court website: www.ustaxcourt.gov

Read a decision from yesterday (9/25/07) Norman TC Summary 2007-170. It will illustrate the NECESSITY of Form 8332 (or an equivalent form containing everything required on the 8332). I do disagree slightly with Solomon - the new regs wil clarify some issues but the Courts have already held that state divorce decrees cannot overcome the provisions of §152(e) - See Miller 114 TC 184 as an example.

Not only the necessity of filing the 8332, but the fact that the form must be attached to the original return. Norman filed papers from his divorce decree that said he got the dependency exemptions, but the decree wasn't signed and didn't meet the 8332 requirements. He got his ex wife to sign the 8332, then went to court, but too late. It wasn't filed with the original return, so they disallowed the exemption.

[bertrans]

WOW.....I have not yet spent a lot of time looking at such issues for 2008.

Will they still be able to alternate the dependency exemption per the divorce decree, or should they hire an (other) accountant to track all of the expenditures for their darling? Child support WILL be paid by the father.

In the meantime, I'll tell the parents to invest in a good-quality 2008 calendar!

Thanks!

FE

Just one caveat: if the divorce decree stipulates that parent 'x" can claim child 'y', if and only if parent 'x' stays current with child support payments(absent which, the dependency reverts to the other parent), the IRS will NOT accept this even now(never mind 2008), since such a stipulation is deemed a 'contingency provision'. And, realistically, such a contingency would be unenforceable by the Service; hence, the prohibition.

[DaveO]

The IRS definition

will hold sway over anything the court says. I recently testified at a divorce trial on these issues. The opposing council was trying to tell the judge that the courts could decide who the custodial parent was (in an otherwise shared situation) and who would be head of household. He also said the court could decide how to divide the suspended passive losses and the NOL carry forward.

[taxmandan]

Form 8332

If they decide to use multiple 8332 forms, be sure you advise them that there is no way to cancel or amend a Form 8332 once signed and given to the other party. Your E&O insurance will appreciate you documenting that you so advised your client.

[solomon]

Actually, when the new regs. become effective there is a way to revoke a 8332.

[taxmandan]

That's some good news, that "for all future years" caused a painful awakening for a couple of clients who didn't understand that it couldn't be changed later.

[New York Enrolled Agent]

Actually, there is some ability to revoke the Form 8332 on a limited basis.

Take a look at Chief Counsel Advise 200007031. I'm pasting the headnote:

Custodial Parent May Revoke Release of Claim for Child's Exemption

Headnote:
Custodial parent is permitted to revoke Form 8332, “Release of Claim to Exemption for Child of Divorced or Separated Parents,” and claim dependency exemption for child for that year, but only if noncustodial parent agrees and doesn't claim child