It is important for divorce attorneys and clients to remember what a state court judge can and cannot do with regard to federal income tax matters.  Knowing the rules will help lawyers draft appropriate clauses for marital settlement agreements and insert appropriate language into court orders or request the court to include such language.

Shenk v. Commissioner, 140 T.C. No. 10 (May 6, 2013) illustrates problems that arise from not understanding the rules. The complete case may be found at: http://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/shenk-opinion.pdf  In Shenk, the state court’s “Judgment of Absolute Divorce,” provided, in part, as follows: 

 [I]n 2003, and in odd-numbered years thereafter, provided that she is employed and earning income, defendant [Ms. Phillips] shall be entitled to claim the parties’ two younger children, WS and LS, as dependency exemptions on her income tax returns; and, assuming he is current with his child support payments as of the end of the year, plaintiff [Mr. Shenk]  shall be entitled in 2003, and in odd-numbered years thereafter, to claim the parties’ oldest son, MS, as a dependency exemption on his income tax returns. In even-numbered years, the parties’ entitlement to the foregoing dependency exemptions shall be reversed, with plaintiff having two exemptions and defendant having one, again assuming that defendant is employed and earning income and plaintiff is current with his child support payments at the end of the year in question.

FACTS

In 2009, here’s what occurred and was stipulated:

• All three children resided with Ms. Shenk and not with Mr. Shenk, throughout 2009.
• Ms. Shenk (now Mrs. Phillips) did not earn income from employment.
• Mr. Shenk was current on his child support payments.
• Mrs.  Phillips, nonetheless, filed a joint return with her husband, claiming dependency exemptions for two children, WS and LS.
• Mr. Shenk in his return claimed dependency exemptions for MS and also duplicated Mrs. Phillips dependency exemption claim for LS.
• IRS disallowed Mr. Shenk’s exemption claims for both children (IRS had been alerted since both former spouses claimed the same child).
• IRS also disallowed Mr. Shenk’s claimed child credit and Head of Household filing status.

ARGUED

Mr. Shenk argued that the divorce decree should bar his former spouse from claiming the dependency exemptions since she did not earn income from employment and he was current on child support payments.  He initially argued that the case should be continued that he could seek an order from the state court requiring her to sign and deliver to him Form 8332.  That motion having been denied, he argued at trial that the record should be kept open until he could obtain and submit Form 8332. 

 DECISION

The court denied his motion and held for IRS on all issues.  The court noted, “Ultimately, it is the Internal Revenue Code (Code) and not state court orders that determine one’s eligibility to claim a deduction for federal income tax purposes.”

 The court did not rule on whether a noncustodial spouse may submit Form 8332 after filing a return that claims the dependency deduction and have the form be considered as “attached to the noncustodial parent’s return, “ for purposes of Section 152(e)(2)(B).  Rather, it:

• Held that Form 8332 submitted now would not satisfy Section 152(e) (2) (A) (“Custodial parent signs a written declaration …..that (she) will not claim such child as a dependent…”) because the statute of limitations had run on the custodial parent’s return (general 3-year statute for the 2009 return had expired on 4/15/13) and IRS would not be able to disallow Mrs. Phillips claimed exemption for the same child, if Mr. Shenk were now allowed to satisfy the statutory requirement.
• Upheld the disallowance of Mr. Shenk’s claimed dependency exemptions.
• Upheld the disallowance of Mr. Shenk’s claimed child tax credits since the credit is allowance only for a qualifying child who is a dependent.
• Upheld the disallowance of Mr. Shenk’s Head of Household status since the children admittedly resided with their mother for more than ½ of 2009 and with him for less than ½ of 2009 (See IRC Section 2(b)).

 WHAT IS DEFICIENT IN THE STATE COURT’S ORDER WITH REGARD TO THE DEPENDENCY EXEMPTION?

•  Does not require the noncustodial parent to sign and deliver Form 8332 in odd-numbered years.
• Makes the right to claim the dependency exemption contingent on facts the Tax Court will not delve into.
• Tries to do too much to maximize tax benefit by bringing into the picture factual issues whether the custodial parent is employed and earning wages.

STIRRING CHILD SUPPORT ENFORCEMENT INTO THE SOUP

If the right to claim the dependency exemption is to be made contingent on being current in child support payments, a process should be provided for:

•  Establishing that one is current in child support
• Delivery of the Form 8332
• Revocation of the release of the exemption if child support becomes delinquent.
• Damages for violating the court’s order in refusing to sign and deliver Form 8332 to include the additional tax, interest and penalty, if any, paid by the noncustodial parent, but not attorney’s fees in vainly attempting to obtain relief before IRS or in Tax Court, absent the required Form 8332.

© 2013 by Robert S. Steinberg, Esquire

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