During tax season this past Spring, we posted blog entry entitled "Who Gets The Tax Exemption". This past month in a Chief Counsel Advice (CCA), the IRS has clarified the provisions in the IRS Code relating to exemptions which were discussed in our blog. CCA 200925041 cautions that a Final Judgment of Divorce awarding one party a dependency exemption may not be upheld by the IRS if the Judgment awarding the dependency exemption contains contingencies.
In our prior blog, we discussed the recently amended IRS code, Section 152(e) relating to tax exemptions. Section 152(e) directs, for exemption purposes, that the custodial parent is the one with whom the child resides the greater number of nights during the year regardless of the terms of a divorce decree. However, Section 152(e) does not preclude the non-custodial parent from claiming the exemption so long a the custodial parent executes IRS Form 8332 releasing the exemption. Sandra Fava, the scrivener of the blog, noted that it is important to make sure that there is a procedure in place to have the custodial parent file IRS Form 8332 so that the non-custodial parent will be able to claim the exemption. CCA 200925041 clarifies the procedure in effectuating the exemption through execution of Form 8332 and further recommends additional procedures in order for the non-custodial parent to exercise his or her right to claim the exemption..
CCA 200925041 clarifies that (1) for pre-July 3, 2008 divorce decrees or separation agreements allowing a non-custodial parent to claim an exemption for a child, a non-custodial parent may attach pages of a divorce decree or separation instrument executed on or before July 2, 2008 if the pages constitute a statement substantially similar to the requirements of Form 8332 in effect at the time of the entry of the decree or separation agreement; and (2) for post-July 3, 2008 divorce decrees or separation agreements, a custodial parent's release of a claim to an exemption for a child must be separate from the decree or separation agreement. The release of the exemption my be pursuant to a signed Form 8332 or a document that conforms to the substance of Form 8332 but the document's only purpose must be to release a claim to the exemption.
Also very important is that CCA 200925041 specifically noted that for pre-July 3, 2008 divorce decrees or separation agreements, while in order to obtain the exemption the non-custodial parent may attach pages of a divorce decree or separation instrument executed on or before July 2, 2008, the provisions to the divorce decree or separation agreement must not contain any conditions on claiming the exemption. For example, parties often agree that one party may claim an exemption so long as his or her child support obligation is current. If this type of provision is contained in the divorce decree or the separation agreement, regardless of whether the condition is satisfied, a non-custodial parent will be unable to claim the exemption simply by attaching copies of the decree or separation agreement as has been the practice in the past.
Accordingly, it is important to do the following: (1) If you have a pre-July 3, 2008 divorce decree or settlement agreement that contains conditional requirements and you are the non-custodial parent, discuss with an attorney how to best protect your exemption right and any necessary modifications to your Judgment or your settlement agreement to effectuate your right; and (2) if you are currently separated or about to be separated and are heading to divorce, make sure that you address these issues with an attorney so that you can insure that there are no problems in the future with respect to the IRS and exemptions.