Originally published on Passive Activities and Other Oxymorons on February 4th, 2011.
Michael F. Wesner v. Commissioner, TC Summary Opinion 2011-5
Here is some advice for the about to be divorced. I will preface it with a cautionary note. It is a minority opinion and the simplest thing is probably to just go with the flow of however your attorney is handing things. There are two issues that I think they often get wrong, though. The first is filing a joint return in the final year of the marriage. It is usually assumed that this is a simple numbers exercise of comparing the total tax of two married filing separate (or head of household) returns and a single joint return. I have more posts on this subject than just this one, but it will give you the gist of why this is not a good approach. It ignores the joint and several liability created by a joint return. That is not the topic of this post though.
The other is the dependency deduction. The most common solution to this overrated problem is for the couple to divide up the dependency deductions and in the case of a single child take it in alternate years. Here is my advice on that. If you are the non-custodial parent and you can get any concession at all in exchange for giving up the dependency deduction entirely, give it up. The case of Michael Wesner is a good illustration of this point, although as you can see here, by no means, the only one.
This was the Court order relative to the child support and dependency deduction :If *** [petitioner] has paid in full all current support and court ordered arrearage payments due for the calendar year by December 31, *** , the Federal tax exemption for the minor child(ren) shall be allocated as follows: *** [petitioner] to claim 2006 & 2007. *** [Ms. Tokar] to claim 2008. Three year pattern to continue. [Ms. Tokar] shall execute the necessary Internal Revenue Service forms to transfer the exemption(s) consistent with the order. Note: The exemptions are not allocated unless the current support obligation is greater than $1,200 per year. Petitioner was also obligated to pay 60 percent of the minor child's unreimbursed medical and dental expenses. In addition to future child support, petitioner was also ordered to pay past care and support of $9,160 for April 1, 2003, through June 30, 2006, at the rate of $76 per month.
Mr. Wesner followed through on his obligations and accordingly thought he was entitled to the dependency deduction. Things were difficult though.
Petitioner approached Ms. Tokar, the custodial parent, immediately after the entry of the court order and arranged an appointment with her to execute the Internal Revenue Service forms (tax forms) as ordered by the divorce court. Ms. Tokar did not appear at the appointed time and failed to execute the tax forms. After petitioner's attempt to obtain Ms. Tokar's signature failed, he sought enforcement of the court order by service of legal process but he did not know her mailing address. He requested Ms. Tokar's address from the agency to which he made the support payments, and it refused to provide her address. Accordingly, at the time his 2007 income tax return was due, petitioner did not have the required consent form executed by Ms. Tokar; and his income tax return was filed without the form or any other documentation supporting his claim for the dependency exemption deduction.
After more than 6 months of trying to obtain Ms. Tokar's address, petitioner hired a process server during August 2009 to find and serve her. By the time the matter came before the divorce court it was too late for Ms. Tokar to sign the tax forms.
It seems like the IRS or the Tax Court should have cut Mr. Wesner a break. No such luck.
“The custodial parent signs a written declaration *** that such custodial parent will not claim such child as a dependent *** and *** the noncustodial parent attaches such written declaration to the noncustodial parent's return for the taxable year.”
No such document was executed and/or attached to petitioner's 2007 income tax return and, accordingly, petitioner does not meet the requirements of the statutory exception and is not entitled to claim the minor child as a dependent. This is so even though a State court with jurisdiction over the parties to a divorce proceeding ordered that petitioner was entitled to the dependency exemption deduction for 2007 and even though the custodial parent had been ordered but failed to execute the consent form required by the Federal statute. The consent form requirement is in absolute terms and is unambiguous.
In this case Mr. Wesner did get some relief from the divorce court :
The divorce court, finding that petitioner had made support payments for 2007 and had qualified under the court order for the dependency exemption deduction, credited $2,559 against petitioner's future support payments beginning September 1, 2009. The income tax deficiency respondent determined for 2007 was $2,559.
Presumably, he is still out the interest on the deficiency.
Here is the problem. The divorce court has a lot of power over you and your ex-spouse, but it takes time, energy and money to get it to use that power to enforce its orders. The divorce court has no power over the IRS. The divorce court can order that the dependency deduction be released or, as in many innocent spouse cases, that your ex-spouse is liable for an income tax deficiency, but its determinations are not binding on the IRS.
Here is another way to look at the dependency deduction that might be applicable to those more prosperous than Mr. Wesner, who was working down a child support arrearage of $9,160 at the rate of $76 per month. If you and your ex-spouse are on the older side and are both prosperous enough that the estate plan of bouncing your last check is improbable (i.e. you are both going to be leaving money to the same kids), does a couple of thousand dollars one way or the other matter at all ? That is an attitude that probably has limited applicability, but it does have the potential of cutting your stress level.