Tax Court in Brief | Hicks v. Commissioner: Dependency Deductions

The Tax Court in Brief – February 21 – 25th 2022

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Tax Litigation:  The Week of February 21, 2022, through February 25, 2022

• Hoops, LP v. Comm’r, T.C. Memo. 2022-9 | February 23, 2022  | Nega, J. | Dkt. No. 11308-18

Hicks v. Comm’r, T.C. Memo. 2022-10 | February 23, 2022  | Gale, J. | Dkt. No. 10406-17

Opinion

Short Summary: This case presents a unique situation of when a noncustodial parent may claim a dependency deduction for a child. Petitioner conceded that the two children in issue (C1 and C2) did not reside with Petitioner for more than one-half of the tax year and thus could not be “qualifying children” for dependency purposes. But, Petitioner claimed that the children were still “qualifying relatives” since Petitioner provided over one-half of their support; thus, Petitioner claimed that the dependency deductions and child credits remained available.

Primary Holdings: 

• Under the general dependency rules, C1 and C2 were each a “qualifying child” of their grandmother with whom the children resided along with their mother, and thus, neither child may be claimed as a “qualifying relative” of Petitioner for dependency purposes.
• However, and, pursuant to the special dependency rule for separated parents that allows a non-custodial parent to claim a dependency deduction, Petitioner presented sufficient evidence of an agreement in the form of a court order (i.e., the 2006 Shared Parenting Plan) which substantially satisfied the requirements of Form 8332, being a written declaration of the custodial parent that she would not—and that Petitioner would—claim one of the children as a dependent during the tax year. Therefore, Petitioner was entitled to one dependency exemption deduction and one child tax credit for the tax year.

Key Points of Law:  

• An individual is allowed a deduction for an exemption for “each individual who is a dependent of the taxpayer for the taxable year.” 26 U.S.C. § 151(c). “Dependent” includes “a qualifying child” or a “qualifying relative.”
• To qualify as a “qualifying child” the child must: (1) bear a specified relationship to the taxpayer (e.g., be a child of the taxpayer), (2) have the same principal place of abode as the taxpayer for more than one-half of such taxable year, (3) meet certain age requirements, (4) not have provided over one-half of such individual’s support for the taxable year, and (5) not have filed a joint return for that year. See 26 U.S.C. § 152(c)(1)-(c)(1)(E).
• “Qualifying relative” means an individual: (A) who bears a specified relationship to the taxpayer, including being a child or grandchild thereof; (B) whose gross income is less than the exemption amount; (C) with respect to whom the taxpayer provides over one-half of his or her support; and (D) who is not a qualifying child of the taxpayer or of any other taxpayer. at § 152(d)(1)-(2).
• If an individual may be claimed as a “qualifying child” by two or more taxpayers, such individual shall be treated as the qualifying child of (1) the taxpayer who is the parent of the individual or (2) if a parent does not so qualify, the taxpayer with the highest adjusted gross income for the taxable year. at § 152(c)(4)(A). However, if a parent is a dependent of a taxpayer for a tax year, that parent is treated as having no dependents for that year, and thus the above-noted “tie-breaker” rule does not apply. Id. at § 152(b)(1).
• In the case of divorced or separated parents, special rules apply to determine which parent may claim a dependency exemption deduction for a child. When certain criteria are met, a child may be treated as a qualifying child of the noncustodial parent rather than of the custodial parent. See 26 U.S.C. § 152(e)(1)-(2) (qualification criteria); Reg. § 1.152-4(a)-(d). Key criteria include that “the custodial parent sign[]a written declaration . . . that such custodial parent will not claim such child as a dependent for any taxable year beginning in such calendar year,” and “the noncustodial parent [must] attach[]such written declaration to the noncustodial parent’s return” for the relevant taxable year. See 26 U.S.C. § 152(e)(2)(A)-(B). 
• A court order or decree or a separation agreement entered after July 2, 2008 may not serve as a written declaration under section 152(e), but one entered before July 2, 2008 may, provided that it contains substantially the same information required by Form 8332. See Reg. § 1.152-4(e)(1)(ii), (h) (providing that the Regulation applies to tax years beginning after July 2, 2008).
• Section 32(a)(1) provides an eligible individual with an earned income credit against the individual’s income tax liability. The amount of the credit to which an eligible individual is entitled increases if the individual has a qualifying child, as defined in Section 152(c), and determined without regard to the special rule for waiver from the custodial parent under section 152(e).   

Insights: When a non-custodial parent requests a dependency exemption for a child, the person should be prepared to show that the child is, under law, a “qualifying child” or a “qualifying relative,” and the taxpayer should obtain and submit with his or her returns, an IRS Form 8332, Release/Revocation of Claim to Exemption for Child by Custodial Parent, signed by the former spouse or the other parent. A court order entered after July 2, 2008 may not be used as a substitute for IRS Form 8332. A court order entered before July 2, 2008 may be used as a substitute for IRS Form 8332, provided the order contains substantially all information required by Form 8332.

 

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