Custodial Determination Changes Under Proposed Regulations

Proposed Regulation §1.152-4 contains changes that will surprise many taxpayers as well as tax professionals. We’ll number the provisions just for simplification.

1) The rules apply when the child’s parents are divorced, legally separated, or live apart at all times during the last 6 months of the calendar year. It is not necessary that the parents are or were ever married to each other.

2) The custodial parent is the parent with whom the child resides for the greater number of nights during the calendar year. When a child does not reside with either parent for a night, the child is deemed to be residing with the parent with whom the child would have resided other than for the absence. However if the child would not have resided with either parent, such as in the case of a court-ordered third party custody situation, the child is deemed to have resided with neither parent. If the number of nights is equal, the “custodial parent” is the parent with the highest AGI.

3) The noncustodial parent can claim the child if the custodial parent signs a written declaration unconditionally releasing the exemption. This declaration can be on the Form 8332 or any other form that conforms to the substance of the Form 8332. The noncustodial parent attaches the original form to the original return. If the waiver is for multiple years, a photocopy can be attached to the future years’ returns.

This regulation further states, “A state court order or decree does not operate to allocate the federal exemption between parents.” (paragraph d(1)) This wording appears to say the decree can say who gets the exemptions, but it is worthless for tax purposes. Example 5 in the regulation states the parents (L and M) of the child execute a written separation agreement that provides the child will live with L and M will pay child support. The agreement also states L will not claim the child for the years 2007 or after and does not mention any conditions tied to this part of the agreement. The IRS states this is an acceptable Form 8332 substitute since it specifies L will not claim the child, specifies the applicable years, and does not have any conditions attached to it.

4) The custodial parent can revoke a written declaration (Form 8332). The revocation is on an IRS designated Form (or other form that conforms to the substance of the Form 8332). It must specify the year or years for which the revocation is effective. The phrase “all future years” means the calendar year following the year the form is executed. The custodial parent attached the original form to the original return. If the revocation is for multiple years, a photocopy can be attached to the future years’ returns. IRS anticipates revising Form 8332 to accommodate a revocation.

Continuing in Example 5 of the regulation, in 2008 M fails to make all child support payments and L signs a Form 8332 revoking the release for 2009 and delivers a copy to M and keeps the evidence of delivery. L attaches the Form 8332, keeping a copy, to L’s 2009 tax return.

5) All of the examples are useful, but Example 8 is worth repeating here in brief. R and S are divorced, Child lives with R, and the decree requires R to sign a Form 8332 releasing the exemption for Child. R doesn’t sign the Form 8332. S cannot claim Child as a dependent.

6) IRS is soliciting comments on this regulation with a due date of July 31, 2007. The Preamble to the regulation contains specifics if you are interested in submitting comments.

This regulation is proposed to apply to taxable years beginning AFTER the date the regulation is published as a final regulation. This could be published as a final regulation as early as shortly after the hearing date in late July or as late as never.

This regulation should be available on the IRS web site as 149856-03. We can also send you a pdf copy attached to an email upon request.

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This text has been shared with you courtesy of: David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (fax 920-496-9111) , , , and .

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