Matrimonial Law and the IRS

By: Gary Bluestein, Esq.

Federal tax law can impact virtually every area of legal practice.  For example, in debtor/credit law, certain property is protected from enforced collection, such as a 401K, IRA or homestead exemption.  There is additionally a 10% limitation on wage garnishment.  However, none of these exemptions apply to the Internal Revenue Service.  Bankruptcy Law also treats tax creditors differently, with certain type of taxes qualifying for non-dischargeable “priority status[1].”  There are many other examples where practitioners who do not regularly deal with the uniqueness of Federal tax law and the powers of the IRS can be caught by surprise.  Matrimonial law is no exception.

Often, a matrimonial attorney’s practice can be complicated by the fact that Federal law is not controlled by State law or State court decrees.  The IRS frequently ignores directives in a divorce decree to the detriment of the client, and due to recent regulatory changes, is not bound by decrees directing which parent is responsible to pay a tax liability.  The State court’s limitation in its ability to direct the IRS is also evident in determining which parent is entitled to a dependency exemption.  This fact was recently illustrated in Armstrong v. Commissioner, 139 TC 468 (2012),  aff’d, 2014 U.S. App. LEXIS 4693 (8th Cir. 2014).

Armstrong explained that §152(e) of the Internal Revenue Code requires that the non-custodial parent can only claim a child as a dependent if there is an “unconditional declaration” attached to his or her return, executed by the custodial parent, waiving the right to claim that child.  Subsequent to the tax year in issue in Armstrong, the Secretary promulgated regulations specifically requiring that a written declaration be unconditional, and be executed by the custodial parent waiving the exemption[2].  Section 152(e)(1)(B) of the Internal Revenue Code requires that a waiver statement be attached to the return.  Treas. Reg. §1.152-4(e)(1)(ii) specifically states that attaching a divorce decree to the return will not suffice.  Any conditional language added by the custodial parent, such as “this waiver is conditioned on the non-custodial parent paying child support,” will likely invalidate the waiver.  The result here can be harsh in that it creates a situation whereby a non-custodial parent will be denied the dependency exemptions granted in a divorce merely because the waiver form was inadvertently omitted as an attachment to the return.  Perhaps more commonly, the exemption will be derived when an uncooperative ex-spouse refuses to execute the mandated waiver, or insists on adding conditional language.

Since the dependency exemption issue is often significant – potentially involving multiple children and many future years – it is important to be aware of the requirement referenced above. Steps should be taken to ensure that the non-custodial parent is clearly directed to obtain a signed Form 8332 from the custodial parent, if the non-custodial parent was granted the exemptions per the divorce decree.

Unfortunately, as a result of the statutory provisions and the recent case law, despite an attorney’s best efforts to protect the non-custodial client, an uncooperative ex-spouse can make this a difficult problem long into the future.  Not only can the ex-spouse refuse to provide the required Form 8332, the regulations and the form itself allow the custodial parent to revoke the waiver.  Unfortunately, the Tax Court has made it clear that it will not look behind the waiver by allowing the introduction of a divorce decree; and the non-custodial parent will be forced to go back into State court and try to compel the necessary form to be signed or an improperly revoked waiver to be reinstituted.

 

 

[1] However, contrary to common belief, income taxes may be discharged in bankruptcy assuming certain requirements are met.

[2] 26 CFR 1.152-4.  Moreover, the unconditional declaration must be executed on the Form 8332, or a document conforming to its substance.

Disclaimer

This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decision of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult an independent licensed attorney before making any decision or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Andreozzi Bluestein LLP and the recipient.

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