A commonly negotiated issue in mediation is who is entitled to take the dependency deduction exemption for the parties’ minor children.  Assuming the child is a qualifying child under 26 USC § 152(e)(1), the custodial parent after a divorce is finalized must use either Form 8332 or a similar statement (containing the same information required by the form) to make a written declaration to release the exemption to the noncustodial parent. The noncustodial parent must attach a copy of the form or statement to his or her tax return. The exemption can be released for 1 year, for a number of specified years (for example, alternate years), or for all future years, as specified in the declaration.

In Luis Santana and Flor E. Vargas v. Commissioner, T.C. Memo 2012-49, the Tax Court upheld an IRS disallowance of a claimed dependency exemption for the tax year 2008 because the taxpayer father did not comply with the IRC requirements for allowing a non-custodian parent to claim a personal exemption for a qualifying child.

The couple was divorced in 2001 and entered into a mediation agreement whereby in addition to other stipulations, the mother and father were to alternate claiming their younger child as a dependent after the older child reached majority provided the father was current on child support.  The father did not attach to his return Form 8332, Release of Claim to Exemption for child of Divorced or Separated Parents, or a written declaration containing the same information.

Since the father did not attach Form 8332 or a declaration, the Tax Court upheld the denial of the exemption by the IRS.

Since the father did not have Form 8332 to attach, he could have substituted a declaration such as the mediation agreement as long as it had the following Form 8332 information:

• The name of the child.
• The name and Social Security number of the noncustodial parent claiming the dependency exemption deduction.
• The Social Security number of the custodial parent.
• A declaration that the custodial parent will not claim the dependency exemption deduction.
• The years for which the claims are released, and,
• The signature of the custodial parent.

Two Options:

1. In the event the custodial spouse does not provide Form 8332, mediation agreements should include the information above that would go on the form.  The agreement can then be attached to the return in lieu of Form 8332.
2. A second option is to have the Form 8332 signed at the mediation instead of waiting later for signature.

A well-written mediation agreement can prevent future problems if it becomes difficult for the non-custodial parent to obtain the Form 8332.  Without the form or a declaration such as a mediation agreement containing the required information, the agreed upon exemption could be disallowed.

(The above information does not constitute tax advice or create an attorney-client or CPA-client relationship.  This information is provided for general information only and anyone seeking advice should contact the appropriate professional.)