Opinion ID: 2612514
Heading Depth: 1
Heading Rank: 5

Heading: State Allocation of Federal Tax Exemption

Text: The remaining issue is one of first impression and requires us to decide whether the divorce courts of this state have authority to require a custodial parent to execute a written waiver of tax exemption under 26 U.S.C.A. § 152(e) (hereinafter I.R.S. § 152(e)) which provides in pertinent part: (e) Support test in case of child of divorced parents, etc.  (1) Custodial parent gets exemption.  Except as otherwise provided in this subsection, if  (A) a child (as defined in section 151(e)(3)) receives over half of his support during the calendar year from his parents  (i) who are divorced or legally separated under a decree of divorce or separate maintenance, (ii) who are separated under a written separation agreement, or (iii) who live apart at all times during the last 6 months of the calendar year, and (B) such child is in the custody of one or both of his parents for more than one-half of the calendar year, such child shall be treated, for purposes of subsection (a), as receiving over half of his support during the calendar year from the parent having custody for a greater portion of the calendar year (hereinafter in this subsection referred to as the custodial parent). (2) Exception where custodial parent releases claim to exemption for the year.  A child of parents described in paragraph (1) shall be treated as having received over half of his support during a calendar year from the noncustodial parent if  (A) the custodial parent signs a written declaration (in such manner and form as the Secretary may be regulations prescribe) that such custodial parent will not claim such child as a dependent for any taxable year beginning in such calendar year, and (B) the noncustodial parent attaches such written declaration to the noncustodial parent's return for the taxable year beginning during such calendar year. In addressing this issue in the instant case the Idaho Court of Appeals carefully reviewed both federal and state law before it concluded that Idaho magistrates have the authority and discretion in divorce proceedings to allocate the income tax dependency exemption to the noncustodial parent by directing the custodial parent to execute a written waiver of the exemption under I.R.C. § 152(e). Rohr v. Rohr, 118 Idaho 698, 800 P.2d 94 (Ct.App. 1989). We agree with the Court of Appeals' holding on this issue and are of the opinion its analysis is noteworthy. Finally, we address Teresa's assertion that the magistrate erred when he concluded that William was entitled to claim the dependency tax exemption for the couple's child. Teresa raises two reasons in support of her argument. First, she submits that, under federal law, only a custodial parent may claim the exemption. I.R.C. § 152(e) (1988). Second, Teresa asserts that, even if William is entitled to the dependency tax exemption under federal law, he has failed to make timely payments of child support, thus negating his entitlement to the exemption. Because Teresa's claims raise independent questions for our review, we will address each in turn. A. Federal Law Teresa first urges us to conclude that I.R.C. § 152(e) precludes a divorce court from allocating the dependency exemption to a noncustodial parent. Teresa submits that only she, as the custodial parent, can claim or waive this exemption. Teresa raises a question of first impression for this court; at issue is whether a divorce court may allocate the dependency exemption, pursuant to I.R.C. § 152(e), to a noncustodial parent without the custodial parent's approval. We hold, as a matter of law, that a divorce court may make such an allocation. Prior to 1985, divorce courts could allocate a dependency exemption to either the custodial or noncustodial parent. See, e.g., Morphew v. Morphew, 419 N.E.2d 770 (Ind. App. 1981). However, in 1984, enactment of an amendment to I.R.C. § 152, occasioned by the Tax Reform Act of 1984, P.L. No. 98-369, § 423(a), 98 Stat. 494, 799 (1984), produced significant changes in the standards for allocation of the dependency exemption. Under that amendment only the custodial parent is entitled to claim the dependency exemption, subject to three exceptions: cases involving multiple-support agreements, I.R.C. § 152(e)(3); cases involving qualified pre-1985 instruments, I.R.C. § 152(e)(4); and the exception applicable in the present situation, where the custodial parent waives the dependency exemption by written waiver. I.R.C. § 152(e)(2). The noncustodial parent may waive the dependency exemption on a yearly basis for a number of specified years, or for all future years. 26 C.F.R. § 1.152-4T (1988). Congress' purpose for amending the statute was to resolve factual disputes between divorced parents over the issue of who could claim the dependency exemption. Thus, the new law has clarified the question of when each parent may claim the exemption, and in so doing it has undercut the authority of judges simply to award the exemption, as the magistrate did here. However, it has left unanswered the question of whether a divorce court can indirectly accomplish the same thing by directing the custodial parent to execute a waiver. Several appellate courts have concluded that the amendment divests divorce courts of this authority. McKenzie v. Kinsey, 532 So.2d 98 (Fla.App. 1988); Lorenz v. Lorenz, [166 Mich. App. 58] 419 N.W.2d 770 (Mich. App. 1988); Hughes v. Hughes, [35 Ohio St.3d 165] 518 N.E.2d 1213 (Ohio 1988); Gleason v. Michlitsch, [82 Or. App. 688] 728 P.2d 965, 967, n. 6 (Ore. App. 1986); Brandriet v. Larsen, 442 N.W.2d 455 (S.Dak. 1989); Davis v. Fair, 707 S.W.2d 711 (Tex. App. 1986). For the most part these appellate courts have reasoned that, other than the three enumerated exceptions provided for in I.R.C. § 153(e), there is no explicit authorization in the amendment for a divorce court to allocate the dependency exemption. See Brandriet v. Larsen, supra . In contrast, appellate courts from other jurisdictions have concluded that, notwithstanding the amendment, a divorce court still has authority to allocate a dependency exemption to the noncustodial parent by directing the custodial parent to execute a written waiver. Lincoln v. Lincoln, [155 Ariz. 272] 746 P.2d 13 (Ariz. App. 1987); In re Marriage of Einhorn, [178 Ill. App.3d 212, 127 Ill.Dec. 411] 533 N.E.2d 29 (Ill. App. 1988); Fudenberg v. Molstad, 390 N.W.2d 19 (Minn.App. 1986); Fleck v. Fleck, 427 N.W.2d 355 (N.Dak. 1988); Cross v. Cross, 363 S.E.2d 449 (W. Va. 1987); Pergolski v. Pergolski, [143 Wis.2d 166] 420 N.W.2d 414 (Wis.App. 1988). Following the lead of the Minnesota Court of Appeals in Fudenberg v. Molstad, supra , these courts generally agree that, regardless of the amendment's restrictive language, state divorce courts retain the equitable authority to direct execution of a waiver by the custodial parent where one is so required. Cross v. Cross, 363 S.E.2d at 458. In reaching this conclusion, there is a consensus among these appellate courts that judicial allocation of the dependency exemption does not interfere with the amendment's purpose, namely to rid the Internal Revenue Service of the burden of deciding who may claim the exemption. As noted in Cross v. Cross, supra , what Congress sought to achieve in amending I.R.C. § 152(e) was certainty in the allocation of the dependency exemption for federal tax administration purposes; nothing in the amendment precludes a domestic court from requiring a custodial parent to execute such a waiver. Id. at 457. We agree with this reasoning. In this state, the dependency exemption has traditionally been treated as a valuable right which can be allocated, like other rights, by the divorce court. In many cases, the parties themselves will allocate the exemption pursuant to the terms of their separate agreement. However, we find nothing in the wording of the amendment nor in the legislative history which expressly prohibits a divorce court from directing allocation of the dependency exemption to the noncustodial parent; the amendment itself contains no requirement that the waiver be voluntarily signed and likewise, the amendment does not prohibit a divorce court from directing the custodial parent to sign such a waiver. In re Marriage of Einhorn, [127 Ill.Dec. at 419] 533 N.E.2d at 37. If Congress had intended to prohibit divorce courts from allocating the exemption, it could have stated so in the amendment. Furthermore, we believe that divorce courts are in a much better position than the IRS to ensure efficient enforcement of child support orders directly linked to allocation of the dependency exemption. If a custodial parent who executes a waiver finds later that he or she has not received the child support payments which the noncustodial spouse was obligated to make, then the custodial spouse may go to court and obtain an order or judgment compelling the noncustodial spouse to pay the value of the lost exemption. We therefore hold that, in divorce proceedings, a divorce court has discretion to allocate the income tax dependency exemption to the noncustodial parent by directing the custodial parent to execute a written waiver of the exemption under I.R.C. § 152(e). In so holding, we intimate no view that directing a waiver is the only permissible means of assuring that the proper party ultimately receives the economic benefit of the tax exemption. Another method, recognized by the South Dakota Supreme Court in Brandriet v. Larsen, supra , is to adjust the child support itself to reflect the benefit realized by the party claiming the exemption. This approach is consistent with I.C. § 32-706(A)(6), which currently allows the court in fixing the level of support to consider the actual tax benefit recognized by the party claiming the federal tax exemption. Although it may be debated whether child support levels should be fixed by reference to factors other than need and ability to pay, it is permissible under federal law and the Idaho statute to take the value of the exemption into account, thereby indirectly allocating its economic value between the parties. (Footnotes omitted.) Rohr v. Rohr, 118 Idaho 698, 703-706, 800 P.2d 94, 99-102 (Ct.App. 1989). Although several state appellate courts have held that I.R.C. § 152(e) preempts their divorce courts' discretion and authority to allocate the federal tax exemption, we are of the opinion that the opposite position taken by many other appellate courts is a more reasonable and functional policy. In amending I.R.C. § 152(e) in 1984, Congress allowed the allocation of the federal tax exemption by providing for a waiver of the exemptions to be executed by the custodial parent. I.R.C. § 152(e). The reason the law was changed in 1984 was to relieve the Internal Revenue Service of involvement in resolving disputes between parents over the tax exemption. Enactment of amended I.R.C. § 152(e) persuades us that Congress intended that state divorce courts would allocate the tax exemption so long as it was accomplished within the framework of the statute by execution of a waiver. As noted by the Court of Appeals, in order to shift the dependency exemption, the custodial parent must sign a written waiver foregoing the exemption, and the noncustodial parent must attach this waiver to his or her income tax return for the taxable year in question. The Internal Revenue Service has provided Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, to accomplish this transfer of the tax exemption to the noncustodial parent. See 26 C.F.R. § 1.152-4T (1988). The mechanism and procedure for transfer of the tax exemption to the noncustodial parent has been provided by both the Congress and the Internal Revenue Service. No compelling reason exists for not granting the divorce courts of this state the authority and discretion, in the proper case and circumstance, to utilize this method to equitably allocate the rights of the parties. The suggested alternative of denying our divorce courts authority to order the custodial parent to sign the exemption and then imposing upon the court the responsibility of taking tax consequences into account in making a property division is a circuitous process that is cumbersome at best and beset with the likelihood of error. Our divorce courts should have the authority of doing directly what is suggested to be accomplished indirectly. Our holding today is consistent with the stated purpose of Congress in relieving the Internal Revenue Service of the responsibility of deciding which of the parents may claim the tax exemption. [4] The magistrate courts of this state work on a daily basis with the division of property rights, child support, visitation rights, responsibility for medical care and a myriad of other significant issues in divorce actions. Rather than requiring in every case the circuitous process of allocating a division of property, adjusting child support payments or some other process in order to balance the effect of the tax exemption, and then leaving the parties to work with the Internal Revenue Service, better policy reasons and practicality in dealing with this issue compels us to hold that the magistrate courts who are confronted with these issues on a regular basis be allowed the discretion and the authority to resolve the tax exemption issue directly if they are of the opinion that it is a proper remedy to utilize. Obviously, such power and authority is to be exercised cautiously and prudently. However, the magistrate courts of this state deal with issues of equal or greater significance and impact than tax exemptions and they should have this alternative available to utilize in the proper circumstances. Idaho's magistrate courts are the courts of general jurisdiction for divorce cases and have the plenary and equitable power to order the parties to execute various documents of significance such as deeds, assignment of interest in stocks and bonds, insurance policies, bills of sale, and numerous other documents during the divorce process. We are of the opinion that the same discretionary and equitable power exists in our divorce courts with regard to ordering a party to execute a waiver for the federal tax exemption. Accordingly, we hold that the judicial allocation of the dependency exemption is not inconsistent with and does not interfere with I.C.R. § 152(e). See Cross v. Cross, 363 S.E.2d 449 (W. Va. 1987). At the time the divorce decree in the present case was entered I.C. § 32-706 did not specifically require the court to consider the effect of the federal tax exemption. [5] However, the magistrate court was statutorily required at that time to consider the financial resources, needs, and obligations of both the custodial and noncustodial parents. Certainly, the allocation of the federal tax exemption affects the financial resources of either the custodial or non-custodial parent and the magistrate court did not err in requiring Teresa to either sign the tax exemption waiver or pay William the additional tax he incurred as a result of not having the exemption. In this case the parties stipulated to the divorce decree which by its express terms allows William the right to claim the federal tax exemption provided he is current with his child support payments. The record supports the magistrate's finding that William was substantially current in his child support payments. The magistrate court simply ordered Teresa to comply with the divorce decree to which she had previously stipulated and allow William the tax exemption. In the alternative, the magistrate ordered Teresa to compensate William for the added tax for which he became liable because of not having the claimed exemption available. Under these circumstances this order was within the power of the magistrate and was not an abuse of discretion. Directing a party to execute the waiver is not the only means of allocating the economic benefit of the tax exemption. The magistrate court may, and is authorized by the current version of I.C. § 32-706, to take account of the value of the exemption and allocate its effect when it makes an initial or modified child support order. Nonetheless, the authority to require execution of waiver is an alternative which the divorce courts of this state should have available to utilize under the proper circumstances. We have considered the other issues raised by Teresa and conclude they are without merit. Therefore, we affirm the magistrate court and district court decisions concerning the federal tax exemption issue, denial of attorney fees and dismissal of William's petition to modify. However, we remand for a hearing or further proceedings on Teresa's Response to Petition to Modify which seeks affirmative relief. Costs on appeal to respondent. No attorney fees awarded on appeal. BAKES, C.J., McDEVITT, J. and WOOD, District Judge, Pro Tem., concur.