The Supreme Judicial Court released a slip opinion, Phalla IV vs. Samath HANG., No. 11-P-2181. (May 14, 2013) (Phalla), resolving ambiguities created by recent amendments to the Internal Revenue Service Code, and providing an interesting abstract of a Massachusetts State judge's authority to allocate Federal dependency exemptions in divorce proceedings.
State judges were historically deemed to have the power to allocate Federal dependency exemptions, confirmed in Bailey v. Bailey, 27 Mass.App.Ct. 502, 504 (1989) (Bailey). The Massachusetts Court of Appeals addressed for the first time in Bailey whether a 1984 amendment to the Internal Revenue Code precluded a State judge from assigning the dependency exemption. The applicable provision as amended entitled a parent to claim a child for the purposes of the exemption so long as the child received over half his support from his parents per year, was the child of divorced parents, and who is in the custody of one of his parents (the "custodial parent") for more than half of the calendar year. Internal Revenue Code, 26 U.S.C. §152(e)(1) (Supp. IV 1986). The exception at issue allowed a non-custodial parent to claim the exemption only if the custodial parent executes a written declaration (or approved IRS form) that he/she will not claim the child as a dependent for the taxable year, which the non-custodial parent would affix to his/her income tax returns for the year. Temporary Treas. Reg. §1.152-4T, 26 C.F.R. §1.152-4T (1984).
Bailey held that the purpose of the amendment was not to pre-empt the State judge's right to allocate such dependency exemptions in a divorce matter, but rather to allow parents to resolve dependency disputes without IRS involvement, and that such orders were consistent with applicable Massachusetts law. 27 Mass.App.Ct. at 504.
Since Bailey, applicable dependency provisions have been further amended and current provisions require that the written declaration must be on a specific form (8332) or if not, it must substantially conform to the form, must be executed for the exclusive purpose of releasing that parent's claim. 26 C.F.R. §§1.152-4(h), 1.152-4(e)(1)(ii) (2012). This meant the practice of attaching a separation agreement or divorce judgment to one's tax returns was no longer sufficient.
In Phalla the lower court, McSweeney, J., issued a judgment of divorce nisi which, in relevant part provided that the Wife was to have primary physical custody of the parties' two children, Husband was to pay child support of $228 per week, and further, "Husband shall be entitled to claim both the unemancipated children, as dependents on his [S]tate and [F]ederal tax returns until each child is emancipated or further order of the Court. The Court finds that Husband shall be entitled to claim all the children for tax purposes." Wife appealed, asserting that for Federal income tax purposes, the States are preempted and that the recent amendments overruled Bailey. She argued that the amended code sets a system by which the custodial parent is entitled to the child unless he/she agrees to release it, and a State court order is insufficient to allocate the right to claim the child as a dependent.
The Phalla court disagreed, stating that the amendments were not fatal to the general holding in Bailey. The case was remanded for an order that the Wife execute a written declaration in accordance with the IRS requirements.
The overarching message is that where the IRS and domestic relations matter clash, the IRS will invariably defer to State courts as they are deemed in the best position to be involved with such matters. This "hands off" approach begs the question: Is this tenable prospectively should the Supreme Court uphold the Defense Of Marriage Act ("DOMA").
