It is not unusual during the course of settlement negotiations for the custodial spouse to give one or more of the tax dependency deductions to the non-custodial spouse. This is particularly true if the custodial parent earns substantially less than the non-custodial parent. Usually there is some quid pro quo for the deduction. Sometimes the release of the tax dependency deduction is part of child support negotiation, and at other times, it's linked to property settlement issues.
However, IRS regulations require that in order for a taxpayer to be legally entitled to the dependency deduction, certain explicit statutory requirements must be met. A non-custodial parent, regardless of whether a divorce decree awards the deduction, is not entitled to the dependency deduction unless the custodial parent releases the deduction. This is done by completing a valid written declaration (IRS Form 8332 or its equivalent) to the Federal tax return for the year the deduction is claimed. The beauty of IRS Form 8332 is that a custodial parent may relinquish more than one year on that form. The original Form 8332 must be attached to the first year's tax return and a copy must be attached to each subsequently claimed year.
Woe be unto him, however, who loses his or her copy of the form!
In Chamberlain v. Commissioner, the former husband (taxpayer) claimed the deduction for one of his children on his 2003 tax return. The U.S. Tax Court ruled that he was not entitled to the dependent deduction, however, because he didn't attach a valid IRS Form 8332 (Release of Claim to Exemption for Child of Divorced or Separated Parents) to his tax return. The tax court also denied the child care credit since entitlement is tied to the dependent deduction for the child.
In Chamberlain, the taxpayer's former wife relinquished the dependency deduction for one of two children beginning in 1995 and for all future years by executing a Form 8332. The taxpayer attached the original to his 1995 return. Later, a fire destroyed all copies of the taxpayer's returns, and thus his only copies of form 8332. Although the taxpayer tried to get the IRS to provide a copy of his 1995 tax return information, of course, it was too late. The IRS doesn't keep tax returns that long.
The tax court was unsympathetic. "Although we are sympathetic with [taxpayer's] plight, we are bound by the wording of the statute as enacted and accompanying regulations when consistent therewith."
One wonders why the taxpayer could not get his former spouse to execute another Form 8332. I guess the lessons here are: #1 Don't burn your files. #2 Don't burn bridges behind you.