YOUNG v. YOUNG
Docket No. 112325
Court of Appeals of Michigan
March 19, 1990
182 Mich App 643
Submitted December 12, 1989, at Detroit.
The Court of Appeals held:
One of the provisions of the 1984 amendment of the Internal Revenue Code clearly empowers a state court to modify a pre-1985 divorce judgment provision which awarded to the noncustodial parent the right to claim the federal income tax exemption for a child to provide that such right to claim the exemption shall be in the custodial parent. Because there is that specific provision in the Internal Revenue Code, it is unnecessary to address the broader question of whether state courts retain the authority to make or modify an award respecting the claiming of federal income tax exemptions under other circumstances.
Affirmed.
SAWYER, J., concurred. While he agreed with the result reached by the majority, he would reach that result on the
DIVORCE — CHILD SUPPORT — INCOME TAX — DEPENDENCY EXEMPTIONS — CIRCUIT COURTS.
A Michigan circuit court has the power to modify a divorce judgment entered prior to January 1, 1985, which provided that the noncustodial parent would be able to claim the state and federal income tax dependency exemption for each child to provide that such exemption shall be taken by the custodial parent.
John J. Grech & Associates, P.C. (by Kenneth A. Skuzenski), for plaintiff.
Jerry W. Drowns, for defendant.
Before: GRIFFIN, P.J., and GILLIS and SAWYER, JJ.
GRIFFIN, P.J. Plaintiff appeals as of right from an order modifying an April 9, 1984, judgment of divorce. The 1984 divorce judgment had granted plaintiff, the noncustodial parent, the federal and state income tax exemptions for the parties’ two minor children.
In March of 1988, defendant, the custodial parent, filed a motion for an increase in child support which also requested transfer of the income tax exemptions from plaintiff to defendant. Following a stipulation by the parties as to child support and child care expense levels, the lower court ordered a hearing as to the request for modification of the tax exemptions. Following the hearing, the lower court entered an order which transferred the tax exemptions for the youngest child from the noncustodial plaintiff to the custodial defendant. The tax exemptions as to the oldest child in favor of the plaintiff remained unchanged.
Plaintiff appeals arguing that federal and state
The divorce judgment in the instant case qualifies as a “qualified pre-1985 instrument” under
(B) Qualified pre-1985 instrument. For purposes of this paragraph, the term “qualified pre-1985 instrument” means any decree of divorce or separate maintenance or written agreement—
(i) which is executed before January 1, 1985,
(ii) which on such date contains the provision described in subparagraph (A)(i), and
(iii) which is not modified on or after such date in a modification which expressly provides that this paragraph shall not apply to such decree or agreement.
The present divorce decree was entered before January 1, 1985, and provides that the noncustodial parent (plaintiff) shall be entitled to federal and state tax exemptions for the parties’ children. It is undisputed that the noncustodial parent (plaintiff) provided at least $600 for the support of each child during the calendar year.
The tax provision at issue requires a pre-1985 divorce judgment to have specifically awarded the dependency exemptions and recognizes only subsequent modifications which are consistent with the act. We construe the operative language to hold that a noncustodial parent may lose his or her exemption under a “qualified pre-1985 instrument” through subsequent modification, but that the noncustodial parent cannot gain an exemption by attempting to transform a nonqualified divorce judgment into a “qualified pre-1985 instrument.” As stated in Baron, Modification of Divorce Decrees by Virtue of the 1984 Tax Amendments
The new tax provisions make clear that a “qualified pre-1985 instrument” must have specifically provided for the allocation of the dependency exemption as of January 1, 1985, recognizing only subsequent modifications which may serve to remove a pre-1985 instrument from the status of being qualified. In other words, a noncustodial parent may lose his exemption under a “qualified pre-1985 instrument” (if he or she had one) through modifications but the noncustodial parent cannot gain an exemption by attempting to convert an existing nonqualified instrument into a “qualified pre-1985 instrument” through modification.
In the instant case, a “qualified pre-1985 instrument” was modified to transfer tax exemptions from a noncustodial parent to a custodial parent. For the reasons stated, we hold that such a modification is not proscribed by either the Internal Revenue Code or state law.
Finally, at this time we choose not to revisit our holdings in Stickradt v. Stickradt, 156 Mich App 141; 401 NW2d 256 (1986), Lorenz v. Lorenz, 166 Mich App 58; 419 NW2d 770 (1988), and Varga v. Varga, 173 Mich App 411; 434 NW2d 152 (1988), as such decisions are clearly distinguishable.
Affirmed.
GILLIS, J., concurred.
SAWYER, J. (concurring). I concur.
While I do not necessarily disagree with the majority‘s analysis concerning the modifying of pre-1985 orders, I do not believe we should resolve this issue on the narrow grounds on which the majority limits its analysis. Rather, I believe we
I
Plaintiff first argues that the trial court lacked the authority to modify the judgment of divorce with respect to the allocation of the federal tax exemptions for the children. I disagree. Plaintiff argues that he is entitled to both exemptions since they were awarded to him in the judgment of divorce, that the judgment constitutes a “qualified pre-1985 instrument” under
A. A BRIEF HISTORY OF IRC § 152(e)
Prior to amendment in 1984, it was generally agreed that a state court had the authority, under
However, the Tax Reform Act of 1984 amended
The instant dispute may be resolved by determining whether the state courts were divested of jurisdiction over the tax exemption issue by the 1984 amendment to
B. THE 1984 AMENDMENT
As noted above, the Tax Reform Act of 1984 amended
The first exception allows the noncustodial parent to claim the exemption where the custodial parent has released the exemption to the noncustodial parent by executing a written declaration “in such manner and form as the Secretary may by regulations prescribe,” which the noncustodial parent must attach to his or her tax return each year.3
Eliminated in the 1984 amendment was the provision that the noncustodial parent had to pay at least $600 per year per child in child support in order to claim an exemption when allocated to the noncustodial parent under a divorce decree or an agreement of the parties.4 Also eliminated was the prior provision that the noncustodial parent was treated as having provided more than half a child‘s support, and thus entitled to the exemption,
It is this later change which seems to have provided the greatest impetus to changing the provisions of
The present rules governing the allocations of the dependency exemption are often subjective and present difficult problems of proof and substantiation. The Internal Revenue Service becomes involved in many disputes between parents who both claim the dependency exemption based on providing support over the applicable thresholds. The cost to the parties and the Government to resolve these disputes is relatively high and the Government generally has little tax revenue at stake in the outcome. The committee wishes to provide more certainty by allowing the custodial spouse the exemption unless that spouse waives his or her right to claim the exemption. Thus, dependency disputes between parents will be resolved without the involvement of the Internal Revenue Service. [The Legislative History of the Deficit Reduction Act (PL 98-369) reported in HR Rep 98-432, part II, 98th Cong (2nd Sess) 3, reprinted in 1984 US Code Cong & Admin News 697, 1140.]
The 1984 amendment was enacted to address this problem. While various state courts have interpreted the purpose and effect of the 1984 amendment, they have reached differing results.
C. THE “MICHIGAN RULE”
On March 5, 1986, Michigan became the first
Only five states besides Michigan adhere to the Michigan Rule and hold that state courts cannot award exemptions: Florida,6 Missouri,7 Oregon,8 South Dakota9 and Texas.10 One additional state, Indiana, did follow the Michigan Rule in one opinion.11 However, the Indiana Court of Appeals recently took a contrary position, adopting the
The evolution of the Oregon Court of Appeals position is somewhat interesting and merits discussion. It initially addressed the issue in Gleason v. Michlitsch, 82 Or App 688; 728 P2d 965 (1986). Gleason, however, involved an illegitimate child, not a divorce. As the court noted,
None of these cases provide much analysis in
D. THE “MINNESOTA RULE”
The majority of states take a broader view of state court authority under
The Minnesota Rule has been followed in at
The West Virginia Court of Appeals wrote what may be the best analysis of this issue in Cross v. Cross, 363 SE2d 449 (W Va, 1987). Accordingly, I take the liberty of quoting from that opinion at length:
The commentators indicate that the purpose of the 1984 amendment to
IRC § 152(e) was to remove from the Internal Revenue Service the burden of resolving numerous factual disputes between divorced parents over the issue of who actually provides more support for the child. Such disputes arose when, under the previous law, the noncustodial parent paid more than $1,200 yearly as support. Under the amendedIRC § 152(e) , the criteria to be followed by the IRS is much more objective—the custodial parent always gets the exemption unless he or she has assigned it to the non-custodial parent through a written declaration on an official IRS form. Thus, under the newIRC § 152(e) , a court order standing alone—without the necessary IRS waiver form—is ineffective to transfer the dependency exemption.Contrary to the legislative history of the amended
IRC § 152(e) , Mrs. Cross maintains that the 1984 version ofIRC § 152(e) was designed to confer, by federal law, a collateral financial benefitupon the custodial parent. Nothing, however, could be farther from the truth. What the new Code section sought to achieve was certainty in the allocation of the dependency exemption for federal tax administration purposes. By placing the dependency exemption in the custodial parent unless a waiver is executed, the new statute relieves the Internal Revenue Service of litigation. The new statute is entirely silent concerning whether a domestic court can require a custodial parent to execute a waiver, and this silence demonstrates Congress‘s surpassing indifference to how the exemption is allocated as long as the IRS doesn‘t have to do the allocating. [Cross, supra 457-458; emphasis in original.]
The Cross court went on to discuss the Texas Court of Appeals decision in Davis v. Fair, 707 SW2d 711 (Tex App, 1986), and strongly rejected the Texas court‘s reasoning:
Davis v. Fair, is an extremely formalistic opinion that strains at a gnat but swallows a camel. The Davis court held that the trial court could adjust child support to reflect the lost value of the dependency exemption, but could not allocate the exemption to the non-custodial parent because there was no express authority in the Internal Revenue Code allowing it.
Indeed, under the new
IRC § 152(e) a state court does not have the power to allocate the exemption simply by court order alone (as it could have done before the 1984 Amendment), but it does have the equitable power to require the custodial parent to sign the waiver. In this regard, what the Davis court missed is that there is no prohibition—express or implied—on a state court‘s requiring the execution of the waiver, and because state court allocation of dependency exemptions has been custom and usage for decades, it is more reasonable than not to infer that if Congress had intended to forbid state courts from allocating the exemptionby requiring the waiver to be signed, Congress would have said so. In this regard it is interesting to note that Texas was the one state that discouraged court-ordered allocation of the exemption under the old law.37 See, R.M. Baron, [Modification of Divorce Decrees by Virtue of the 1984 Tax Amendment Relating to Dependency Exemptions, 8 U Ark Little Rock L J 683 (1985)]. Thus, we arrive at a conclusion diametrically opposed to Davis v. Fair, supra, because we find nothing in the 1984 amendment to
IRC § 152(e) that precludes a power in our trial courts to award the dependency tax exemption as an integral part of setting child support by ordering the custodial parent to execute the waiver required by the IRC. In this regard, the U.S. Supreme Court has articulated two tests for determining whether there is a conflict between a federal statute and state law. The first of these tests provides that a conflict exists when “compliance with both federal and state regulations is a physical impossibility . . .” Florida Lime & Avocado Growers, Inc. v. Paul, 373 US 132; 83 S Ct 1210; 10 L Ed 2d 248 (1963). The second test provides that a conflict will be found when a state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Hines v. Davidowitz, 312 US 52; 61 S Ct 399; 85 L Ed 581 (1941).Our holding today concerning a court‘s power to order a custodial parent to waive the dependency exemption meets both tests.
IRC § 152(e) seeks only certainty; it requires a waiver to allocate the dependency exemption to the non-custodial parent and a court-ordered waiver is as acceptable as any other. The second test relating to congressional intent is also met: the amendedIRC § 152(e) is designed to ease the IRS‘s administrative burden and not to rearrange economic benefits between divorced parents. [Cross, supra at 458-459; emphasis in original.]
In a peculiar way, perhaps, Davis v. Fair, supra, is squarely on point. In Davis the court held that although a trial judge could not allocate the dependency exemption, he could reduce child support to reflect the value of the dependency exemption. If that is so, a court can do indirectly what Mrs. Cross would have us prohibit a court from doing directly. Take away $100 a month from Mrs. Cross‘s child support payments and she‘ll gladly execute a waiver to have the $100 a month restored; in her tax bracket the dependency exemption is nearly worthless.
The facts of life are that income tax exemptions are valuable only to persons with income, and up to a certain point, the higher the income the more valuable exemptions become because of the progressivity of the federal income tax. In this regard, it is to be remembered that the federal government is not providing every custodial parent with a cash grant under
IRC § 152(e) . Rather,IRC § 152(e) provides an economic benefit that is of significantly greater value to a parent with income than it is to a parent without income. Consequently, it seems only reasonable that a trial judge should allocate the dependency exemption to the parent in the highest tax bracket, and then enhance (or reduce) the value of the cash child support payments to offset the value of the exemption. . . . Certainly what can be done indirectly under any reading of the law by a circuit judge—namely, to adjust the award of child support depending on whether a waiver of the dependency exemption is made by the custodial parent, as in Davis, supra,—can be done directly. [Cross, supra at 459-460.]
The Washington Court of Appeals, in In re Marriage of Peacock, 54 Wash App 12; 771 P2d 767, 768-769 (1989), while employing a similar analy-
The Tennessee Court of Appeals, in Hooper v. Hooper, supra, also noted that there is no constitutionally guaranteed right to an exemption which would prevent ordering the execution of IRS Form 8332. Furthermore, the court noted that
E. THE “NEVADA RULE”
One state, Nevada, cannot be easily classified into either category. In Jensen v. Jensen, — Nev —; 753 P2d 342 (1988), the Nevada Supreme Court ruled that it was inappropriate to award the noncustodial father the income tax exemption. However, it did not base its holding on a conclusion that the trial court lacked the authority to award exemptions under
The Connecticut Supreme Court addressed this theory, though without specifically considering Jensen, supra, in Serrano, supra. Specifically, the court rejected the notion that an adequate legal remedy exists by revising the child-support obligation since (1) that would, in reality, be an equitable remedy, not a legal remedy, and (2) divorces are equitable actions and, therefore, the court can use its equitable powers as needed.
F. DISCUSSION
I am convinced that the reasoning behind the Minnesota Rule, which is followed by the vast majority of appellate courts which have addressed the issue, represents the correct view. The time has come to abandon the Michigan Rule set forth in Stickradt, supra, and its progeny. Not only is the Minnesota Rule followed by at least twenty-one states, those states’ appellate courts have developed a large body of articulate and thorough opinions which set forth in detail the reasons behind the conclusion that state courts may continue to allocate the dependency exemptions, subject to certain procedural restrictions. Not only is the Michigan Rule followed in only six states, none of the appellate decisions in those six states have
As discussed above, a number of reasons exist in support of the conclusion that dependency exemptions may be awarded in a domestic relations action. First, there is no indication in the federal statute that Congress wished to deprive the state courts of authority in this area; had Congress wanted to do so, it would have explicitly said so. As the court in Cross, supra at 457, stated, Congress has “surpassing indifference to how the exemption is allocated as long as the IRS doesn‘t have to do the allocating.” If this were not the case, Congress would have acted to amend
Second, it is not necessary to deprive state courts of the authority to award exemptions in order to achieve the congressional intent behind the amendment. Congress passed the amendment in order to relieve the IRS of the burden of having to mediate disputes between parents over who was entitled to the exemption for their child. Before the amendment, the IRS had little choice but to audit both parents’ tax returns, consider supporting evidence, and determine which parent had spent more money supporting the child and was thus entitled to claim the dependency exemption for the child. So long as the state courts achieve its allocation by requiring the execution of IRS Form 8332, the objectives behind the amendment
I would further add on the issue of congressional intent that there is no indication that the 1984 amendment was passed for purposes of enhancing federal revenues. If Congress wished to stop the practice of transferring exemptions from custodial parents in lower income brackets to noncustodial parents in higher income brackets as a revenue enhancement mechanism, it would not have included
Third, the allocation of the exemption from a custodial parent in a lower income tax bracket to the noncustodial parent in a higher income tax bracket has the effect of increasing the parents’ combined after tax income. This increased income can be used to increase the child-support award without decreasing the noncustodial parent‘s net income. See Nichols v. Tedder, 547 So 2d 766, 775 (Miss, 1989). Thus, with the appropriate allocation of the exemption and child-support award, the net income, after taxes and child support are taken into account, for both parents can be increased over what it would be without an allocation. Id. The Nichols court further noted that
[t]o deny our trial courts the power to allocate the exemption gives the custodial parent the ability to punish the non-custodial parent by making the tax liability greater for the non-custodial parent; greater in fact than the savings the custodial
parent stands to gain from claiming the exemption. The only real winner in such a situation is the federal government, while the real loser is the child. [Nichols, supra at 775.]
Fourth, if the requirement of executing Form 8332 is made contingent upon full payment of child support, as most of the courts have required, the custodial parent is given an additional tool to enforce the noncustodial parent‘s support obligation. However, I do not believe it appropriate to require such a provision, as some appellate courts have done. Rather, this issue should be left to the trial court‘s discretion and it may include such a provision where it deems it appropriate.
Finally, I am unpersuaded by the reasoning of the courts adhering to the Michigan Rule. As Cross, supra, and other cases have pointed out, the fact that there is no explicit provision in the IRC authorizing the state courts to allocate the exemptions by requiring the execution of Form 8332 is irrelevant. What is relevant is that such action by the state courts is neither prohibited by the IRC nor by principles of federal preemption.
Moreover, the conclusion that the same result may be reached by adjusting the child-support award is flawed. While this approach may yield the same result in net income for the noncustodial parent, it does not arrive at the same result for the child support to be paid to the child. It must be remembered that child support is paid for the benefit of the child, not for the benefit of the custodial parent. It, therefore, makes little sense to reduce the child-support award, thus harming the interests of the child, because the custodial parent refuses to execute a waiver.
This latter point was commented upon in McCarthy, supra at 1029:
As Michigan law now stands, an impecunious custodial parent could refuse to release the tax exemption to a salaried noncustodial parent, even though the exemption would be of no benefit to him or her, and releasing the exemption would actually increase the child support payment by increasing the noncustodial parent‘s net income. The best interests of the children would not be served by wasting an asset, i.e., tax exemption, available for their support.
The interests of all concerned, including the child, can be better served by merely allocating the exemption and requiring the execution of the waiver.
G. CONCLUSION
McCarthy, supra, politely suggested that this Court‘s decision in Stickradt, supra, was incorrectly decided and “that when Michigan appellate courts revisit this issue they may decide that the circuit court has jurisdiction to allocate tax exemptions in a divorce.” McCarthy, supra at 1029. I agree.
Accordingly, I conclude that Stickradt and its progeny were incorrectly decided. For the reasons discussed above, I conclude that state courts continue to have the authority to allocate federal dependency exemptions in light of the 1984 amendment to
II
There remains, however, the determination of
Since the parties limit their arguments to the issue of the trial court‘s authority, I will not determine whether the trial court erred in transferring one of the two exemptions to defendant. However, I will offer a few general principles to aid the trial courts in this area. Generally, the exemption should be awarded to the parent who is in the higher income tax bracket and, therefore, will realize the greatest benefit from the exemption and, by receiving the exemption, be able to provide further financial support to the child. Additionally, the court might wish to consider which parent contributes the greater amount to the child‘s support. Furthermore, as the court in Motes v. Motes, 786 P2d 232 (Utah App, 1989), noted, the exemption should not be awarded to the noncustodial parent as a “consolation prize” for not receiving custody of the children. Similarly, where there are two or more exemptions available, the trial court should not merely divide the exemptions between the parents in an attempt to
In sum, the trial court will have to weigh any relevant factor present in each case and make an award which is in the best financial interests of all concerned, including the child. In the appropriate cases, by awarding the exemptions and adjusting support obligations, the trial court can achieve an increase in the net income (i.e., income after taxes and child support) of all concerned.
Accordingly, I conclude that the trial court did not err in modifying the judgment of divorce to transfer one of the tax exemptions to defendant. However, it should be noted that there may be some question whether the trial court‘s modification of the judgment destroyed its status as a “qualified pre-1985 instrument.” This question cannot be answered with any authority since this Court cannot enforce our decision against the IRS. While, in my opinion, the judgment remains a qualified pre-1985 instrument with respect to the exemption retained by plaintiff, the IRS may decide otherwise and we would be powerless to stop them. Accordingly, plaintiff may wish to confer with tax counsel and take the appropriate action, such as obtaining an IRS ruling, having defendant execute Form 8332 with respect to the exemption retained by plaintiff, or both.39
For the above reasons, I conclude that the trial court possessed the authority to modify the divorce judgment and change the award of the dependency exemptions.