Question

Issue #1

Our clients Fred and Sarah Thompson were divorced in December 2014. During their marriage, they had two children, Aaron and Lisa. At the time of the divorce, the children were ages 13 and 12, respectively. The divorce decree provides for joint custody of the children. Specifically, Fred and Sarah are to have the children in alternating weeks. Both Fred and Sarah are professionals with high incomes, so the divorce decree doesn’t provide for child support. It also does not stipulate which parent is to claim the dependency exemptions.

During 2017, Fred and Sarah tried to alternate custody to the best of their ability. Work issues, however, caused a great deal of “trading” to take place. Fred kept the children for two weeks while Sarah was out of town on business during her custody week. Sarah would return the favor by keeping the children during one of Fred’s weeks. Unfortunately, neither parent kept any records, so it’s impossible to determine who had the most custody. Sarah feels that she had custody half of the year. Fred tends to agree as to Lisa, but disagrees as to Aaron. Fred recalls that he took Aaron walleye fishing during one of Sarah’s custody weeks. It looks like the two of them contributed equally to the children’s support. Neither parent has or will sign a Form 8332. Both parents know that the dependency exemption goes away under the new tax law, so 2017 will be the last year either can claim it. Which parent should claim the dependency exemptions for the children for 2017?

Issue #2

Fred is an insurance agent who receives a commission on each policy he sells. During 2016, he purchased a policy on his own life, naming his wife, Sarah as the beneficiary. He did not report the commission on the policy as gross income because he considered the commission a reduction in his cost (like a discount) for the life insurance. The Thompson’s 2016 joint return is being audited and the agent is challenging the exclusion. Is the agent correct, or is the position taken by our client correct? Provide citations to all relevant authority. I’ll need that for my meeting with the auditor.

Answer 1

Issue 1:

Only one parent is allowed to claim the child dependency exemption in case the parents are divorced. The child dependency exemption shall be claimed by the parent who has the custody of the child. However, in case of joint custody then the number of nights that a child slept in the home of the parent shall be taken into consideration for determination of the child dependency claim that a particular parent can claim. In this case it seems that Fred is in the pole position to claim child dependency claim.

Issue 2:

The income of an insurance agent mainly includes commission from sale of insurance policy and it should be included in the gross income of the agent irrespective of the insurance beneficiary. Thus, even if an agent purchases an insurance policy on his own life the amount of commission he earns even on that policy shall be included in the gross total income of the agent. Thus, the position taken by Fred is not correct as the amount commission shall be included in the gross total income of Fred.