Broker Check

May 15, 2000

Whew! Made It Through Another One !

             This tax season was a bad one as tax seasons go.  Tax returns were more complex than last year`s but we knew that.  What we didn`t expect was that it would get off to a slow start as clients tended to come in later, with more complex matters.  In general, they made money in the stock market so they owed tax and did not withhold enough tax during the year and therefore had to sell stock or mutual funds in order to pay their taxes (need I mention that the stock market sold off in early April so more was sold than clients anticipated, so they were grouchier).  To compound this, while we were better staffed at the administrative level, we were less staffed at the professional level because of the continuing shortage of CPAs.  Tax returns, therefore took longer to be completed and sent to clients.

             Additionally, more of you are investing with Lisch Investment Services so additional precious tax season time was taken to review your investment portfolios.  I am taking steps now to plan for next year`s tax season from the lessons learned from this year`s.

Mutual Fund Accounting is a Horror

             The main problem we experienced with regard to stock market transactions was the sales of mutual funds.  This was compounded by the fact that almost nobody kept track of the cost basis and their funds, that is, the original cost and the addition to cost due to reinvesting dividends and capital gains.  This will be a continuing problem.

H & R Block Screwed Up Again

             Poor H & R Block, the tax preparation giant experienced yet another problem with its online tax filing software.  It seems that a tax of $1,000 was being misread by the software as $1.  Taxpayers will have to ante up the extra $999 but Block promises to cover any IRS penalties or interest that arise from the screwup.

             While H & R Block will undoubtedly have a better time next tax season, these kinds of gaffes will undoubtedly send more taxpayers to trusted professionals like us to oversee their filing needs.

Tax Quote of the Day

             People who complain about taxes can be divided into two classes: men and women.                                                                                        - Unknown.

 Noncustodial Spouse Should Comply With Procedural Requirements For Claiming Dependency Exemption

          In a bad decision, the Tax Court held that a noncustodial parent who was awarded the dependency exemptions in the divorce decree which was attached to his tax return but who did not attach to his tax return a Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, signed by the custodial parent, was not entitled to the dependency exemptions.

             The Court, in its misguided opinion, ruled that since the court order was not signed by the custodial parent, that the Temporary Regulations under IRC 152 suspended the divorce decree.  Even though this foolishness by the court would negate the power and authority of the local court by requiring the custodial parent to specifically agree to the ruling (which, let`s face it 50% of most litigants don`t) the Tax Court ruling is law in the federal circuit encompassing Colorado.  This case not only is bad law, but calls into question the mental competence of those in this circuit.

             The Tax Court held that the husband`s attachment of the divorce order granting him the dependency exemptions did not meet the requirements of the statute.  It said that satisfying the custodial spouse`s signature requirement is critical to the successful release of the dependency exemption to the noncustodial parent.  Form 8332 incorporates this statutory requirement and the form is valid only, when signed by the custodial parent.  The court found that the divorce order the husband attached to his tax return did not satisfy the signature requirement of the Internal Revenue Code or other requirements of the regulations.

             The court also determined that the signature of the wife`s attorney on the divorce order was not a substitute for the wife`s signed declaration waiving dependency deductions!

             The court also found that the husband could not rely on any unclear or inaccurate information in IRS publications regarding the requirements for a noncustodial parent to claim dependency exemptions.  It noted well-established precedent that taxpayers rely upon IRS publications "at their peril".

             In light of the above, we recommend noncustodial parents not live in Colorado!  We would also like to litigate this matter as a matter of principle.  On a more serious note, under the belts and suspenders rule, don`t trust the law implicitly.  Regardless of the clear intent of the statute, it would be wise for noncustodial parents who obtain the right to claim dependency deductions by court order or under a separation agreement to have the custodial parent sign Form 8332 at the time the order is finalized or the agreement is entered into to insure the ability to claim the exemption.  Custodial spouses, however, may not want to agree to an open ended release of the dependency exemptions to the noncustodial parent in case the noncustodial spouse does not keep child support payments current.  A recent IRS legal memorandum says that a custodial parent who has released the dependency exemption to the noncustodial parent for all future years may not unilaterally revoke the release.

             Noncustodial parents who were awarded the right to claim dependency exemptions by pre `85 divorce or separate maintenance decrees, and who meet other conditions, do not have to attach Form 8332 to their tax returns in order to claim the deductions on their tax returns.

             If you have questions about these or any other tax or financial matters, please call me.