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These new regulations (Regs.) focus on which parent is the "custodial parent" and how the custodial parent waives the dependency exemption and revokes the waiver.

Under the basic rule of IRC §152(c)(4)(B), when both parents want to claim a child as a dependent, the parent with whom the child spends most time during the year gets the exemption. If they spend equal time with the child, the parent with the higher income gets the exemption. The "nights" rule, discussed below, does not yet apply to this test.

IRC §152(e) lets the "noncustodial parent" claim the exemption if the "custodial parent" waives it. This device is not allowed unless the child receives more than half of his or her support from the parents and unless the child is in the "custody" of one or both parents for more than half of the year. The Regs. say that "custody" for this test means the right to physical custody under state law. The "nights" rule, discussed below, does not apply to this test. One result of this test is that the rules for transferring the exemption by waiver do not apply if the child has been an adult for six months, because during that period neither parent has the right to physical custody.

Measuring Nights. Once §152(e) is available to the parents, "custodial parent" status – that is, which parent can waive the exemption -- is determined by the actual time spent with the child. For this purpose the Regs. measure times by counting the number of "nights" the child has spent with each parent. The nights rule also doesn't apply if one parent works the night shift, in which case it is measured by the number of days. On a school day, the child is treated as residing at the "primary residence registered with the school." "Custodial parent" status under §152(e) does not entitle you to the exemption if you don't waive it. If there is no waiver, the right to the exemption as between parents is determined under §152(c)(4)(B), where the "nights" rule does not yet apply.

A child resides with a parent for a night if the child sleeps at the parent's residence (not necessarily in the company of that parent) or in the company of the parent if they are away from home. The preamble says "the time a child goes to sleep is irrelevant." Does this mean that if the child sleeps two hours during the day at one parent's house and six hours during the night at the other parent's house, the child has spent the "night" with both parents? [The IRS drafting attorney says the one with whom the child slept most gets the night; "common sense," she says -- but it's not in the Regs.]

Waiver. The really important part of the Regs. deals with granting and revoking the waiver. The waiver by the custodial parent must be on Form 8332 or a similar statement that says "unconditionally" (e.g., not conditioned on the noncustodial parent's paying child support) that the "custodial parent will not claim the child for any taxable year beginning in that calendar year;" and the Form or statement must be attached to the return of the noncustodial parent. The statement must name the noncustodial parent and specify the year or years to which it applies, which may include a statement that it applies to "all future years."

If Form 8332 is not used, the statement must "conform to the substance" of that form. The statement must be "a document executed for the sole purpose of serving as a written declaration" under §152(e). A court order or separation agreement may not serve as such a declaration, except for documents executed before July 2, 2008. Advice: Get the Form 8332 signed by the waiving parent at the time the MSA is signed or the judgment is issued.

Revoking the Waiver. The custodial parent can unilaterally revoke the waiver (even a waiver under an instrument executed before July 2, 2008) "by providing written notice of the revocation to the other parent." The revoking parent must "make reasonable efforts to provide actual notice" to the other parent. The revocation will be effective beginning with the taxable year after the year in which the notice is given. The notice is given on Form 8332 or a substitute statement meeting the requirements of the preceding paragraph. The Form or statement must be attached to the return of the revoking parent for the year in which that parent first claims the exemption. The Regs. do not address whether the family court can impose sanctions for exercising this unilateral right of revocation in violation of a family court order.

Differing Rules for Determining Time with the Child. One problem with these Regs. is that there are three child-custody-related tests for the dependency exemption that aren't necessarily measured in the same manner. The first, in the basic rule of IRC §152(c)(4)(B), asks with which parent the child spends the greater amount of time. The preamble to the new Regs. says that the "nights" rule of §152(e) does not apply to §152(c)(4)(B), although the IRS drafting attorney expects that the upcoming §152(c)(4)(B) regulations will adopt the "nights " rule. The second, to determine whether the §152(e) waiver mechanism is available, asks whether the parents have the right to physical custody of the child under state law for more than half of the year. The third, for defining the "custodial parent" entitled to grant a waiver under §152(e) asks with which parent the child spends the most nights, which is defined as where the child sleeps. Right now, different answers might result from each test.