Gold Diggers Beware!

A tax court case that came out this week shows the danger of receiving gifts or signing agreements with a significant other. In this case one scorned lover not only took legal action against his former girlfriend to get back $400,000 worth of gifts he had conferred to her, but he also reported the full $750,000 worth of gifts as income to the IRS on a form 1099, and the agency isn’t giving up on thinking this is taxable income.

In the 1953 movie, How to Marry a Millionaire, Marilyn Monroe plays one of three young models who survive off their ability to convince men to buy them things. While this was a great tax-free source of income in the 1950’s, the gold diggers of today have it less easy because of this landmark new tax court case that could subject their gifts from gentleman admirers to tax.

In one of the first tax court memos of this year, 2016-2, judge Halpern determined that the amounts paid to the petitioner were indeed taxable income, and not considered gifts. This totals $743,819 worth of cash and goods, including a Corvette and a diamond engagement ring. She will be subject to tax and penalties on the full amount as income, ouch!

The background of the story is the makings of a new Hollywood movie. Diane Blagaich (54) and Lewis E. Burns (72) had a romantic relationship but decided neither of them desired marriage. Instead they entered into a written agreement to confirm their relationship, provide support for her, and agreed to not see other people. This agreement also included a $400,000 cash payment to Ms. Blagaich. The relationship deteriorated quickly after the signing of this agreement, and Mr. Burns learned of Ms. Blagaich’s infidelity.

Mr. Burns sued Ms. Blagaich and was awarded back his $400,000 in a civil suit, but also issued her the 1099 for the total amount he gave her. The state court also determined the additional $343,819 was a gift. However, the tax court is not tied to following what is decided in the state court, and ha determined that this income is considered income and not a gift. Quoting Commissioner v. Duberstein 363 U.S. 278, 285 (1960), the court adds: "the mere absence of a legal or moral obligation to make * * * a payment does not establish that it is a gift.”

Thus she will now be subject to paying tax plus penalties on the entire $743,819 amount received. This includes the $400,000 she repaid after the civil suit, because the income was not returned within the tax year.

Obviously the tax court does not take kindly to gold diggers. Between that and Ms. Blagaich’s representation obviously not doing their background research before submitting the case (clearly Collateral Estoppel was not a good defense, and this seems rather obvious with the circumstances). After reading this court case I can only assume that this case likely will be contested to the Supreme Court, but I don’t expect a significantly different response on that level with the case history involved. Moral of the story: financial relationship agreements outside of marriage can be even more costly than a divorce, as the tax implications can add an additional and costly layer of complexity.

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