## Facts

- Lillian Pascarelli and Anthony DeAngelis maintained a long-term close personal relationship; beginning in 1959 DeAngelis lived in Pascarelli’s home, and Pascarelli performed household and social/hostess functions connected to DeAngelis and his business associates.
- During 1959–1963 DeAngelis transferred substantial sums to Pascarelli, typically by multiple checks each year.
- In 1959 DeAngelis transferred funds to a brokerage account titled in Pascarelli’s name.
- In 1960 DeAngelis paid directly for improvements to Pascarelli’s residence.
- Pascarelli used transferred funds to buy luxury automobiles for herself, make significant gifts and loans to others, and pay certain expenses benefiting DeAngelis (including clothing and entertainment/gifts for his business associates).
- Pascarelli kept no reliable records segregating amounts spent for DeAngelis’s purposes from amounts used for her own benefit, requiring the court to estimate allocations.
- The Commissioner issued (1) income tax deficiency notices to Pascarelli for 1959–1963, including civil fraud penalties under I.R.C. § 6653(b) and estimated tax additions under § 6654, and (2) gift tax deficiency notices for DeAngelis for 1959–1963, asserting Pascarelli’s liability as transferee for those deficiencies and additions under § 6651(a).
- The cases were consolidated; the Commissioner also asserted alternative theories that the transfers were compensation or gifts at the time made.

## Issues

1. Whether funds transferred by DeAngelis to Pascarelli during 1959–1963 were taxable compensation, non-taxable gifts, or merely funds held and spent by Pascarelli as DeAngelis’s agent.
2. Whether amounts placed into a brokerage account in Pascarelli’s name and amounts paid for improvements to her home were includible in her taxable income and/or constituted gifts.
3. Whether the Commissioner proved civil fraud under I.R.C. § 6653(b) for any of the years and amounts at issue, and whether additions under § 6654 applied.
4. To what extent DeAngelis made taxable gifts and whether Pascarelli was liable as transferee for resulting gift tax deficiencies and additions.

## Decision

- The Tax Court held that Pascarelli was not merely a conduit for all transfers; substantial portions that benefited her personally were includible in her income as compensation.
- The court found other portions were expended for DeAngelis’s purposes and were not income to Pascarelli to that extent, based on estimated allocations from the evidence.
- The court characterized certain portions of the transfers as gifts rather than compensation, depending on intent and circumstances.
- The court did not sustain the Commissioner’s civil fraud position to the full extent asserted, applying the clear-and-convincing evidence standard and limiting fraud penalties accordingly.
- In the gift tax/transferee docket, the court imposed gift tax consequences consistent with its compensation-versus-gift allocations and determined Pascarelli’s transferee liability to the extent of gift transfers received.
- The court directed that the parties compute the final deficiencies and additions under post-opinion computation procedures.

## Legal Principles

- Payments received in connection with services, even in an informal or personal living arrangement, are taxable compensation to the extent they confer economic benefit on the recipient.
- A single stream of transfers may be divided into compensation, gifts, and non-income agency expenditures when the evidence supports different purposes and benefits.
- Funds titled in a taxpayer’s name are taxable to that taxpayer to the extent the taxpayer has dominion and uses them for personal benefit; an “agent” characterization depends on facts showing use at the transferor’s direction for the transferor’s purposes.
- For gift characterization, the controlling inquiry is the transferor’s donative intent; transfers lacking “detached and disinterested generosity” may be treated as compensation.
- Civil fraud penalties under I.R.C. § 6653(b) require proof by clear and convincing evidence of intent to evade tax; large understatements and poor records alone are insufficient without proof of fraudulent intent.
- Gift tax determinations and transferee liability turn on the characterization and amount of transfers as gifts and the transferee’s receipt of the donor’s assets, measured by the value of the property transferred.

## Conclusion

The Tax Court treated DeAngelis’s payments to Pascarelli as partly taxable compensation and partly gifts or non-income agency expenditures, allocating amounts based on personal benefit and purpose; it limited fraud penalties for lack of clear and convincing proof while imposing income, gift, and transferee consequences consistent with its allocations.


Pascarelli v. Commissioner, 55 T.C. 1082 (1971)