Facts
- Violet A. Reynolds and Gregg P. Kent cohabited in a nonmarital relationship for about 25 years.
- During the relationship, Kent provided financial support; Reynolds maintained the household, hosted guests, and cared for Kent during illness.
- In 1991, the relationship ended, and Kent sued Reynolds in state court to have her vacate a residence and to recover a car previously given to her.
- The parties settled the litigation; Kent agreed to (i) pay Reynolds about $60,000, (ii) make monthly “maintenance” payments for five years, and (iii) transfer title to the car and certain personal and household property to Reynolds.
- In 1994, Reynolds received $22,000 under the settlement agreement and did not report it as income, treating it as a nontaxable gift.
- The IRS determined a 1994 income tax deficiency of $5,805 and an accuracy-related penalty of $1,161 under I.R.C. § 6662(a).
- The case was submitted on a fully stipulated record under Tax Court Rule 122.
Issues
- Whether $22,000 received in 1994 under a settlement resolving claims arising from the breakup of a long-term nonmarital relationship is includible in gross income under I.R.C. § 61 or excludable as a “gift” under I.R.C. § 102(a).
- Whether Reynolds is liable for the I.R.C. § 6662(a) accuracy-related penalty for the underpayment attributable to the omission.
Decision
- The Tax Court held the $22,000 settlement payment was includible in gross income under I.R.C. § 61 and was not a gift excludable under I.R.C. § 102(a).
- The court sustained the IRS’s deficiency determination.
- The court sustained the I.R.C. § 6662(a) accuracy-related penalty, finding the underpayment was attributable at least to negligence or disregard of rules or regulations and that Reynolds did not show reasonable cause and good faith.
Legal Principles
- Gross income under I.R.C. § 61 includes all income from whatever source derived unless a specific exclusion applies.
- The I.R.C. § 102(a) gift exclusion applies only to transfers made with donative intent; the controlling inquiry is the transferor’s intent.
- Under Commissioner v. Duberstein, a “gift” requires “detached and disinterested generosity,” not a transfer motivated by a legal or moral duty or expected economic benefit.
- Payments made pursuant to negotiated settlements of disputes are commonly characterized by reference to the origin and nature of the claims resolved; litigation-driven, bargained-for payments generally indicate an economic exchange rather than donative intent.
- I.R.C. § 6662(a) imposes a 20% accuracy-related penalty for underpayments attributable to negligence or disregard of rules or regulations (among other grounds), absent reasonable cause and good faith.
Conclusion
The Tax Court treated a 1994 payment made under a written settlement resolving property and support-type disputes after the end of a long-term nonmarital relationship as taxable income rather than a gift, and it upheld an accuracy-related penalty because the taxpayer failed to reasonably support the exclusion and did not establish reasonable cause or good faith for omitting the payment from income.