## 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

1. 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).
2. 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.


Reynolds v. Commissioner, T.C. Memo. 1999-62 (1999)