A Spurned Lover and His 1099

Mrs. Maultsby is a well-respected family law attorney. She has seen a lot of strange cases in which love has gone sour. I don’t think she has seen one quite like this.

Lewis Burns and Diana Blagaich were involved in a romantic relationship from November 2009 until March 2011. When they started the relationship, he was about 71 years old and she was about 53 years old. Mr. Burns was really fond of Ms. Blagaich. In 2010, Mr. Burns transferred to Ms. Blagaich cash and other property totaling in value at least $743,819, The total included a $70,000 Corvette that he gave her because Mr. Burns did not want Ms. Blagaich to ride on her Harley Davidson motorcycle – too dangerous.

Neither Mr. Burns nor Ms. Blagaich was interested in marriage, but on November 29, 2010, they entered into a written agreement to confirm their commitment to one another and to provide financial accommodation for her. Among other provisions, the agreement provided that both “shall be faithful to each other and shall refrain from engaging in intimate or other romantic relations with any other individual.” Upon signing the document, Mr. Burns gave Ms. Blagaich $400,000.

Their relationship hit the skids pretty quickly thereafter. On March 10, 2011, Ms. Blagaich moved out of Mr. Burns’ house. Shortly thereafter, Mr. Burns came to believe that Ms. Blagaich had been involved in an ongoing romance with another man throughout their relationship.

Mr. Burns filed a civil suit against Ms. Blagaich in state court and sent her a Form 1099-MISC reporting income to her of $743,819 for 2010. The IRS responded to the 1099 by asking Ms. Blagaich for her taxes on that amount.

The state court found that the $400,000 payment was income and the rest constituted gifts. The court ordered Ms. Blagaich to repay Mr. Burns $400,000 in 2014. She did. Mr. Burns died shortly after the trial, having exacted his revenge.

Ms. Blagaich filed for summary judgement by the Tax Court on two pretty technical issues. One of those was that the doctrine of rescission caused her to have no taxable income on the $400,000 that she gave back. Basically, rescission occurs when a taxable event is undone in the same taxable year that the event occurred. The event is then considered a non-event. The Tax Court pointed out that 2010 is not 2014. She lost on both of her arguments. Also, the Tax Court left for trial whether or not her tax is on $743,819 or on $400,000 or on nothing at all.

I remember that our first case studies in my graduate school tax research class involved two similar court cases with disparate results. In the first case, the recipient of the money convinced the court that the money was a gift emanating from true love – not taxable income. In the second case the taxpayer had a history of trading affection (do you like that euphemism?) for money. She had income.

I wonder how Ms. Blagaich will fare?

VKM