tax affairs

When Extramarital Affairs Run Afoul With Taxes

Apr 3rd 2018
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Of the articles I've written over the years, odds are that more than a few visitors are going to notice that more than a few of the articles chronicle IRS successes and stumbles when the agency endeavors to exact taxes from women who receive currency, cars, clothing, dwellings, furs, gems and other valuables from men with whom they’re amorously involved.

Why are bureaucrats bedeviled? Because Congress wants them to enforce an Internal Revenue Code that stipulates disparate treatment for compensation and gifts. Whereas one provision says payments received as “compensation for services” are taxed, another one says money or other assets received as “gifts” aren’t taxed.

The key issue: Should these women be treated as recipients of taxable compensation or as recipients of nontaxable gifts? No surprise then that the courts often have to resolve these gift-versus-compensation clashes.

My favorite dispute, which I have written about in one of my books: One that pitted the IRS against Leigh Ann Conley and Lynnette Harris, twin sisters and Playboy magazine models. Both became mistresses of the same wealthy — and much older — widower, David Kritzik.

David was in his late 80s when he rewarded each sister with cash payments totaling more than $500,000 over a period of several years. Leigh and Lynette thought that what they had received from David were gifts and they wouldn’t have been liable for assessments on back taxes, interest charges and an assortment of penalties. The IRS, believed otherwise, making the case that they had been compensated for their efforts and had to pay the assessments.

The IRS invoked a trifecta to establish that David compensated them: Lynette’s description of her relationship with David as “a job” and “just making a living;” her derogatory statements about sex with him; and her complaint that she “was laying on her back and her sister was getting all the money.”

Luckily for Leigh and Lynette, the IRS explanation fell flat with the Seventh Circuit Court of Appeals, a tribunal one rung below the Supreme Court. The Seventh Circuit concluded that the sisters were “entitled to treat cash and property received from a lover as gifts, as long as the relationship consists of something more than specific payments for specific sessions of sex.”

Men Behaving Badly

My list of favorites ranks Leslie Ann Ashe right behind Leigh Ann and Lynette. Like the twins, Leslie tangled with the IRS. Unlike the twins, who were billed with six-figure assessments for taxes, interest and penalties, Leslie was billed for a token amount.

Leslie’s involvement with the IRS came about because she and her boss had an office romance. During the affair, she received several cash payments from him. The IRS found out about the payments as a consequence of which the twosome became a threesome.

The affair ended badly. The vengeful boss fired his subordinate. Not content with that, he intimidated her into signing over to him several checks that had been issued to her by the company’s pension plan.

And where did he deposit the checks? In his personal account.

And how did he explain the checks? They were repayments by Leslie of amounts he had “loaned” to her.   

The IRS’s always-alert computers thought otherwise. So the agency taxed the checks aggregating about $16,000 as pension distributions to Leslie. But until Leslie saw the checks, her understanding had been that the pension plan didn’t cover her.

Fortunately for Leslie, she easily bested the IRS. The Tax Court held she shouldn’t be taxed on the funds purportedly paid to her. At no time did she have control over them.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting). 

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