Tax Court no help for opportunist girlfriend.

• Author: Beavers, James A.
• Position: 2016 memorandum decision in Blagaich v. Commissioner

The Tax Court found that the rescission doctrine did not allow a taxpayer to exclude from income $400,000 that she received under what was held to be a fraudulently induced agreement with her elderly boyfriend in 2010 that she was forced to pay back in 2014. It further found that the IRS was not estopped from arguing that other transfers to the taxpayer were includible in income by a state court's ruling that the transfers were gifts.

Background

Diane Blagaich and Lewis Burns were involved in a romantic relationship from November 2009 to March 2011. In 2010, Blagaich was 54 years old and Burns was 72 years old. During 2010, Burns, both wealthy and smitten, gave Blagaich cash and property worth $343,819. In addition, on Nov. 29, 2010, to formalize their relationship without getting married, the couple signed an agreement providing that they "shall respect each other and shall continue to spend time with each other consistent with their past practice," and that both "shall be faithful to each other and shall refrain from engaging in intimate or other romantic relations with any other individual. "The agreement required Burns to make an immediate payment of $400,000 (the agreement payment) to Blagaich, which he did.

Blagaich left Burns on March 10, 2011, and Burns sent notice of termination of the agreement the next day. Shortly afterward, he came to believe, contrary to what Blagaich claimed, that she had been involved in a romance with another man during their entire relationship.

Burns filed suit in Illinois seeking nullification of the agreement and return of the various gifts he had given Blagaich in 2010 and the $400,000 payment made under the agreement. He also sent Blagaich a Form 1099-MISC, Miscellaneous Income, reporting the amount of the gifts and the payment. In November 2013, the state court found that Blagaich had fraudulently induced Burns to enter into the agreement and ordered her to pay back the $400,000. However, the court ruled that the other money and property Burns gave her were clearly gifts that she was entitled to keep.

Burns had died shortly after the trial in the case, so the executor of his estate issued a revised 2010 Form 1099-MISC for $400,000. In March 2014, the executor informed the IRS that Blagaich had paid the $400,000 in compliance with the court's order.

Having received the Form 1099-MISC from Burns, the IRS adjusted Blagaich's 2010 income to include the full amount reported as income on the form. Blagaich...