Love Affair - Gifts or Compensation

By: A.J. Cook


For 28 years Lloyd P. Cavett and Rose A. Bell had a torrid love affair.

They began as casual friends and developed a close relationship even though both were married. Ten years after meeting Cavett, Bell divorced her husband following a dispute over Cavett.

Six years later, Cavett's wife died.

Once both were free, they never got married again - not even to each other. But Cavett involved Bell fully in his life. They lived together, had joint bank accounts and traveled as husband and wife. She had unrestricted access to his wealth, and he gave her authority to make medical decisions for him in case he was unable to do so. She took care of him and his invalid daughter. The two good friends signed an agreement that Bell would continue her services, and in his will he would give her certain assets including his Cincinnati home. Because his daughter died before he did, Bell, as principal beneficiary in his will, received assets worth $815,360.

That rang a false note with the estate executors. They accused Bell of theft, alleging that before Cavett's death she wrongfully withdrew $59,000 from his bank account. An Ohio state court, however, ruled these were gifts.

"Gifts!" the Internal Revenue Service said. We want taxes and interest for all those presents given over the last 28 years. The agency claimed Bell received gifts from Cavett totaling $347,000 and the estate owed gift taxes of $10,000 plus penalties and interest.

The executors countered these weren't gifts but rather compensation for her services. And further, the bequest to her in the will was also compensation; therefore, the estate gets a deduction.

The Tax Court ruled against the executors on both counts and said the estate owed taxes on Cavett's gifts. "Their relationship was one of love and affection.... There was no employment relationship."

The moral: Love is blind and sometimes taxable.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.