                  T.C. Memo. 1999-62



                UNITED STATES TAX COURT



           VIOLET A. REYNOLDS, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 5708-97.                    Filed March 4, 1999.



     P and H cohabited for 24 years, H earning the
income and P primarily taking care of the household.
After H terminated the relationship, H sued P for
ejectment, trespass, and conversion, praying in his
complaint mainly for a judgment stating that P had no
interest in property that was purchased during their
relationship. P, in her answer, alleged that she had
an equitable interest in the property. H, in
settlement of the lawsuit, generally agreed to pay P
$153,500 to perfect his sole ownership of all the
property. R determined that the portion of the
settlement that P received during the subject year was
paid to her as compensation for the homemaking services
that she provided during the relationship.
     Held: H paid P the disputed amount in
satisfaction of her interest in the property, an
interest that she had received as a gift from H during
their relationship. Because P's basis in the property
is greater than the settlement amount, none of the
disputed amount is income to her.
                                - 2 -




     Paul Eugene Groff, for petitioner.

     J. Scott Hargis and Joyce Marr, for respondent.



                          MEMORANDUM OPINION


     LARO, Judge:     This case is before the Court fully

stipulated.   See Rule 122.   Violet A. Reynolds petitioned the

Court to redetermine respondent's determination of a $5,805

deficiency in her 1994 Federal income tax and an $1,161

accuracy-related penalty under section 6662(a).    The principal

issue we decide is whether payments received by petitioner under

a settlement agreement are includable in her gross income.    We

hold they are not.1    Unless otherwise stated, section references

are to the Internal Revenue Code in effect for the subject year.

Rule references are to the Tax Court Rules of Practice and

Procedure.

                              Background2

     Petitioner and Gregg P. Kent (Mr. Kent) were involved in a

close personal relationship from 1967 until 1991, and they

cohabited as an unmarried couple during the last 24 years of the

relationship.   Mr. Kent told petitioner early in the relationship


     1
       The only other issue in dispute is the applicability of
the accuracy-related penalty. Our holding on the principal issue
renders this other issue moot.
     2
       The parties have stipulated all facts. The stipulation of
facts and the exhibits submitted therewith are incorporated
herein by this reference. When the petition was filed,
petitioner resided in Seal Beach, California.
                                - 3 -


that she should not work and that he would provide for her

financially.    Petitioner generally was not employed during the

relationship.    She took care of the house and grounds in and on

which she and Mr. Kent lived, and she took care of a boat that

was acquired during their 25 years together.    She also acted as

hostess for their parties and as Mr. Kent's nurse when he was

ill.    Her relationship with Mr. Kent resembled that of a husband

and wife, including, but not limited to, the sharing of affection

and the presence of sexual relations.

       Several items of real and personal property were purchased

during their relationship.    Each item was placed in the name of

Mr. Kent or in the name of KENCOR, a California corporation in

which Mr. Kent was the majority shareholder.    The property

included a house, an automobile, furniture, and boats.    The house

was purchased in 1980, and, following the purchase, Mr. Kent and

petitioner lived there for the next 11 years.

       Mr. Kent purchased clothing and jewelry for petitioner and

gave her a weekly allowance.    When Mr. Kent and petitioner

traveled together, they would hold themselves out as husband and

wife.

       In July 1991, Mr. Kent moved out of the house and broke off

the relationship.    He asked petitioner to leave the house and

return the vehicle she was driving (a 1987 Lincoln Town Car),

which was in the name of KENCOR.    Petitioner refused, and Mr.

Kent and KENCOR (collectively, the plaintiffs) sued petitioner

for ejectment, trespass, and conversion (the lawsuit).    The
                               - 4 -


plaintiffs prayed mainly for a judgment stating that petitioner

had no interest in the property that was purchased during their

relationship.   Petitioner, in answering the plaintiffs' claim,

asserted as a "First Affirmative Defense" that she had an

equitable interest in the property.    She stated in a

"Declaration" filed in the lawsuit:

          2. I met Mr. Gregg P. Kent in 1957. At that time
     each of us was married. I was working with my husband
     in his construction business and Mr. Kent had jobs on
     which we wanted to bid. For the ten year period
     between 1957 and 1967, I saw him periodically in
     connection with his dealings with my husband.

          3. In 1967, Mr. Kent and I had an affair that
     lasted for approximately a year. In 1968 Mr. Kent
     rented an apartment in Kent, Washington. He asked me
     to leave my husband and move in with him. At that
     time, we discussed getting married but, as I indicated,
     we were both already married. In connection with our
     discussions of marriage, Mr. Kent told me: "As my
     wife, Violet, you would not have to work. I am the
     provider, I do that job." He told me that my role in
     our relationship would be to provide for his needs, be
     the hostess and social director, and take care of the
     home. Relying on that agreement, I left my husband and
     moved into Mr. Kent's apartment in Kent, Washington
     with him some time in 1968. * * *

          4. In 1970, Mr. Kent moved back to Southern
     California and approximately four to six months later,
     I joined him in Downey, California. We lived together
     in Downey at the Stonewood Apartments between 1970 and
     1972. In 1973 we moved to the Oak Hills Apartment in
     Montebello, California * * *. We lived together there
     until 1974. In 1974 we moved to * * * El Monte,
     California. We lived there in 1974 and 1975. In 1975
     we moved to * * * Huntington Beach, California, and
     lived there from 1975 to 1980. In 1980, we purchased
     the property in which I presently reside * * *.

          7. * * * At the time we purchased the home, he
     and I went looking for new homes. He told me that
     things were going well in the business, he wanted a new
     home for us and wanted me to pick out our home. He and
     I looked at a number of houses and selected our present
                         - 5 -


home. At the time the residence was purchased, he told
me it would be my home, and it was our home.

          *     *    *    *      *   *   *

     11. * * * in approximately 1989, Mr. Kent
acquired a new Mercedes for his personal use. At that
time, he told me that he was giving me the 1987 Lincoln
Town Car for my car and that car would be mine. * * *

     12. From the time Mr. Kent and I moved in
together to the present, he has provided for all of the
needs of each of us in accordance with our prior
agreement. Specifically, Mr. Kent provided everything
that was needed by us to live. Mr. Kent, during the
last several years, would give me between $500-$600 a
week, which money was to be used by me for the normal
household expenses, plus personal expenditures (hair,
nails, etc.), except that approximately once a month we
would go to the store together to buy major items for
cleaning and household purposes. Usually at those
times we would spend between $500-$600.

          *     *    *    *      *   *   *

     16. In 1987, when we purchased the present boat,
Mr. Kent told me he wanted us to get a bigger and
better boat so that we could do more entertaining on
board. At the time the boat was purchased, Mr. Kent
said that the boat was ours. On many occasions he
referred to it as "our boat" which I took to mean that
I had an equal interest in the boat. I believe the
boat's purchase price was approximately $260,000.00.
Since then Mr. Kent has spent at least another
$100,000.00 in upgrades on it. He told me that the
reason he paid so little for it was that he was able to
buy it for us at cost.

     17. In 1970 when we moved in together, Mr. Kent
told me that his wife had asked him to leave and that
he wanted to move ahead with his life and wanted me to
be part of that life. Each of us was married at that
time. He told me that he and his wife were discussing
a divorce and that when his divorce situation was
settled, we would then talk about getting married.
Subsequently, my divorce became final in 1974 and Mr.
Kent's divorce became final in 1978. At that time, we
discussed getting married; however, Mr. Kent told me:
"Why should you worry? Look at all the things we have
acquired together. It isn't necessary to be married.
Why should you worry? I will continue to take care of
                                - 6 -


     you just like I have taken care of you in the past." I
     relied upon those statements and never insisted on us
     getting married * * *.

                 *     *    *    *      *   *    *

          21. I have seen financial statements prepared by
     Mr. Kent where he showed that he owned assets in excess
     of $18,000,000.00.

                 *     *    *    *      *   *    *

          26. In 1968, Mr. Kent and I entered into an
     agreement whereby he was to be the provider and I was
     to take care of our nest. That agreement subsequently
     became more involved and included my taking care of
     him, the home, the interior of the boat, acting as a
     hostess for all parties and entertaining he wanted to
     do for personal and business reasons, doing laundry,
     housekeeping, ironing, cooking, shopping, supervising
     the service people who occassionally [sic] worked on
     the home and acting as nurse for Mr. Kent when he had
     health problems. In turn Mr. Kent agreed to provide
     for all of my living expenses * * *. For over 20 years
     we have lived according to our agreement. * * * Mr.
     Kent wants to throw me out with nothing to show for the
     many years we spent together.

     In October 1991, the lawsuit was settled,       Petitioner and

Mr. Kent (both individually and on behalf of KENCOR) signed the

Release and Settlement Agreement (settlement agreement).       The

settlement agreement provided in pertinent part:

          WHEREAS, KENT[3] in said case contends that REYNOLDS has
     no right, title, or interest, or legitimate claim in and to
     the real and personal property referred to therein, and
     further, KENT contends REYNOLDS has no right, title, or
     legitimate claim to any real and/or personal property of
     KENT, whether alleged in the case or not, and further, that
     Kent is not liable or responsible for any sums whatsoever;
     and

          WHEREAS, REYNOLDS contends that she has a claim to said
     real and personal property and to other property, both real


     3
         KENT in this document refers to both Mr. Kent and KENCOR.
                         - 7 -


and personal, which may belong to or stand in the name of
KENT; and

     WHEREAS, each of the parties hereto disputes the
other's contentions: and

     WHEREAS, the parties, KENT and REYNOLDS desire to
resolve their respective differences concerning their
respective claims and to memorialize their agreement
resolving those differences, and further, forever place the
dispute behind them * * *

          *     *    *    *      *   *     *

     1. In consideration for the full and complete release
by REYNOLDS of any claims of any nature, including but not
limited to, any sums of money, and/or claims to any real
and/or personal property of KENT, KENT agrees to pay
REYNOLDS the following sums, on the following terms:

          A. Cash in the sum of Fifty-seven Thousand Five
Hundred Dollars ($57,500), payable after REYNOLDS has
delivered all items she has removed from KENT, whether
removed from the property * * * or any other items belonging
to KENT whether removed from the Subject Property or any
other location, and after KENT has verified all items have
been returned to the Subject Property * * * and

          B. The sum of Two Thousand Dollars ($2,000) per
month for a period of three (3) years payable to the first
day of each month commencing November 1, 1991; and

          C. Thereafter, the sum of One Thousand Dollars
($1,000) per month for a period of two (2) years, payable on
the first day of each month commencing November 1, 1994 to
and including October 1, 1996.

     2. In addition to said sums, KENT will transfer
all right, title, and interest in and to the following
personal property:

          A. That certain 1987 Lincoln Town Car
automobile * * *;

          B. All clothing and jewelry in
     Reynolds'
 possession;

          C. * * * miscellaneous household furniture
and furnishings * * *.
                               - 8 -


     In accordance with the payment plan set forth in the

settlement agreement, petitioner received $22,000 in 1994.     This

amount was received from KENCOR, and KENCOR issued a Form

1099-MISC, Miscellaneous Income, to petitioner reporting the

amount as miscellaneous income.   Petitioner did not perform

services for KENCOR during that year, nor did she sell it any

property during that year.   Petitioner, allegedly relying on

advice from her attorney and accountant, did not report this

amount on her 1994 Federal income tax return.

                             Discussion

     We must decide whether the $22,000 amount is includable in

petitioner's 1994 gross income.   Respondent argues it is.

Petitioner argues it is not.   Respondent contends that petitioner

received the disputed amount as compensation for her homemaking

services.4   Petitioner contends that she received the disputed

amount as a gift.

     We agree with petitioner that the $22,000 amount is not

includable in her 1994 gross income, but we do so for a reason

slightly different than she espouses.     The taxability of proceeds

recovered in settlement of a lawsuit rests upon the nature of the

claim for which the proceeds were received and the actual basis

of recovery.   Sager Glove Corp. v. Commissioner, 36 T.C. 1173,

1180 (1961), affd. 311 F.2d 210 (7th Cir. 1962).    Ascertaining

the nature of the claim is a factual determination that is

     4
       In this regard, respondent states, petitioner's homemaking
services do not include sex.
                               - 9 -


generally made by reference to the settlement agreement in light

of the facts and circumstances surrounding it.   Key to this

determination is the "intent of the payor" in making the payment.

Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965),

affg. T.C. Memo. 1964-33; Agar v. Commissioner, 290 F.2d 283, 284

(2d Cir. 1961), affg. per curiam T.C. Memo. 1960-21; Seay v.

Commissioner, 58 T.C. 32, 37 (1972).   We must ask ourselves:    "In

lieu of what was the payment received?"   See Robinson v.

Commissioner, 102 T.C. 116, 126-127 (1994), affd. in part, revd.

in part on an issue not relevant herein and remanded 70 F.3d 34

(5th Cir. 1995).   Although the payee's belief is relevant to this

inquiry, the payment's ultimate character depends on the payor's

dominant reason for making the payment.   Commissioner v.

Duberstein, 363 U.S. 278, 286 (1960); see Agar v. Commissioner,

supra at 298; Fono v. Commissioner, 79 T.C. 680 (1982), affd.

without published opinion 749 F.2d 37 (9th Cir. 1984).

     The settlement agreement indicates that Mr. Kent paid the

disputed amount to petitioner in surrender of her rights in most

of the property purchased during their relationship.5    Respondent

agrees with this characterization, but extrapolates therefrom

that Mr. Kent paid petitioner the disputed amount to compensate

     5
       We recognize that KENCOR paid petitioner the $22,000
amount and that KENCOR issued petitioner a Form 1099-MISC
reporting that the amount was paid as miscellaneous income. The
record, however, tends to disprove such a characterization. The
more likely explanation of the payment, and the one we find from
the facts herein, is that Mr. Kent, as principal shareholder of
KENCOR, caused KENCOR to pay petitioner the $22,000 amount on his
behalf.
                              - 10 -


her for past services that she rendered to him.    We do not agree.

Nothing in the record persuades us that petitioner ever sought in

the lawsuit remuneration for services that she may have rendered

to Mr. Kent during their relationship, let alone that Mr. Kent

intended to compensate her for any such services by paying her

the disputed amount.   The written judgment sought by Mr. Kent and

the settlement agreement both indicate that the only reason Mr.

Kent commenced the lawsuit and paid the disputed amount to

petitioner was to retain possession of most of the assets

acquired during their relationship.

     Although petitioner did refer in her Declaration to an

agreement under which she would provide services to Mr. Kent in

exchange for support, the facts of this case do not support an

inference that she ever sought in the lawsuit to recover

remuneration for these services, or, more importantly, that Mr.

Kent paid her the disputed amount intending to compensate her for

any services that she may have rendered to him.6   The payor's

intent controls the characterization of settlement payments, and,

as we have found, Mr. Kent intended to perfect his sole

possession of most of their joint property when he paid

     6
       Even if we were to assume arguendo that Mr. Kent did agree
to support petitioner in consideration for her homemaking
services, it would not necessarily follow that every item of
property that he gave her during their relationship was pursuant
to this agreement. In fact, if we were to believe the
allegations in petitioner's Declaration to the effect that Mr.
Kent spent approximately $32,000 to $38,400 a year on their
household and her personal expenses, it would seem most logical
to conclude that many of the additional amounts that he gave her
were gifts.
                              - 11 -


petitioner the disputed amount.   In this regard, the cases of

Green v. Commissioner, T.C. Memo. 1987-503, affd. per curiam

846 F.2d 870 (2d Cir. 1988), Cotnam v. Commissioner, 263 F.2d

119, 122 (5th Cir. 1959), revg. in part and affg. in part 28 T.C.

947 (1957), and Braddock v. United States, 434 F.2d 631 (9th Cir.

1970), are factually distinguishable from the case at hand.    The

taxpayer in Green, unlike petitioner, sued her partner's estate

as a creditor, seeking to recover the value of services that she

rendered to him.   The same is true with respect to the taxpayer

in Cotnam, where the appellate court noted that "The pleadings in

the * * * [State court] proceedings show clearly that Mrs.

Cotnam's claim was based on the theory of a contract for

services."   As to Braddock, the payor there, unlike the payor

here, had a legal obligation to pay the taxpayer for her services

in cooking, cleaning, and helping him with his farm.

     Our conclusion that Mr. Kent paid petitioner the disputed

amount for her interest in the property does not end our inquiry.

Petitioner's sale of her property interest to Mr. Kent is a

taxable event for which she must recognize gain to the extent

that the selling price exceeds her basis in the property.    Sec.

1001(a).   As to her basis, the record indicates that petitioner

received her interest in the property by way of numerous gifts

that Mr. Kent made to her throughout their relationship.

Petitioner's declaration depicts a setting under which Mr. Kent

repeatedly "gave" her property, and the facts of this case

support the conclusion that he made these "gifts" with the
                              - 12 -


"detached and disinterested generosity, * * * affection, respect,

admiration, charity, or the like" required by Commissioner v.

Duberstein, supra at 285.7   Given the fact that petitioner and

Mr. Kent for a long period of time lived as husband and wife in

most regards, but for the obvious fact that they were not legally

married, we find it hard to believe that their relationship was

actually akin to a business arrangement.8

     Our conclusion herein that the property received by

petitioner from Mr. Kent was by way of a gift, rather than as

compensation for her services, is consistent with prior decisions

of this Court.   First, in Starks v. Commissioner, T.C. Memo.

1966-134, the taxpayer, a young unmarried, nonworking woman was

involved with a much older man.   The man, in return for the

woman's companionship, gave her money to buy a house and to spend

on her living expenses.   He also gave her an automobile, jewelry,


     7
       In reaching this conclusion, we bear in mind the
allegations set forth in petitioner's Declaration. We do not,
however, accept all these allegations as true.
     8
       We are mindful that all property acquired during the
relationship was placed in the name of Mr. Kent or that of a
corporation that he controlled. We do not find this fact to
negate the presence of a gift under the facts herein. Federal
law answers the question of whether a gift has occurred for
Federal income tax purposes, Commissioner v. Duberstein,
363 U.S. 278, 286 (1960), and we believe that Mr.
Kent's requested judgment and the settlement agreement speak
loudly to the effect that he gave petitioner interests in
property under the test set forth in Duberstein. To the extent
that State law is relevant to this inquiry, applicable State
(California) law does provide that a nonmarital partner may have
an equitable interest in property titled solely in the other
partner's name. See Marvin v. Marvin, 18 Cal.3d 660, 684 n.24,
557 P.2d 106 (1976), and the cases cited therein at 669-670.
                              - 13 -


furniture, fur coats, and other clothing.     Respondent determined

that the money and other assets were taxable to the woman as

compensation for services rendered to the man.     We disagreed.    We

held that the woman received the money and other assets as gifts.

See also Libby v. Commissioner, T.C. Memo. 1969-184 (similar

holding as to cash and property given to a young mistress by her

older paramour).

     Later, in Pascarelli v. Commissioner, 55 T.C. 1082,

1090-1091 (1971), affd. without published opinion 485 F.2d 681

(3d Cir. 1973), we held to the same effect.     There, the taxpayer

was a woman who lived with a man who was not her husband.     The

man gave money to the woman in exchange for "wifely services".

Respondent determined that the money was taxable to the woman as

compensation that she earned for her services.     We disagreed.    We

held that the payments were gifts.     We found that the man paid

the money to the woman "motivated by sentiments of affection,

respect, and admiration".   Id. at 1091.

     And later, in Reis v. Commissioner, T.C. Memo. 1974-287, the

taxpayer was a young female nightclub dancer who met an older man

when he bought dinner and champagne for the performers in the

show.   The man paid each person at the table, other than the

woman, $50 to leave the table so that he and she would be alone.

The man gave the woman $1,200 for a mink stole and another $1,200

so that her sister could have an expensive coat too.     Over the

next 5 years, the woman saw the man "every Tuesday night at the

[nightclub] and Wednesday afternoons from approximately 1:00 p.m.
                               - 14 -


to 3:00 p.m. * * * at various places including * * * a girl

friend's apartment and hotels where [he] was staying."    He paid

her living expenses, plus $200 a week, and he provided her with

money for other things, such as investing, decorating her

apartment, and buying a car.    We held that none of the more than

$100,000 that he gave her over the 5 years was taxable to her.

We concluded that she received the money as a gift.    We reached

this conclusion notwithstanding the fact that the woman had

stated that she "earned every penny" of the money.

     Given our conclusion in this case that petitioner received

her interest in the property as gifts from Mr. Kent, her basis in

the property equals Mr. Kent's basis immediately before the

gifts, to the extent that his basis is attributable to the gifted

property.9   Sec. 1015(a).   Although the record does not indicate

with mathematical specificity the amount of Mr. Kent's basis that

passed to petitioner as a result of the gifts, we are satisfied

from the facts at hand that her basis equaled or exceeded the

amount that she realized on the sale; i.e., $153,500.10   We

conclude that petitioner had no gain to recognize upon receipt of

the disputed payment.



     9
      If petitioner were claiming (which she is not) that she had
realized a loss on her disposition of any of the gifted property,
her basis in that property would equal the lesser of Mr. Kent's
basis at the time of the gift or the property's fair market value
at that time. Sec. 1015(a).
     10
      In fact, we do not think it unreasonable to conclude that
petitioner's basis in the house and boat equaled or exceeded
$153,500.
                             - 15 -


     We have carefully considered all arguments by respondent for

a contrary holding, and, to the extent not discussed above, find

them to be irrelevant or without merit.

     To reflect the foregoing,

                                          Decision will be entered

                                   for petitioner.
