State court decision on transfers between couple as gifts didn’t collaterally estop IRS
Blagaich, TC Memo 2016-2
F. Stephen Glass
The United States Tax Court has concluded that a taxpayer couldn’t assert collateral estoppel against IRS and rely on a State court decision in a lawsuit between her and her ex-boyfriend that cash and property given to her by him were nontaxable gifts under Internal Revenue Code Sec. 102(a). The Tax Court also held that the taxpayer couldn’t assert the rescission doctrine to exclude from taxable income certain other amounts that the State court required her to repay to her boyfriend.
Under Code Sec. 102(a), gifts, devises, bequests, and inheritances are excluded from gross income.
Under the judicial doctrine of collateral estoppel, any issue actually litigated in a prior action between two or more parties is conclusive of the same issue raised in a later action between the same parties. For collateral estoppel to be invoked before the Tax Court, the following conditions must be met:
- The issue in the later case must be identical in all respects to the issue decided in the earlier case;
- A final judgment must have been rendered in the earlier case by a court of competent jurisdiction;
- Collateral estoppel must be asserted in the later case against a party to the earlier case;
- The issue in the later case must be one that the parties to the earlier case actually litigated and that was essential to the earlier decision;
- The controlling facts and legal principles must remain unchanged from the earlier litigation; and
- No special circumstances exist that would warrant the trial court in the later case to exercise its discretion to find an exception to the normal rules of preclusion.
In this case, Diane Blagaich and Lewis E. Burns were involved in a romantic relationship from November 2009 until March 2011. In 2010, Mr. Burns provided Ms. Blagaich with cash and other property totaling in value at least $743,819. He wired to her bank account $200,000, gave her a $70,000 Corvette automobile, and wrote her various checks totaling $73,819 (in all, $343,819).
On Nov. 29, 2010, Ms. Blagaich and Mr. Burns entered into a written agreement intended in part to confirm their commitment to each other and to provide financial accommodation for her. Neither desired to marry and the agreement was, at least in some respects, intended to formalize their “respect, appreciation and affection for each other” in the way a marriage otherwise would do. The agreement also required Mr. Burns to make an immediate payment of $400,000 to Ms. Blagaich, which he did.
Mr. Burns’ relationship with Ms. Blagaich quickly deteriorated in the months following execution of the agreement. On Mar. 10, 2011, Ms. Blagaich moved out of Mr. Burns’ residence, and, the next day, he sent her a notice of termination of the agreement. Following their breakup, Mr. Burns reported to IRS on a Form 1099-MISC, Miscellaneous Income (the original Form 1099-MISC) those transfers to Ms. Blagaich.
IRS increased Ms. Blagaich’s gross income by the amount reported on the original Form 1099-MISC, making a positive adjustment of $743,819 to her reported 2010 gross income.
Late in March 2011, Mr. Burns also initiated a civil suit against Ms. Blagaich, seeking nullification of the agreement, her return of the Corvette and a diamond ring, and an order directing Ms. Blagaich to disgorge all cash and other accommodations that he provided to her, totaling in excess of $700,000.
IRS learned of the State court action and wrote to Ms. Blagaich’s counsel in May 2013 requesting, among other things, copies of any depositions taken in the case and filings and motions relating to the original Form 1099-MISC and Mr. Burns’ fraudulent inducement claim. In October 2013, Ms. Blagaich moved for a continuance in the present Tax Court case on account of the pending State court action, and IRS did not object. The Tax Court continued this case.
The State court found that Ms. Blagaich had fraudulently induced Mr. Burns to enter into the agreement and entered a judgment against her for $400,000, payable to Mr. Burns’ estate (he having passed away shortly after the trial). The State court further found that Mr. Burns had given her the Corvette because he did not want her to ride her motorcycle, which activity frightened him. He had wired the $200,000 to her account to entice her to leave her job and to travel with him, and he gave her the various checks, totaling $73,819, under similar circumstances. In sum, the State court found that the Corvette, the $200,000 wire transfer, and the various checks were “clearly gifts” from Mr. Burns to Ms. Blagaich and that she was entitled to keep them. The State court also found that the reasonable inference from the facts was that the ring given to Ms. Blagaich was also a gift.
Ms. Blagaich asked the Tax Court to take notice of the State court’s finding that, other than the agreed payment to her of $400,000, all other cash amounts and property paid or given to her by Mr. Burns were found to be gifts. She further asked the Tax Court to hold, on the basis of that notice, that IRS was estopped from denying a $343,819 adjustment to her 2010 gross income representing the value of the gifts that she received from Mr. Burns. She also argued that the return of that money to Mr. Burns’ estate in 2014 invoked the equitable doctrine of rescission, reducing IRS’s adjustment by another $400,000.
The Tax Court did not buy Ms. Blagaich’s argument and found that IRS was not collaterally estopped from litigating the State court’s finding that the property was a gift. Ms. Blagaich failed to demonstrate that IRS was in privity with a party to the State court action—i.e., that there was any collaboration or genuine alignment of interests between IRS and either party to the State court action.
The Court reasoned that, in general, privity contemplates “substantial identity” between a party of record and an unnamed third party; or alternatively, courts have recognized that a nonparty may be bound where its interests are so closely aligned with those of a named party that the named party effectively served as its “virtual representative” in the previous suit. Here, however, the mere fact that IRS took steps to keep apprised of the litigation to which Ms. Blagaich was a party—i.e., that IRS knew of the State court matter and requested, and received, updates, pleadings, and discovery documents—couldn’t, without more, support a conclusion that there existed any working relationship or coincidence of interests between IRS and either Ms. Blagaich or Mr. Burns. Nor did any agreement by IRS to a continuance establish its controlling role in the State court action, as Ms. Blagaich contended.
[Source: Thompson-Reuters Checkpoint Newsstand January 7, 2016]