MEMORANDUM OPINION
[1] 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.
BACKGROUND 2
[2] 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 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.
[3] 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.
[4] 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.
[5] 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 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 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 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.
[6] 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 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 * * *.
[7] 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
[8] 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.
[9] 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 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, 4 L. Ed. 2d 1218, 80 S. Ct. 1190 (1960); see Agar v. Commissioner, supra 290 F.2d at 298; Fono v. Commissioner, 79 T.C. 680 (1982), affd. without published opinion 749 F.2d 37 (9th Cir. 1984).
[10] 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 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.
[11] 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 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.
[12] 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 "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
[13] 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, 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).
[14] 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.
[15] 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. 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.
[16] 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.
[17] 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.
[18] To reflect the foregoing,
[19] Decision will be entered for petitioner.