Tale of Two Tax Cases

Some taxpayers' cases should never have gone to court in the first place. And then again, some court cases should be tax litigation, but are not.

Pete and Maureen Speltz, of Rollingstone, Minnesota, got some excellent tax advice. Pete works the very early shift as a machinist, and, to augment Pete's income, Maureen has operated a daycare center in their home for over twenty years. In order to optimize the family finances, Maureen and Pete entered into a written agreement whereby Pete became Maureen's employee and actually performed work at the daycare center, thus qualifying for exclusion from his income of certain medical benefits paid by Maureen (which Maureen was entitled to deduct from the day care center's income).

The IRS challenged the arrangement as a sham. But Pete and Maureen were able to show that all of the Internal Revenue Code's requirements were fulfilled for the favorable tax treatment they sought. The Tax Court ruled against the IRS and allowed the deduction.

As written many years earlier by Judge Learned Hand, "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934), aff'd, 293 U.S. 465 (1935).

The Speltz's case should never have gone to the Tax Court. And, not that I know (or particularly care to involve myself with) anything regarding the Speltz's personal lives, but there seems every indication that their marriage is cooperative and supportive if not amorous.


Meanwhile, Jeanette Levine lost her bid for palimony from her lover, Philip Konvitz. Seems that Phil and Jeanette had a continuous 70-year meretricious romantic relationship which began when they were teenagers and which persisted through their respective marriages. Phil, who became very wealthy, shared much of his wealth with Jeanette, giving her cash, jewelry, furs and an $80,000 condominium (which she sold for $131,000 three years later), and paid for the maintenance of her home and automobile. She was on the payroll of one of Phil's companies until the company ran into legal trouble, at which time Phil paid Jeanette $6,000 per month, plus an additional $2,000 per month to Jeanette's daughter (not Phil's daughter).

But Alzheimer's Disease got the better of Phil, and so, after Phil's son Norman and friend Howard Walter became Phil's attorneys-in-fact, they cut off the payments. Jeanette sued Phil (who died on 7 September 2005), Norman and Howard. The court dismissed the case, finding that Phil and Jeanette never actually lived together in the same residence, and therefore, there was no need to even reach the merits (or lack thereof) of her palimony suit. The judicial opinion is not yet (as best I can determine) freely available on the Internet, but the citation is Levine v. Konvitz, N.J. Superior Court, Appellate Division, Docket No. A-6449-03T5, 2006 N.J. Super. LEXIS 25 (February 6, 2006).

I shall leave discussion of the evils of adultery to the sky pilots (and in fact, this week, the world over, Jewish congregations read the Torah portion that includes the Ten Commandments, including the one about not committing adultery). It would seem to me, thought, that Phil's largesse over the years rose to the level of a series of taxable events. The amounts of money he allegedly gave to Jeanette (and, for that matter, Jeanette's daughter) would be subject to the gift tax, which would affect the computation of Phil's Estate Tax bill to the IRS (I shall not now get into the mechanics of computing the Estate Tax and its relationship to the Gift Tax. I am scheduled to teach a graduate course on the very topic this summer, and shall go over all of the particulars at that time.). Phil's Estate Tax Return is due on 7 June 2006, the nine-month anniversary of his death, but Phil's Estate can (and, in all likelihood, will) receive a 6-month extension which is theirs for the asking if they timely request it. Therefore, we can presume that the Executors of Phil's Estate will have until 7 December 2006 to file the Form 706 Estate Tax Return.

And now that Jeanette's contentions are a matter of public record, Phil's Executors (who, in all likelihood, include his son Norman) cannot say that they didn't know about them. And because of Phil's other legal problems, the case is, to say the least, a high profile matter. Which means that the IRS attorneys in Estate & Gift are likely reading about it, and if so, are no doubt thinking about the Estate and Gift Tax consequences of Phil's transactions.

Moreover, Jeanette has alleged that she paid nothing for the condominium Phil gave her, and kept the $131,000 proceeds from its 1986 sale. The deed to Jeanette reflected an $80,000 purchase price, which Jeanette now claims she never paid. Because there is no statute of limitations within which the IRS must assess a tax adjustment due to fraud, maybe Jeanette has attracted the tax man's attention by trying to squeeze Phil for all he was worth.

Most IRS cases settle before ever going to court. Maybe we will never know the details of Phil's Estate's transactions with the IRS (nor of Jeanette's). But it could be that this 60+ year adulterous relationship will yet prove to be a tax matter for the courts.