New 1099-BLACKMAIL allows taxpayers to report blackmail payments

A good read:

A husband and wife claimed that a $25,000 payment to them was a gift rather than income. The money was given to them by a doctor who had been having an affair with the wife. When the husband found out about the affair, he lured the doctor to his home and confronted him, threatening to sue him for $150,000. The husband then forced his wife to call the doctor’s wife and admit the affair to her.

At this point, the doctor told the husband that while he did not have $150,000, he did have $25,000. They agreed to meet in a parking lot to conduct the transaction, which the husband recorded. The doctor apologized to the husband, and in fact warned him to be careful because the money could be considered income.

Even though they had received $25,000, the husband and one of his daughters contacted the state medical board and reported the doctor for misconduct, and a hearing ensued. The doctor’s accountant then sent a Form 1099-MISC for tax year 1999 to the husband and wife; they did not report the income on their 1999 return.

According to the court, “a gift in the statutory sense … proceeds from a detached and disinterested generosity’ … ‘out of affection, respect, admiration, and charity or like impulses.’”

The husband and wife claimed that the money should be treated as a gift because it was the doctor’s idea to pay it. The court disagreed and held the money to be income, because they believed that the doctor had paid the money as an alternative to being sued and to close the matter. The court also stated, “A payment made because of the constraining force of moral or legal duty is not a gift.”

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Courtesy of: Spidell publishing (Kathryn Zdan, EA)