Palimony: Thought palimony was dead after Marvin v. Marvin? Well, guess again!!

In Est. Of Bernard Shapiro, 2011-1, USTC ¶60,614 (9th Cir. 2011), the 9th Circuit Court of Appeals found that under Nevada law, where two unmarried people co-habit, one member of this group can sue the other for the reasonable value of services.  The facts briefly in Shapiro were as follows: Bernard Shapiro and Cora Jane Chenchark lived together in Nevada for twenty-two years, but never married. During this 22 years period of time, Chenchark cleaned, cooked and managed their household.  When they broke up, Chenchark filed a palimony lawsuit claiming a breach of express and implied contract, breach of fiduciary duty and quantum meruit for the reasonable value for her services. While Chenchark’s law suit was pending, Shapiro died and his estate reached a settlement with her for approximately $1,000,000 which the estate sought to deduct as a claim against the estate. The 9th Circuit held that love, support, and management of a household can constitute consideration for a promise to share property under Nevada law citing a 1984 case. Thus, the payments Mr. Shapiro’s estate made to settle palimony suit were allowed as a deduction for estate tax purposes.  

The motto of Shapiro is unmarried people should not move to Nevada unless they want to face a claim for palimony. 

Personal Residences: Parents allowed to deduct mortgage interest and real estate taxes on a residence which their son owned but where they resided: It is almost becoming common place due to the tough economic times this country is experiencing for one family member (ie, a child) to buy a condominium, house, etc. for another family member (ie, the parents) using the child’s credit to obtain the mortgage, but having the parents pay the mortgage and real estate taxes.  An examination of  the Internal Revenue Code will reveal that whoever owns title to the residence, (ie the child in this situation) is usually the one who is entitled to the deduction for real estate taxes and mortgage interest.  However, courts at times have utilized the concept of “equitable and beneficial ownership” to allow the occupants of the property (ie the parents)  the deduction for real estate taxes and mortgage interest.  Such was the case in Njenge, TC Summary Opn 2008-84 where the parents went bankrupt and the son bought the house for the parents.  In sustaining the deduction the court stated “where the residence is occupied exclusively by the taxpayers and all mortgage payments are made by the taxpayers, the indebtedness may be found to rest solely on those taxpayers (and not on the title owner of the residence) … Where the taxpayers are equitable and beneficial owners of the property, enjoying exclusively the burden and benefit of the property, payments of interest are deductible. Uslu v. Commissioner, T.C. Memo. 1997-551. 

Edosada, TC Summary Opn. 2012-17 is a case in reverse where the parents bought the house but the son deducted the mortgage interest.  In Edosada, the parents purchased a 2.1 million dollar house with a $570,000 down payment with their adult son contributing $70,000 toward this down payment. The parents name was on the title, but there was an oral agreement with the son that he would reside in the residence and make the mortgage payments providing at some later date he would be given a legal interest in the property.  The court sustained the son’s deduction of the mortgage interest on the $1,000,000 of debt on the concept of  “equitable and beneficial ownership.”

Under state and local law, care should be practiced however when one person buys the house for another.  This was evidenced in the recent case of Matter of John Gaied, DTA No. 821727

(N.Y.S. Tax App. Trib., June 16, 2011) involving a son who took care of his parents buying them a house in which to live.  In Gaied, the son, a New Jersey domiciled taxpayer living in Old Bridge, NJ, owned a house in Staten Island, New York where his parents resided. John’s business was located approximately 2 miles away in Staten Island where he worked full time.  John’s parents relied on him to support them.  John kept no personal items such as a bed in the house  and stayed overnight occasionally sleeping on the couch.  Notwithstanding, John was found to be a resident of New York thereby required to pay tax on his entire net income; not just the net income he earned in New York.  New York reasoning for taxing John as a New York resident is due to the fact that he both owned a home and worked in New York more than 183 days.

While you may think the Gaied decision is unfair, try Matter of Barker, NYS Tax Appeals Tribunal, DTA No. 822324 (2011)  where taxpayers who were  Connecticut domiciliaries owned a vacation home on the North Shore of Long Island, New York and were classified as New York residents.   To get to the vacation home the Barkers had to travel almost 140 miles each way. They only spent a total of 20 days at the vacation home each year. Their undoing was the fact that Mr. Barker, like Gaied, worked more than 183 days in New York City commuting to work each day at Neuberger Berman.

Motto of the story: If you commute to work in New York from out of state and own or lease a residence in New York, be prepared to be classified as a New York resident for tax purposes.

Care should also be practiced when a resident of one state takes a job in another state or country.  This was evidenced in the case of Matter of Eileen J. Taylor, NYS Div. Of Tax. App. DTA 822824 (2010). Here, the Taxpayer, A banker residing in New York took a job in London, England. She was classified as a New York domiciliary liable for tax to New York even though she was granted United Kingdom citizenship, worked in London, England for 5 years, purchased a home in London, voted in London and voted regularly in British elections, had a United Kingdom drivers license, went to church in England, had her doctors in London plus many other English connections. The reason for her difficulty with New York was due to the fact that she kept two homes in New York.  The Tribunal did not believe she changed residence. In reaching its decision, the Tribunal stated: “Mere change of residence although continued for a long time does not effect a change of domicile, while a change of residence even for a short time, with the intention in good faith to change the domicile, has that effect.”  

Motto of the story: when you take a job in another state or country, change domiciles removing all vestigages of domicile unless you want to run the risk of audit by your former residential state.  This means in the case of Taylor renting out your residence if you insist on keeping it.


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