Dustin Decker was the founder of Decker Industries, and through his company's success, attained substantial wealth (into the low billions). At some point after his eightieth birthday, Dustin was introduced to Marie Esquivel who was 28 years old at the time. Dustin's relationship with Marie blossomed over a period of eight years. Dustin provided her with cash payments of over $500,000, paid her rent, and purchased cars for her.

Marie had stacks of letters and e-mails from Dustin alleging his "love" for her. By all accounts, however, Dustin was not actually in love with Marie. In fact, Dustin, to his friends and confidants, described his relationship with Marie as a "paid escort" or "friend for hire." He often complained that he "overpaid" his staff when referring to Marie. However, Dustin has never referred to the situation as providing sex for money or prostitution.

Marie, on the other hand, was totally "in love" with Dustin. She was never, ever compelled to participate in any activities by Dustin and assumed that he "must love her" or else why would he pay her all that money? At times, he would threaten to "take away her sugar daddy" if she did not respond to his requests as quickly as Dustin would have preferred, but Marie chalked this up to Dustin's somewhat cantankerous disposition. Over time, since the threats were never fulfilled, Marie simply assumed that Dustin was having a bad day and would be back soon enough. And time and time again, he was. Marie secretly hoped that Dustin might someday ask her to marry him, but this never happened and Dustin died earlier this year.

Over all those years, Marie never claimed any of the monies provided to her by Dustin as income on her individual tax returns, instead electing to treat the cash, rent, and cars as "gifts" excludable from income. She never received a Form 1099 from him for any of the payments. However, Marie was recently contacted by the IRS. Apparently, the IRS was auditing Dusting's finances and found the payments made to her. The IRS is considering treating the transferred amounts as taxable compensation to Marie, which would mean she would owe a significant amount of tax, interest, and penalties. Also, Marie says doesn't know if Dustin reported the amounts on a gift tax return. Marie has engaged you to research this matter and, hopefully, find a way to support treating the payments she received as gifts.

Opinion on the proper treatment of payments made by Dustin to Marie?

(Please cite at least one case.)

[Answer Form]

1. Summary of Facts

2. Issue

3. Law and Analysis

4. Conclusion