U.S. v. Harris, 942 F.2d 1125 (7th Cir. 1991)
Nov 20, 2014 by Vahid Dejwakh

Facts and Procedural History

1) Kritzik, a “wealthy widower partial to the company of young women,” gave twin sisters Leigh Conley and Lynnette Harris over half a million dollars each over the course of several years. Sisters are convicted in separate criminal trials of evading taxes on this income. The sisters appeal, claiming this income was a gift and should not be taxed.
2) At trial, Harris wanted to introduce letters Kritzik had sent her, but the judge excluded them on the basis of hearsay and F.R.E. 403 (i.e. evidence being more prejudicial than probative). The letter was Kritzik expressing his love for Harris, and that he enjoys giving these things to Harris more than she enjoys receiving them.


Are payments to a mistress in a long-term relationship considered taxable gross income for the mistress, or tax-free gifts?

Holding and Dissent(s)

Must admit the letters, because they are being offered not for the truth of the matter, but because of their effect on Harris. Even if Kritzik was lying in the letters, the letters could still cause Harris to believe that he gave her those things as a gift. What matters here, however, is not what the receiver thinks, but what the giver thinks. Unless the government can show that Kritzik paid the sisters for specific sexual acts, the income they received here in this long-term relationship was indeed a gift and not taxable.

DISSENT: Agree with reversing the convictions of the sisters, but not with the majority’s reasoning. The convictions should be reversed because of the lack of evidence that there was any quid-pro-quo rendering the gifts as payment for services, but this does not mean that all long-term relationships necessarily are free of such taxable exchanges. For example, person B could enter into a long-term relationship with A and receive free housing and stipend from A, in exchange for specific services due to A. In this example, B’s income from A should be taxed, as it would not constitute a gift.

Analysis and Discussion

Note: this is a criminal tax case, which requires the government to prove not only that 1) the transfer was not a gift, but also that 2) the defendant knew it was not a gift. In a civil tax liability case, however, the government need only prove the former (part 1), as a party is liable even if they honestly thought it was a gift (strict liability).

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