Case Study Assignment: Stephen Colbert and Simpson Twins

The money that was gifted from Stephen Colbert to Patty and Selma should have been claimed as a source of income.  Considering that he gifted the two over $500,000 and that their own incomes most likely were under this amount, the money that they received as well as the services that Mr. Colbert paid for cannot reasonably be seen as only a “gift.”  My recommendation for Patty and Selma, therefore, is that the two should claim their gifted money in both cash and services from Mr. Colbert as a primary source of income and report the earnings as a source of taxable income.  They can take the allotted amount of gifted money as a gift, however, it is unreasonable to say that the money they received was entirely a gift considering that he was paying for their rent and bought them each their own car.  

Under the taxation form 709, there are specific instructions for individuals that receive monetary gifts from another.  The form specifically states, “All of the gifts made during the calendar year to a donee are fully excluded under the annual exclusion if they are all gifts of present interest and they total $13,000 or less. ”  The form clearly states the amount that an individual is allowed to take as a nontaxable gift.  Patty and Selma, on the other hand, have received much more than this according to the information presented.  By receiving $500,000 as well as other services for over 8 years, Patty and Selma have received at least $62,500 a year from Mr. Colbert, which is $49,500 more than what is considered to be a nontaxable gift.  Even if this number is split in half, the two received $31,250, which is still $18,250 more than what can be claimed as a nontaxable gift.    

Another important issue to consider in this case is the true nature of the relationship between Patty, Selma, and Mr. Colbert.  Because they claim that they both were in love with him, the money that they receive should not be taxable; rather it was a gift from the heart.  However, Mr. Colbert reportedly claimed that the money he gave to them was in accordance with their services.  He was noted as saying on multiple occasions that the two were “paid escorts” or “friends for hire.”  This brings some very unclear circumstances into the spotlight.  If in fact the two were paid escorts to Mr. Colbert, then it is no question the money and other services that Mr. Colbert paid for should be taxed.  Even if the money was a gift, the two are still basically in a battle between their words vs. that of Mr. Colbert’s.  To make matters more unclear, with Mr. Colbert’s death, the money that they had received becomes more of an issue.  

The largest issue pressing Patty and Selma would be if they were to be audited by the IRS.  The fact that it basically comes down to he said vs. she said would not be seen favorably by the IRS.  Because the two were using the money received from Mr. Colbert as one of the main sources for paying for their expenses, there exists a distinct possibility that the IRS will see the nature of the relationship between Patty, Selma, and Mr. Colbert as an escort service.  Specifically, the fact that their relationship remained the same for some 8 years without Mr. Colbert ever making a real effort to advance his relationship with either will be a key point for any thorough an investigation into the nature of the relationship.  If they find that the two’s relationship was, in fact, no more than an employer to employee, there is no question that they will be audited.  

I would recommend that the two claim the money as a source of income and begin to pay back taxes on the money that they received.  The largest immediate issue facing the two is that they have not filed a tax return on the money that they received from Mr. Colbert for the last 8 years, making them liable for fraud.  If nothing else, the two should at least claim the money that they used to pay for the livelihood (car payments, rent, food, etc.) as a source of income for the last 8 years.  By at least making this concession, the two may be able to buy themselves some time and leniency from the IRS should they be audited for not correctly filing their respective tax returns over the last 8 years.

The nature of the relationship between Patty, Selma, and Mr. Colbert is of an interesting nature.  Though they each claimed to be in love with Mr. Colbert and therefore all money that they received from him (as well as other services) was a gift from his own kindness of heart, others may see their relationship in a different nature.  Since Mr. Colbert claimed to his associates and close personal acquaintances that Patty and Selma were no more than paid friends or escorts, there are plenty of witnesses that would be willing to state that the two were just that.  As paid escorts, the money that Mr. Colbert gave to the two should have been treated as a source of income.  From the IRS tax forms, one can clearly see that either way an individual cannot claim more than $13,000 as a nontaxable gift, therefore the money they received from Mr. Colbert should in some way have been taxed over the course of their relationship.  

My recommendation to the two as an accounting and tax adviser, therefore, is a simple one.  The two should claim that a portion of the money that was given to them by Mr. Colbert was, in fact, pay for the services that they provided him, noting that they never were paid for or engaged Mr. Colbert in a romantic sense during the times in question.  What the two need to then do is claim that portions of the money received were also gifts from Mr. Colbert.  No one can reasonably deny that the three did share a unique relationship and given Mr. Colbert’s financial status, it is very likely that he would have provided the two with monetary gifts periodically.  The issue would be to prove that everything they received was a gift, therefore in the sense of playing it safe, the two should claim the money they received was indeed a source of income and begin to file the correct taxation paperwork that they should have paid over the last 8 years.

Bibliography

Department of Treasure, (2011). Instructions for form 709. Retrieved from Internal Revenue Service website: http://www.irs.gov/pub/irs-pdf/i709.pdf