Pascarelli v. Commissioner

Lillian Pascarelli (plaintiff) and Anthony DeAngelis had a close personal relationship for many years. Between 1959 and 1963, DeAngelis made substantial payments to Pascarelli, ranging from $32,650 to $64,000 per year, via multiple checks. In 1959, DeAngelis put $32,406 into a brokerage account in Pascarelli’s name. Also in 1959, DeAngelis moved into Pascarelli’s home, albeit in a basement apartment due to the sensibilities of Pascarelli’s teenage children. Other than keeping separate bedrooms, Pascarelli and DeAngelis held themselves out as husband and wife, with Pascarelli performing traditional household duties and often serving as hostess to DeAngelis’s business associates. In 1960, DeAngelis directly paid over $14,500 for improvements to Pascarelli’s home. With the funds transferred to her by DeAngelis, Pascarelli made several large expenditures, including: (1) a personal Cadillac, followed by a trade-in Cadillac of higher value, (2) large gifts and loans to her family and friends, (3) about $350 worth of clothing for DeAngelis per year, and (4) entertainment and gifts for DeAngelis’s business associates, ranging from $2,500 to $6,000 per year. Pascarelli kept no records that tracked the extent to which the spending was for DeAngelis’s benefit versus her own (the tax court estimated the amounts set forth above). The commissioner of internal revenue (defendant) issued notices of deficiency to Pascarelli seeking to tax the transferred funds either as income to Pascarelli or as gifts.