Paul L. Caron

Friday, July 10, 2009

Adultery and Tax Planning

Ensign As Kay Bell points out, there is a tax angle to the sordid tale of Sen. John Ensign (R-Nev.), who had an extra marital affair for eight months with Cynthia Hampton, a campaign staffer who is married to Douglas Hampton, Sen. Ensign's chief of staff.  Sen. Ensign's parents made $96,000 in gifts (hush money) to the Hamptons in the form of eight checks of $12,000 each -- four checks each from Sen. Ensign's father and mother to Cynthia Hampton, her husband, and their two children.   The eight checks thus took full advantage of the $12,000 gift tax annual exclusion available in 2008 (it is $13,000 this year).  Nice.

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There was a criminal tax evasion case, US v Harris, about twin sisters being kept as mistresses and the money and gifts they got from their sugar daddy. The sisters won on appeal under Duberstien. Of course, the payments didn't come from family members and the contention was that the money and stuff was for other 'services' not hush money.

Of course, it could also be considered a gift to Ensign. It doesn't have to be paid directly in cash to him for it to be a gift.

Posted by: TTC | Jul 13, 2009 8:53:15 PM

How about substance over form?

Posted by: Shag from Brookline | Jul 11, 2009 2:52:07 AM

Isn't there a case in the Bankman Shaviro casebook about payments to a mistress? Would payments to your son's mistress be in a similar category? I'm betting this will show up on at least one exam this year.

Posted by: mike livingston | Jul 10, 2009 2:07:50 PM

I wonder about the family's characterization of these payments as gifts, which, if they were really gifts, permit the recipients to receive them tax free. The Duberstein test for gift, as I recall it, requires detached and disinterested generosity. Ensign's lawyer in announcing the payments did a spin to make the payments fit that defintion. But, it seems to me that the facts may not be consistent with gift characterization and that the recipients might indeed be taxable on the payments. And, what is the potential exposure of the payors and their advisors for some type of criminal tax prosecution from the mischaracterization -- perhaps the defraud / Klein conspiracy or tax obstruction or even tax evasion (not just the taxpayers can be tried for evasion they facilitate?

Posted by: Jack Townsend | Jul 10, 2009 1:40:18 PM

Or did tax law (i.e., the possibility of receiving as much as $12,000 tax free from any one "gifter" for any one "giftee") cause John Ensign's mistress to help him cheat on his wife?

Posted by: Linda | Jul 10, 2009 1:03:20 PM

After reading the various blog posts on tax law's supposed role in the metro crash, I am waiting for a tax commentator to posit:

Did tax law cause John Ensign to cheat on his wife?

Posted by: andy | Jul 10, 2009 12:33:28 PM