Rick and Maria had been married for 20 years before their divorce in the current year. At that time, they made the usual property settlement: Maria got the house, the van, and the cat; Rick got the mortgage, the Ford, and the dog. Other property was divided equally with the exception of the following:
At the time of their divorce, Maria had instituted a number of lawsuits against various fast-food chains for infringement of her patent on an automated burrito stuffing machine. Maria had developed the machine in the early ’90s and patented it under her name. (Rick thought it was a silly idea and refused to have his name associated with it.) At that time, her efforts to license the machine to fast-food outlets were unsuccessful. Five years ago, she observed a similar machine in Tucker’s Tacos, a fast-food Mexican restaurant, and instituted her first claim against that chain. Subsequent research revealed that several other chains had stolen her idea without compensating her, and she sued them for patent infringement.
As part of the divorce decree, 20%of any net proceeds (1%for each year of marriage) that Maria ultimately receives from the lawsuits is to be paid to Rick. During the current year, Maria settles the initial suit with Tucker’s Tacos for $200,000. The proceeds are placed into an escrow account from which the costs of litigation are paid. Rick receives a check for $30,000 from the escrow agent for his share of the net proceeds. Maria receives the balance from the account. The remaining lawsuits are still being litigated. Rick would like to know if he must include the $30,000 in his gross income. Write Rick a letter explaining the tax treatment of the $30,000 he received from the escrow account.