UNITED STATES TAX COURT
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136 T.C. No
8
UNITED STATES TAX COURT
SETTY GUNDANNA AND PRABHAVATHI KATTA VIRALAM, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21355-03.
Filed February 14,
2011.
In 1998 P-H transferred stocks and cash to X, an
organization described in I.R.C. sec. 501(c)- that was not a
private foundation. X sent P-H acknowledgment letters for
the stock transfers which stated that no goods or services
were provided for the "donation" of the stocks. X sold the
stocks in 1998.
X maintained a segregated account for P-H
in its records, reflecting the stocks and cash received, the
proceeds from the sales of the stocks and their
reinvestment, the dividends and 'interest generated by the
assets in the account, and the disbursements from the
account in subsequent years.
Promotional materials provided to P-H by X represented
that P-H would be able to direct the distribution of the
funds in the account for purported charitablé purposes,
including student loans and as compensation for the
performance of charitable services by P-H or members of his
family. P-H anticipated at the time of the transfers of the
stocks to X that account funds could be used for student
loans to his children. Ps claimed a charitable contribution
deduction on their 1998 Federal income tax return equal to
astmD ÆB $42011
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the fair market value of the stocks and the cash transferred
to X.
In 2001 and 2002 X transferred at P-H's request a total
of $70,299 from the account to an educational institution in
payment of the college tuition and related expenses of P-H's
son.
P-H's son executed loan documents that obligated him
to repay the amounts transferred, plus interest, in cash or
by providing designated amounts of charitable services.
R issued a notice of deficiency for 1998 disallowing
the charitable contribution deduction claimed, requiring the
inclusion in Ps' gross income of capital gains realized upon
the sales of the stocks by X in 1998 after the transfers as
well as the dividends and interest generated by the account
assets in 1998, and determining a penalty under I.R.C. sec.
6662(a)
and
(b) (1)
and
(2).
Held:
P-H retained dominion and control over the
property transferred to X. Accordingly, Ps are not entitled
to any chafitable contribution deduction on account of the
transfers and must include in gross income the capital gains
realized upon X's sales of the transferred stocks as well as
the dividends and interest generated by the assets in the
segregated account.
Held, alternatively, Ps are not entitled to any
charitable contribution deduction for failure to comply with
the substantiation requirements of I.R.C. sec. 170(f) (8).
Held, further, Ps are liable for a penalty under I.R.C.
sec. 6662(a) and (b) (1) or (2).
Michael C. Durney, for petitioners.
Thomas A. Dombrowski and Mark A. Weiner,
GALE, Judge:
for respondent.
Respondent determined a deficiency of $91,948
and an accuracy-related penalty of $18,389 with respect to
petitioners'
1998 Federal income tax.
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3
The issues for decision* are:-
-
(1) Whether petitioners are
entitled to a charitable contribution deduction under section
1701 of $263,933 for purported transfers of appreciated stocks
and cash to the xélan Foundation;
(2) whether petitioners must
include in gross income $93,324 of capital gain resulting from
the sales of the appreciated stocks- by the xélan Foundation in
1998 and $981 of interest and dividend income generated in 1998
by property purportedly transferred by petitioners to the xélan
Foundation; and (3) whether petitioners are liable for an
accuracy-related penalty under section 6662.
FINDINGS OF FACT
Some of the facts have -been stipulated and are so found.
The stipulation of facts "and the attached exhibits are
incorporated herein by this reference.
At the time the petition
was filed, petitioners resided in Florida.
xélan
Petitioners are both medical doctors.
Petitioner Setty
Gundanna Viralam (petitioner) owned a 50-percent interest in a
medical.practice, which.he sold in 1998 for $2,262,500,
generating a taxable gain of.$2,261,750 in that year.
In late
1997, when negotiating the sale of his medical practice,
Unless otherwise noted, all:section references are to the
Internal Revenue Code of- 1986, as in effect for the year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure..All dollar amounts are rounded to the
nearest dollar.
petitioner learned of xélan,2 a financial planning company for
doctors.
Petitioner attended a presentation promoting the
financial planning programs of, xélan and became a member in
November 1997.
xélan, also known as the Economic -Association of Health
Professionals,
Inc., was a membership organization for doctors
during the years relevant to this case.
It provided member
doctors with financial planning services, including pension
plans,
insurance products,
tax reduction and asset protection
strategies, and investment management.
These financial services
were provided through a network of xélan financial counselors.
Payment of a $975 membership fee entitled a xélan member to
the "xélan Tax Reduction Plan", including.a questionnaire on
which he or she provided personal financial information from
which xélan made financial planning recommendations.
Members
were also provided various promotional materials, including a
Program Summary describing xélan programs and services, and the
xélan Doctors Financial Education Program (Financial Education
Program), which provided similar material in video and audio tape
formats.3
After joining xélan, petitioners received copies.of
2According to a xélan publication, the name xélan
"[combines] 'x', the individual's savings required to'finance
lifestyle costs through life expectancy, with 'élan', the French
word meaning a lifestyle of personal freedom."
3Petitioners objected, on the grounds of relevance,
(continued...)
5 -
the xélan Tax Reduction Plan and the Financial Education Program
in December 1997 and, at some timerbefore engaging in the transfers at issue, a copy of the Program Summary.
Petitioner "
was familiar with -these materials.
xélan Foundation.
One of the financial planning strategies summarized in.the
xélan'promotional materials was establishment through donations
to the xélan Foun~dation (Foundation.) of an ac'count that the
materials characterized as a "donor advised fund" or "family
public charity"
(Foundation account), byemeans of which- a donor's
donations would be segregated for -investment and "future e
distribution as the donor might recommend.A
A xélan financial
3 ( . . y continued) ,
duplication, and, in one instance, lack of foundation, to the
admission.of most of xélan's promotional materials and to
materials¯ from the files of Rick Jaye, the xélan finàncial
counselor assigned to petitioners.
We overrule petitioners'
objections.
The evidence is relevant because the promotionalmaterials of xélan and the xélan Foundation bear upon
petitioner's'intent and ùnderstanding -when he transferred,
appreciated stocks to the xélan Foundation.
The disputed
exhibits are not unduly dupleicative, as there 'are variations in
the matérial that help to establish the chronology of events. As
the evideñce establishes that Mr. Jaye was petitioners';financial
counselor at xélan, the materials that are. stipulated to be from
hit files do not lack foundational:evidence.
4The xélan materials variously.characterized a potential
Foundation donor's segregated account to be maintained at the ,
Foundation as a "family public charity", a "sub-foundation of the
umbrella xélan Foundation", or a "donor-advised ,fund".
We shall
refer to the-account -maintained by the Foundation segregating
property petitioner transferred to it, and- the income generated
by and disbursements from those segregated assets, as
(continuedi..)
l
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counselor recommended, -on the -basis of the personal financialinformation petitioners provided, that petitioner establish a
Foundation account.
For the periods relevant to this case,
the Foundation was
recognized by the Commissioner as an organization described in
section 501(c) (3), having received a determination letter to that
effect on March 20, 1998
(determination letter).
The Foundation
was listed as a public charity in Publication 78, Cumulative List
of Organizations described in Section 170(c) of the Internal
Revenue Code of 1986, published in January 1999.5
The-
Commissioner issued at determination in 2002 that the Foundation
was.not a private foundation within the meaning of section 509.
The promotional materials characterized Foundation accounts
as a "tax reduction" program and stated that the Foundation "was
4(...continued)
petitioner's Foundation account;
Any reference to a donor advised fund herein does not denote
the term as defined in sec: 4966, which establishes a definition
of, and certain rules applicable to, a "donor advised fund",
effective for periods after those at issue.
See,Pension
Protection Act of 2006. (PPA), Pub. L. 109-280, sec. 1231(a),
Stat. 1094.
Likewise, secs. 170(f) (18) and 2522(c) (5),
120
establishing certain restrictions on deductions of charitable
contributions to donor advised funds (as defined in sec. 4966)
are effective for periods after those at issues
See PPA sec.
1234,
120 Stat.-1-100.
sThe Foundation continued to be listed in Publication,78 at
the time of trial. However, the Commissioner issued an
examination report in 2004-proposing revocation of the
Foundation's exempt status, and that status was revoked on Sept.
13, -2010.
I
:Announcement 2010-55,
2010-37 I.R.B.
346.
- 7 created to benefit not only charitable causes, but also doctors
and their families."
The Program Summary-describes the
Foundation as follows:
The xélan Foundation is a public charity that enables·
doctors to contribute pre-tax earnings to their own family
public charities that are subaccounts of the "umbrella"
xélan Foundation charity.
* * * Growth on contributions
within the Family Public Charity accounts accrue [sic] tax
deferred.
Doctor donors may direct the use of funds
accumulated within their family'public charity accounts to
finance charitable projects including personal teaching,
research, pro bono works, [and] college and graduate
scholarship programs * * * .
Donors and their family members may work for and be
compensated by- their family public charities for good works
(teaching, research, or providing pro bono services) they
perform on behalf of their family public charities. * * *
The Financial Education Program also expl'ained with reference to
Foundation accounts that
Your family then is the advisor to that fund as to the way
the money is invested, And the growth on the invested money
acarues tax deferred. Anytime you want -to you could take
the money out of your family public charity and pay yourself
compensation to do good works.
The Foundation also offered Foundation account holders a
student loan program whereby Foundation account funds could be
disbursed as loans for college and graduate school tuition and
related expenses.
The program's terms further provided that the
loans could be.repaid (with interest) either through repayments
generally commencing- 5 years after graduation or by the
recipient's providing charitable services for designated periods.
A xélan financial counselor wrote petitioner in April 1998
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recommending that he "Establish- a F,oundation account for
charitable giving,
income- tax reduction planning, estate tax
reduction, educational funding, and future retirement planning."
(Emphasis added.)
Petitioners had three children, and petitioner advised
Foundation personnel in the questionnaire he completed in late
1997 that he anticipated paying for 8 years of college and
graduate school for each of his children, at a cost of
approximately $40,000 annually for each.
Petitioner was
interested in the Foundation's student loan program; he
understood that his own children would be able to benefit from
the student loan-program if he established a Foundation account
and he intended to use the account for that purpose.
Petitioner's Establishment of Foundation Account
Following the xélan financial counselor's recommendation,
petitioner took the initial steps to establish a Foundation
account in April 1998.
Using funds already on deposit with
xélan, petitioner paid a $1,400 setup.fee to establish a
Foundation account and made a $100 initial contribution to the
account.
On May 12, 1998, petitioner submitted an "Application To
Establish a Donor Advised Fund" to -the Foundation, designating
himself as the "fund advisor".
Petitioner signed the application
under a provision labeled "Fund Advisor Statement", which stated:
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I certify that I understand the nature of donor, advised
funds and will conduct activities which satisfy the
requirements óf the Internal Revenue Code.
I understand a
that in order to qualify as a deductible contribution for
income tax.purposes, the ownership and custody of my donated
funds and property will be fully relinquished to the xélan
Foundátiòn.
Thei application allowed petitioner to choose. among 12
investment strategies fot managing (the assets- contributed to his'
Foundation account.
Petitioner'chose a strategy directed-at
aggressive growth.
Petitioner received and reviewed a-brochure ,describing the
features of the 'Foundation program entitled "A New Approach to
Charitable Giving and Savings"-.,.The 'brochure stated,
in response
to the question 'iWhen can I start. drawing. monies out?", that .a
doctor could do:so when helbegan/performing community, service
work and that, to comply with the tax code, a formal request was
required to be-submitted to andsapproved by the Foundation's
board of direc~tors.
The brochure further warranted that "the.xélan ;Foundation ,
will not initiate-charitable distributions from your fund, unless
it is left with no advisor."
After establishing his Foundation account, petitioner
received ailetter from the law firm of Conner & Winters,
,
legal
6The application also had a sectifon :entitTed "Proposed
Charitable Purpose" wherein the applicant was requested to check
off certain charitable purposes or to describe his charitable
objectives.
Petitioner left this section blank.
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counsel to the Foundation.
10
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The letter expressed an opinion that
it was more likely than not that a contributor would be entitled
to a deduction for a charitable contribution to the Foundation.
The letter represented that the opinion expressed therein was
based on an examination of.the Foundation's certificate of
incorporation,
its bylaws, resolutions of its board of directors,
and representations made to the Commissioner of Internal Revenue
in connection with the Foundation's application for recognition
of section 501(c) (3) tax-exempt status.
Further, the letter
stated that Conner & Winters had not examined any documents
pertaining to, and would not render an opinion as to the ·tax
effect of, any of several programs of the Foundation,
"donor advised distributions",
"charitable service
including
"educational loans", and
[performed by a donor]
for the Foundation".
The letter expressly disclaimed any opinion on the tax effect of
"any specific charitable or other activity of the Foundation or
any donor with respect to the Foundation".
No attorney at Conner
& Winters had any contact with-petitioners at any time before the
opinion letter was sent.
Conner & Winters sent similar letters
to other doctors who established Foundation accouñts.
Petitioner also received a letter from xélan's chairman on
May 26, 1998, thanking him for his participation in the
Foundation program.
Enclosed with this letter were sample
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student loan program participation forms and a sample
distribution request form.
Upon establishing his Foundation account, petitioner made
several transfers of stocks to the Foundation.
The transfers are
summarized as follows.
Date of Transfer
Aug. 25,
-
1998
Aug. 25, 1998
Nov. 20-25, 1998
Dec. 28, 1998
Total
Stock
Valuel
Republic Security Financial
$85,000
Professionals Group,
Various2
Citrix Systems, Inc.
51,317
121,536
4,580
262,433
Inc.
Fair market value as of the date of transfer.
2The stocks transferred on Nov. 20-25, 1998, consisted of
shares of 25 companies.
The transferred stocks were recorded in the Foundation's records
in a subaccount denominated the Viralam Family Charitable Trust
(referred to herein as petitioner's Foundation account).
After each of the transfers summarized above, petitioner
received an acknowledgment letter from the Foundation that was
labeled "Receipt for Gift of Stock".
These acknowledgment
letters described the stock transferred and its fair market value
on the date of the transfer.
following statement:
Each letter also contained the
"No goods or services were provided for
this donation."
Petitioner's aggregate basis in the transferred stocks was
$131,360.
The Foundation subsequently sold all of the stocks
during 1998 and invested the proceeds, again segregating them in
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the Foundation's records as petitioner's Foundation account.
The
sales of the stocks yielded the following proceeds:
Date of Sale
Stock
Net Proceeds
Sept. 28, 1998
Republic Security Financial
$73,795
Sept. 28, 1998
Dec. 3, 1998
Dec. 30, 1998
Total
Professionals Group,
Various
Citrix Systems, Inc.
40,151
106,203
4,535
224,684
Inc.
The assets in petitioner's Foundation account generated $981 in
dividends and interest in 1998.
The Foundation sent petitioner a monthly accounting of his
Foundation account.
Between May 18,
1998, and February 1, 2005,
$29,383 was deducted from petitioner's Foundation account for
management and administration fees, consisting of a one-time fee
equal to 6 percent of the value of the stock petitioner
transferred to the account and an annual investment fee of 1
percent of the account's value.'
Charitable Contribution Deduction for Stock Transfers to
Foundation
Petitioners timely filed a joint Federal income tax return
for 1998.
In addition to reporting a $2,261,750 gain from the
sale of petitioner's medical practice, they claimed a charitable
contribution deduction of $263,933, equal to the fair market
'The parties have stipulated that the annual investment fee
was 1 percent, whereas the Foundation brochure in evidence refers
to the fee as 1.1 percent.
We consider the discrepancy
immaterial for purposes of deciding the case.
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value of the stocks transferred to the xélan Foundation in 1998 a
($262, 433-) , plus the $1, 40 0 setup- f ee paid to - the Foundation and
the initial $100 in cash deposited into petitióner' s Foundation
accóunt in túat" year.
petitioners
Petitioners'
1998 return was prepared by
accountant, awho had been providing accounting
services to petitioners sincey1984.
-
Petitioner discussed-the
,
charitable contribution deduction with the accountant befóre
petitionebs signed the return.
Petitioners did not include in
incotne on'the 1998 return añ† gain from the sales of the stocks
that had beer transferred to tle Foundation, and the Foundation
had sold,- in 1998 nor any dividends or Einterest generated by the
assets in petitioner's Foundation account-during that year.
Distributions From Petitioner' s -Foundat'ion Account in Subseguent
Years
In accordance with petitioner' s requests, the Foundation
made distributions from his Foundation account of $4,000, $1,000,
$5, 000,
and $4,:000 to the Shiva Vishnu Temple in 1999,
2000,
2001, and 2002, respectively, and distributions of $1, 000 and
$500 to the Sarada Foundation in 2002 and 2003,: respectively."
Also in 2001, petitioner requested that $17, 247 be
distributed from his Foundation account to the University of
"Petitioners claimed charitable .contribution deductions for
the distribátions made by petitioner' s Fonndat-ión accóúrit to
Shiva Vishnu Temple i.n -1999 and 2000 on their Federal income tax
returns for those years but now concede that those deductions
were improper.
- 14 Pennsylvania in connection with the Foundation's student loan
program, as a loan to his son Vinay.to cover the cost of Vinay's
tuition and room and board at- that rinstitution.
The distribution
was made pursuant to a "distribution request" form the Foundation
sent to petitioner on April 25, 2001.
form was dated July 9,
As sent to petitioner, the
2001, and partially completed..Filled out
were entries for the "amount of distribution":
of charity":
"$17,247";
"name
"University of Pennsylvania"; and the "purpose of
distribution":
"Student Loan for Vinay S. Viralam".
The form had
been signed as approved by a Foundation official and was
forwarded to petitioner for his signature, with instructions that
it be returned to the Foundation with certain loan documents to
be executed by Vinay, as described below.
On July 6, 2001, Vinay executed documents with respect to
t-he-$46-7,-24-74candorais-tai_tion_and_expenses at the University
of Pennsylvania.
The documents included a "Commitment Agreement"
(commitment agreement) and an "Education Expense Repayment
|
Agreement"
(repayment agreement).
In the commitment agreement Vinay agreed to participate in
the Foundation's "Educational Funding Program" and,
in return for
receiving educational loans from the Foundation, to provide 2,000
hours of charitable work for the Foundation for each year of
educational exp'enses advanced.'
The oommitment agreement stated
that if Vinay did not undertake sufficient charitable work to
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repay the educational-expënses advanced, he would repay the
Foundation all -educational expenses advanced that were not
reduced by charitable services, together with interest according
to the terms of the. repayment agreement.
Finally', the commitment
agreement stated that "the student will provide regular reports,
at least annually, of his or her progress in the course of study
and intended work
as well as, his or her.plan to.meet the
obligations of the Agreement."
The repayment agreement acknowledged cash advances on
Vinay's behalf by the Foundation to the University of
Pennsylvan-ia for tuition,
fees, and on-campus room and board for
the period beginning August 2001.
The repayment agreement
provided that Vinay would repay to the Foundation the sums
advanced plus annual interest equal to specified Federal longtcrm--r-at-e-s-eemmenéing-endhe date- of the arfreemeni-
TTnder the
agreement, the obligation to repay principal and interest could
be satisfied either by Vinay's performance of charitable services
at the rate of 2,000 hours of service for each full year of
education expenses advanced, or by actual payment of principal
and accrued interest.
No payments were due until 5 years after
Vinay's "originally'scheduled graduation date".
At that time,
any balance not satisfied through the charitable services option
was required to be repaid over a 15-year term.
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Sometime shortly after July 6,.2001, petitioner submitted
the completed distribution request form and loan documents, and
on July 25, 2001, the Foundation:made a distribution of $17,247
to the University of Pennsylvania for- tuition,
board for Vinay.
,
fees, and room and
e
Also in July 2001, respondent commenced an examination of
petitioners' 1998 return.
On May 20,
2002, respondent sent
petitioners a 30-day letter, proposing a disallowance of the
charitable contribution deduction claimed for petitioner's
transfers of appreciated stocks to the Foundation and an increase
in petitioners'
capital gains income (reflecting an attribution
to them of the proceeds of the sales of stocks in 1998 after
their transfer to the Foundation).
Petitioner submitted four additional distribution requests
in 2-0-9&-t-hat res-u-1-t-ed-i-n-t-rr-ans#e-rs-by-the-F-oundation_to_the
University of Pennsylvania for Vinay's tuition,
fees, and room
and board (to be treated as loans to Vinay) of $6,769, $13,073,
$14,385, and $18,825, on January 28, May 20, July 24, and
December 26, 2002, respectively.
The distributions petitioner
requested from his Foundation account in 2001 and 2002 for
Vinay's University of Pennsylvania expenses totaled $70,299.
On June 15, 2003, $19,499, or 10 percent of petitioner's
Foundation account balance, was withdrawn for "legal fees".
xélan paid the fees for petitioners'
legal representation during
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the examination of ·their 1998 return and the fees for
petitioners'
counsel in this proceeding.
On September 16, 2003, respondent issued petitioners a
notice of deficiency for 1998 disallowing their claimed
charitable contribution deduction for- the transfers of stocks
(and cash") to the Foundation and determining an accuracy-related
penalty.
Eleven days earlier, petitioner arranged for an entity
he and Vinay controlled to pay the Foundation $70,300, the total
of the distributions to the University of Pennsylvania on Vinay's
behalf from petitioner's Foundation account."
credited to petitioner's Founda~tion account.
This payment was
The Foundation
thereupon waived all interest that had accrued under the terms of
the repayment agreement and returned the commitment agreement and
repayment agreement to Vinay-marked "paid in full", along with a
lctter confirming that the $70,300-payment had fulfi]].ed Vinay's
obligation to the Foundation.
"The disputed charitable contribution deduction reflects
1998 transfers of stocks with a fair market value of $262,433,
plus a $1,400 setup fee, and $100 in cash.
The parties have not
advanced any arguments for separate treatment of the setup fee,
and we consequently do not distinguish it in our analysis.
"We assume the $1 discrepancy between the $70,300 payment
-petitioner made to the Foundation in 2003 and the $70,299 figure
reached by totaling the distributions the Foundation made to the
Universi-ty' of Pennsylvania in 2001 and 2002 reflects rounding.
- 18 OPINION
Burden of Proof
Petitioners-argue that respondent bears the burden,of proof
in this proceeding pursuant to section 7491(a).
However, the
burden of proof has no practical consequence in this case, as
there is no evidentiary tie.
Our findings with respect to all
factual issues are based upon a preponderance of the evidence.
See Blodgett v.
2005),
T.C.
Commissioner,
affg. T.C. Memo.
185,
Fed. Appx.
188-189
834,
1039
(8th Cir.
2003-212; Knudsen v. Commissioner,
(2008);
835
394 F.3d 1030,
see also Geiger v.
(11th Cir.
2008),
affg.
Commissioner,
T.C. Memo.
131
279
2006-271.
Charitable Contribution Deduction.
Section 170(a) (1). allows a deduction for any charitable
contribution, payment of which is made during the taxable year.
Section-17A( c )-(-2-)-41efines-a- "cha_r-i-table-contribut.ion"-for t-M s
purpose to include a contribution or gift to or for the use of a
foundation organized and operated exclusively for charitable or
educational purposes."
In order for a transfer of property to a charitable
organization to qualify for a charitable contribution deduction,
(1) the transfer m'ust be a completed gift; that is, the donor
must have relinquished dominion and control over the donated
"As reflected in our findings, the parties have.stipulated
that the Foundation was a tax-exempt organization described in
sec. 501(c) (3) during the periods relevant to this case.
- 19 -
property, Pollard v. Commissioner, 786 F.2d 1063,
1986), affg. T.C. Memo. 1984-536;
1067
(11th Cir.
(2) the contribution must have
been made with donative intent and without the expectation of -a
substantial benefit in return, United States v. Am. Bar
Endowment,
477 U.S.
105,
118
(1986); and (3)
a contribution of
$250 or more must be substantiated by a contemporaneous written
acknowledgment of the contribution by the"donee organization that
meets the requirements of section 170(f) (8) (B), sec. 170(f) (8).
Respondent contends that petitioners are -not entitled to a
charitable contribution.deduction for the stock transfers to the
Foundation because petitioners never surrendered dominion and
control over the property or, alternatively, because petitioners
failed to substantiate -the *deduction' as required by section
170(f) (8), the Foundation's acknowledgment of the contribution
-- --having-f-a-i-1-ed--t-e-deser-i-be--er--v-a-l-us--the-goodsæres_er_v_i-c_es t ha t
petitioner expected to receive in consideration tof the
contribution.
Petitioners contend -that they relinquished to the
Foundation all control over the transferred property, citing
petitioner's certification to that effect in the Fund Advisor
Statement he executed in connection with establishing his
Foundation account.
Petitioners further contend that
petitioner's 'Foundation account satisfied the requirements for a
donor advised fund as set out in Natle. Found.,
States,
13 Cl. Ct. 486
(1987).
Inc. v. United
They maintain that,
consistent
- 20 with the holding in that case, petitioner could only suggest that
the Foundation make designated charitable contributions from his
Foundation account and suggest.an investment strategy for the
assets in the account and that these factors are insufficient to
establish that petitioner retained control over the property
transferred to the Foundation.
Finally, petitioners contend that
they did not receive any substantial benefit in return.for
petitioner's contribution to the Foundation and properly
substantiated the charitable contribution deduction claimed.
We agree with respondent that petitioner retained dominion
and control over the property transferred to the Foundation and
held in his Foundation account..
We reach this conclusion
principally on the basis of the use of funds in petitioner's
Foundation account for student loans to his son.
We also find
--that-t-he-pr-omotion-o-f--another-Roundation_acc.ount-f-e_at_ur_er_--
a_
petitioner's ability to arrange for distributions of account
funds to compensate himself or family members for performance of
"good works"--also supportš the conclusion that petitioner
maintained control of the assets in his Foundation account.
Petitioner received the xélan promotional materials and -was
familiar with their contents.
.The materials petitioner reviewed
identified certain scholarship programs as one of the
undertakings to which a donor could direct funds in his
- 21 Foundation account."
Petitioner was aware of a Foundation'
program under which student loans,could be made from, Foundation
accounts.
The Foundation account, arrangements allowed a donor to
designate a "fund- advisor" to "advise" sthe Foundation regarding
distributions from the donor's account, and petitioner designated
himself as- fund advisor to his account.
A,Foundation brochure
stated that the Foundation would.not~ initiate charitable
distributions from an individua-1 donor;'s account unless there was
no fund advisor in place.
Petitioner testified' that he
understood when deciding to establish a Foundation account. that
the Foundation' s student loani program -would be tavailable for his
children's use and that he contemplating using the studentsloan
program for his children. JThe significance of the student -loan
program in petitioner's decision .to make transfers to his
Fo-undation ac_c_ount_isacDrrohorat-ed_b_ydhe-f.ac_t _thata__sample_
student loan participation.formswas includedi with the first
letter sent to petitioner . (by xélan' s chairman) acknowledging
petitioner's establishmént of acFoundation account
When he established his Foundation -account.in 1998,
petitioner anticipated that each of his three children would
incur 8 years of college and graduate school expenses which he
"The Program Summary.petit:ioner-rev.iewed stated that, donors
to the Foundation with Foundation accounts "may direct the use of
funds accumulated within their family public charity accounts to
finance charitable.projects including * * * college and graduate
scholarship programs."
- 22 -
estimated would approximate $40,000 annually per child.
The
distributions from petitioner's.Foundation account for student
loans for.his oldest son dwarfed the distributions for other
purposes for the first 5 years, until respondent commenced an
examination of petitioners'
1998 return and proposed to disallow
their deduction for the contributions to the Foundation.
Disregarding payment of the Foundation's startup.and annual
management fees, the distributions made from petitioner's
Foundation account in 1999 through 2003 for purposes other than
Vinay's student loans totaled $15,500."
The distributions for
Vinay's student loans during that period totaled $70,299, or
approximately 82 percent of distributions not devoted to
management fees.
Respondent first proposed to disallow
petitioners' charitable contribution deduction for the Foundation
transfer in a 30-day letter issued in May 2002 and formally did
so in a notice of deficiency issued on September 16, 2003.
No
distributions for student loans were made from petitioner's
Foundation account in 2003.
Indeed, on September 5, 2003, just
before issuance of the notice of deficiency, petitioner arranged
"For two of these distributions--$4,000 and $1,000
distributed to Shiva Vishnu Temple in 1999 and 2000,
respectively--petitioners claimed charitable contribution
deductions on'their Federal income, tax returns for those years.
e These deduction claims suggest that petitioners considered the
funds in petitioner's Foundation account to be under his control
in 1999 and 2000.
- 23 -
for the repayment of Vinay's student loans."
Given these facts,
we are persuaded that distributions for student loans -to
petitioners's children would have continued to constitute the
predominant use of the assets in petitioner's Foundation account,
but for the scrutiny of' the Internal Revenue Service,.
The Foundation's approval of'petitioner's son as a student.
loan beneficiary was perfunctory.
The Foundation sent petitioner
a distribution request form on which the approval for a student
loan for Vinay had already been signed by a Foundation official
before petitioner executed the form.
.There is no evidence that
the Foundation reviewed Vinay's qualifications or otherwise-
exercised any independent judgment in selecting him for a student
loan.
In the circumstances, it is obvious that the selection of
Vinay as a beneficiary of the Foundation's student loan program
arose from his relationship to petitioner and as a result of
petitioner's direction.
Petitioner's understanding, at the time he transferred the
stocks to his Foundation account in 1998, that the account's
assets could be used to make student loans to his children, and
the- Foundation's perfunctory acquiescence- in making such loans in
"On Sept. 5, 2003,''petitioner directed an entity controlled
by him and Vinay to pay the Foundation $70,300, the principal
balance of the loans to Vinay (excluding accrued interest).
Upon
receipt, the Foundation waived all accrued interest and declared
the loans paid in full.
-- 24
-
subsequent years, provide substantial support for the conclusion
that petitioner neither intended, nor in fact did, cede dominion
and control over the property transferred to the Foundation in
1998.
-
-
Petitioners, however, point to petitioner's transfer of
legal title to the stocks he contributed to the Foundation and
the ."Fund Advisor Statement" petitioner signed when he
established the Foundation account, which stated that he "fully
relinquished" ownership of the stocks to the Foundation.
In
petitioners' view, these formalities establish that petitioner
had fully relinquished dominion and control over the property
transferred to the Foundation in 1998.
We disagree .
The determination of whether dominion and
control has been surrendered for purposes of a charitable contribution deduction under section 170 "must be based upon all
the facts of a particular case."
Memo. 1984-536.
Pollard v. Commissioner, T.C.
In addition to petitioner's initial
understanding of his ability to direct the use of his Foundation
account funds for his children's- student loans, and the
Foundation's subsequent course of conduct, which confirmed that
understanding, we note that the Foundation did not treat the
I
purported legal obligations in the student loan documents as
binding.
Although the commitment agreement required Vinay to
provide an annual -report, there is no evidence that he did so.
- 25 -
More significantly, when petitioner repaid the principal amount
of Vinay's student loans, the Foundation waived all accrued
interest, notwithstanding the terms of the repayment agreement
providïng that interest was to accrue ~commencing on the- date the
agfeement was -entered-."
The Foundation having disregarded the- -
obligations due to it from Vinay under two contracts executed in
connection with Foundation account transactions, there is no
reason to believe thatsthe Foundation would enforce any rights it
held against petitioner by virtue of his execution of the "Fund
Advisor Statement".
A second feature of petitioner's Foundation dealings also
contributes to the conclusion that he did not relinquish dominion
and control over the property transferred to the Foundation.
xélan promotional materials stated that "Donors
account]
[to a Foundation
and their family members may work for and be compensated
by their fami'ly"public charities
account)
The
[i.e., the donor.'s Foundation
for good works * * * they perform on behalf of their
family public chàrities."
Thé materials elsewhere represented
"Anytide you want to you could -take the money out of your family
public charity and pay youfself compensation to do good works."
While petitioner apyarently did not seek' a distribution from
his Foundation.account to'àompensate him-sor a family member' for
"Petitioners' own estimate of the interest that had accrued
on the Foundation account loans to Vinay at the time they were
repaid was $7,922.
--26 -
"good works", xélan's, repr.esentation to him that he would be able
to do so is further evidence that the Foundation intended, and
petitioner understood when he made the transfers, that he could
retrieve the transferred property (or its proceeds) through this
technique.
A donor advised fund creator's option to receive fund
assets as compensation for the performance of charitable services
by himself or family members has been treated as evidence of
retained dominion and control.
States,
70 Fed. Cl. 782,
See New Dynamics Found. v. United
800-801
(2006).
The materials in the
record describe only in very general terms the standards to be
applied by the Foundation's board of directors.in -determining
whether a donor's Foundation account funds should be paid out to
him or a family member as compensation for the performance of
"good works".
We are satisfied on this -record that "good works"
distributions were contemplated by petitioner and the Foundation
in 1998 as a means for petitioner to retrieve his purported
contributions in the future.
Consequently, we find that the
possibility of such distributions supports the conclusion that
petitioner retained dominion and control over the property
purportedly contributed to the Foundation.
Petitioners contend that they did not have.an impermissible
degree of dominion and control over their Foundation account
because it was a donor advised fund similar to the arrangements
found not to have resulted in a retention of donor control in
- 27 -
Natl. Found.,
Inc~. v. United States,
13 Cl. :Ct. 486 '(1987) .
Natl. Found., however, is entirely distinguishable.
The Claims
Courd there found that while a donor advised fund areator could
suggest a particular charitable use,
the tax-exempt organization
administering the donor's funds would- honor it only ïf the
requested contribution was "inaconsonance With § 501(c) (3)
charitable purposes."
Id. at 492.
The court found substantial
evildence that the National Foundation bo'ard of diréctors
exercised effective control tó ensures that distributions from its
donor advised funds were forteharitable, notepersonal, purposes.
By contrast, petitioner requested, and the Foundation made,
substantial distributions fróm petitioner's Foundation account
for a personal use; namely
ëducational loans for his child.
Fausner V. Commissioner,' 55 T.C.
620,
624
See
(1971~) - (taxpayer's
payment- of-children's secondary schoolituition is a personal, -not
a charitable, expenditure); Whitakër V. Commissioner, T:C. Memo.
1994-109
(to same'effect for college tuition).
Moreover, the
arrangements -in Natl. Found. did not-include an option whereby
the donatèd funds could be distributed back dó the donor or his
family as'compensation for the performance of services deemed
charitable by the foundation.
Instead, the Foundation adaount arrangements moré 'closely
resemble those in New Dynamics Found."v'. United States,
In that case, the Court of Federal Claims sustained the
supra'.
-
28
-
Commissioner's denial of tax-exempt status for an organization
administering purported donor advised funds.
Among the features
of those donor advised funds cited by the court as grounds for
denial of tax-exempt status were the practices of distributing
fund assets to donors' family members as compensation for the
performance of charitable services sor to donors' children as
scholarships.
Such practices, which enabled donors to direct
purportedly donated funds to personal uses, contributed to the
court's conclusion that "the donors in question,did not truly
relinquish ownership and control ov.er the donated funds and
property."
Id. at.803.
In sum, the Foundation's representations concerning the
.student loan program, petitioner's understanding at the time of
the 1998 transfers of his ability ,to direct the use of his
Foundation account for the noncharitable, purely personal purpose
of funding student loans for his children, and petitioner's
subsequent ability to do so in practice all persuade us that
petitioner never intended to, nor in fact did, relinquish
dominion and control over the property transferred to the
Foundation.
This conclusion finds further support in the "good
works" option for distribution to petitioner from the Foundation
account.
Accordingly, we hold that petitioner retained dominion
and control over the property he transferred to the Foundation in
-
29
-
1998 and is therefore not entitled to a deduction under section
170(a)."
Respondent argues in the -alternative that, even if
petitioners were found to have ceded dominion and control of the
property they transferred to the Foundation, their claimed
charitable contribution deduction is not allowed because they did
not comply with the substantiation requ-irements of section
170(f).(8).
We agree.
Section 170(f) (8) (A) provides that no deduction shall be
allowed under section,170(a)
for any contribution of $250 or more
unless the taxpayer substantiates the contribution with a
contemporaneous written acknowledgment of the contribution by the
donee organization that meets certain requirements specified in
section 170(f) (8) (B).
Section 170(f) (8) (B)
requires that the
donee organization state inethe acknowledgment "Whether the donee
organization provided any goods or services in consideration, in
"Because we conclude that the student loan and "good works"
features of petitioner's Foundation account demonstrate that he
retained sufficient dominion and control over the transferred
property to preclude a deduction under sec. 170(a), we find it
unnecessary to consider whether other features of the Foundation
account arrangements constituted impermissible retained control,
including (i) the fact that ßetitioner was entitled to elect the
investment strategy for the assets in his Foundation account;
(ii) the fact that periodic distributions were made from
petitioner's Foundation account to compensate the Foundation for
investment management services provided to petitioner; and (iii)
the fact that distributions were made from,the account.to pay
petitioners'. legal fees for their representation in the
examination of their 1998 return and the prosecution of this
case.
--30 -
whole or part, for" the contributed property or cash.
170(f) (8) (B) (ii).
Sec.
If any goods or services are so provided, the
acknowledgment generally must include "A description and good
faith estimate of the value of any goods or services" provided.
Sec. 170(f) (8) (lB) (iii)."
The regulations clarify that a donee
organization is treated as having provided goods or services in
consideration for the taxpayer's payment if the taxpayer expects
to receive goods or services in exchange for the payment at the
time it is made,
including where the goods or services are
provided in a year other than the year when the taxpayer makes
the payment.
A donee organization provides goods or services in
consideration for a taxpayer's payment if, at the time the
taxpayer makes the payment to the donee organization, the
taxpayer receives or expects to receive goods or services in
exchange for ,that payment.
Goods or services a donee
organization provides in consideration for a payment by a
taxpayer include goods or services provided in a year other
than the year in which the taxpayer makes the payment to the
donee organization.
[Sec. 1.170A-13(f) (6), Income Tax
Regs.]
Respondent argues that petitioner expected when he
transferred the' stocks to the Foundation in 1998 that the'
Foundation would make student loans to his children and that
consequently the Foundation provided goods or services in
"If the goods or services consist solely of "intangible
religious benefits", a statement to that effect must be given in
lieu of the description and good faith estimate of value.
Sec.
170(f) (8) (B) (iii).
-
31
-
consideration of petitioner's transfers within the meaning of the
statute and regulations.
Petitioners contend that respondent bears the -burden of
proof on the issue of their receiptiof benefits in exchange for
their contributions because it is a "new matter" within the
meaning of Rule 142(a) that was not raised in the notice of
deficiency and which requires the presentation of different
evidence.
507
(1989).
See Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500,
Even assuming, arguendo, that respondent bears the
burden of proving-that petitioner eipeated a benefit in exchange
for his transfers of the stocks to the Foundation, respondent has
met that burden."
As our findings reflect, the preponderance of
"The notice of deficiency issued to petitioners merely
states that the deductions claimed for "charitable contributions
to the xélan Foundation * * * are not allowable because they were
not -charitabfe contributions withiN the meaning of section 170 of
the Internal Revenue Code." Because the evidence, adduced so
clearly establishes that petitioner anticipated receipt of
benefits in exchange for his transfer of the stocks to the
Foundation, respondent has satisfied any burden of proof he might
bear on this issue.
Thus, we find it unnecessary ·to decide
whether respondent's contention that petitioner received a
benefit rendering his substantiation inadequate under sec.
170(f) (8) "requires the presentation of different evidence * * *
.or merel,y clarifies or develops the original determination".
See
Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 500, 507 (1989);
see also Shea v.
Commissioner,
112 T.C.
183,
191
(1999).
"Petitioners also appear to suggest that respondent bears
the burden of showing that the fair market values of the goods or
services they received equaled or exceeded the values of the
stocks transferred, so that- a deduction for any excess of the
stocks' values over the fair market values of the consideration
received is foreclosed.
See sec. 1.170A-1(h), Income Tax Regs.
(continued...)
32 -
the evidence shows that petitioner anticipated.at the time he
transferred stocks to the Foundation that the Foundation would
extend student loans to his children.
In addition to the.
abundant circumstantial evidence on this score, petitioner so
testified.
"Goods or services" for purposes of section 170(f) (8) means
"cash, property, services, -benefits, and privileges."
1.170A-13(f) (5), Income Tax Regs.
Sec.
We are satisfied that -the
provision of student loans to family members falls within this
regulatory definition.
The Foundation, upon petitioner's
request,- provided his son a student loan with extended repayment
terms and an option to substitute volunteer charity work for
actual repayment of principal and interest.
The outlays for
petitioner's. son's student loans constituted more than 80 percent
of the distributions from petitioner's Foundation account
(exclusive of distributions to pay the Foundation's management
fees)
in the first 5 years after its creation, until respondent
began an examination of petitioners'
1998 return and the loans
were repaid (with interest forgiven)
in 2003.
The evidence as a
whole persuades the Court dhat, but for respondent's scrutiny of
"(...continued)
We disagree.
To establish petitioners' noncompliance with sec.
170(f) (8), respondent need only show that petitioner expected to
receive a benefit in exchange for his donations to the
Foundation.
See Addis v. Commissioner, 374 F.3d 881 (9th Cir.
• 2004), affg.
118 T.C.
528
(2002).
- 33 the 1998 return, petitioner would have continued to.request and
obtain student loans for all three children from his Foundation
account.
Thus, under the regulations, petitioner's expectation
in 1998 that the Foundation would provide student loans to his
children in subsequent years means that the Foundation is deemed
to have provided goods or services in consideration for the
donated stocks.
See sec. 1.170A-13 (f) (6),
Income Tax Regs.
The written acknowledgment necessary under section 170(f) (8)
to substantiate petitioners' charitable contribution was required
to state whether goods or services were provided by the
Foundation in consideration for the stocks transferred to it and
if so to describe them and provide a good faith estimate of their
value.
See sec. 170(f) (8) (B).
The Foundation acknowledgment
letters offered by petitioners.as substantiation of their claimed
donations of stock each state, inaccurately, that "No goods or
services were provided for this donation."
Petitioners'
substantiation therefore fails to comply with section 170(f) (8).
Section 170(f) (8) provides that "No deduction shall be
allowed" unless the taxpayer substantiates a contribution in
accordance with the terms of that section.
Where the written
acknowledgment of a charitable contribution by a donee
organization states that the donor received no consideration and
the donor actually received a benefit in exchange for the
donation, the deduction is disallowed in its entirety.
'Addis v.
- 34 -
Commissioner,
(2002).
374 Fr3d 881
(9th Cir. 2004),
affg.
118 T.C.
528
"The. deterrence value of section 170(f) (8)'s total
denial- of a deduction comports with the effective administration
of a self-assessment and self-reporting system."
Id. at 887.
I
Petitioners contend belatedly on brief that the value of the
student loan benefit provided to petitioner's son was small in
relation to the value of petitioner's contribution to the
Foundation" and that they should be entitled to a partial
deduction equal to the amount by which the donated stocks' values
exceeded the value of the student loan benefit, citing the "dual
payment" rule of United States v. Am. Bar Endowment, 477 U.S.
at 117,
and section 1.170AT1(h),
Income Tax Regs.
However,
having failed to satisfy a.compl'iance provision designed to
foster disclosure of "dual payment" or quid pro quo
contributions, petitioners may not now claim dual payment
treatment.
See Addis v. Commissioner, supra at 887
("A partial
deduction is foreclosed by the statutory- language.").
"Petitioners assert that the value of Vinay's student loan
benefit is equal to the interest waived upon repayment of the
loans in 2003, discounted to pr'esent value in 1998.
This
estimate ignores the value of the loans anticipated for
petitioner's two other children and the value of the option to
repay the loans with charitable services.
-
35
-
Capital Gains and Investment Income
Respondent determined that $93,324 in long-term capital gain
generated by the sales of the stocks in 1998. after petitioner
transferred them to the Foundation. is includible in petitioners'
gross income for that year, as well as $981 of interest and
dividends generated by t-he property in petitioner's Foundation
account in 1998.
We agree with respondent.
The Federal income tax consequences of property ownerships
generally depend upon beneficial ownership, rather than
possession of mere legal title.
554,
v.
556-557
(7th Cir.
Commissioner,
Speca v. Commissioner, 630 F.2d
1980), affg." T.C. Memo.
61 T.C.
268,
277 (1973).
"'[C).ommand over
property or enjoyment of its economic benefits'
the mark of true- ownership.,
1979-120; Beirnee
*.* *, which is
is a question of fact to be
determined from all of the attendant facts and circumstances."
Monahan v.
v.
Commissioner,
Commissioner,
95 T.C.
109 T.C.
74,
80
235,
240
(1997)
(quoting Hanæ
(1990)).. As outlined in-our e
previous discussion of petitioners' entitlement to a charitable
contribution deduction, although petitioner transferred legal
title to various stocks to the Foundation in 1998, petitioner
retained dominion and control over the stocks transferred.
He
understood that the stocks would be managed according to an
investment strategy he designated, which might include their
being sold and the proceeds invested differently.
He understood
- 36 -
in 1998 that he would be able to direct that the assets in his
Foundation account be distributed to his children as student
loans, and the Foundation complied with his direction that the account assets be applied in this manner in 2001 and 2002.
The
funds so applied and remaining available for that purpose
included the proceeds of the sales of the transferred stocks as
well as interest and dividends generated by the investment of
those proceeds.
-Moreover,
"interest earned on investment is
taxable to the person who controls the principal "
P.R. Farms,
Inc. v.
1987)
Commissioner,
Helvering v. Horst,
820 F.2d 1084, ~1086
311 U.S.
112,
116-117
(9th Cir.
(1940)),
(citing
affg. T.C.
Memo. 19842549; see also Monahan v..Commissioner, supra at 239240.
We see no reason a similar rule should not apply to
dividends.
Because petitioner retained dominion and control of
the assets in his Foundation account, we sustain respondent's
determination concerning the capital gains.and interest and
dividend income in 1998.
Section 6662 Penalty
Respondent also determined that petitioners are liable for
an accuracy-related penalty for negligence, substantial
understatement of income tax, or -substantial valuation
misstatement,
See sec.
6662(a)
and (b) (1)-(3)."
Section 6662(a)
"Respondent did not pursue the substantial valuation
misstatement penalty at trial or on brief, ~ànd we accordingly
(continued...)
- 37 imposes a penalty equal to 20 -percent of that portion of any
underpayment of tax attributable to negligence or disregard of
rules or regulations,
sec. 6662 (b) (1),- or any substantial
understatement of income tax, sec. 6662(b) (2)."
Generally, no
penalty shall be imposed under section 6662, however, .with
respect to any portion.of an underpayment if..it is shown that
there was reasonable cause for such.portion and that the taxpayer
acted in good faith with respect to such portion.
Sec. 6664(c).
Pursuant to section 7491(c), the Commissioner has the burden of
production in any court proceeding with respect to any penalty
imposed by the Internal Revenue Code.
In order to meet that
burden, the Commissioner must offer sufficient evidence to
indicate that it is appropriate to impose the penalty.
Higbee v.
Commissioner,
116 T.C.
438,
446
(2001).-
Commissioner meets his burden of production
See
Once the
the taxpayer bears
the burden of proving error in the determination to impose a
penalty, including proving reasonable cause,
authority, or other exculpatory factors.
substantial
.See id. at 446-447.
"(...continued)
deem it abandoned.
See Rule 151(e) (4) and (5); Cluck v.
Commissioner,
Commissioner,
105 T.C. 324, 325 n.1 (1995)";
92 T..C. 661, 683 (1989).
Petzoldt v.
"The penalties under sec. 6662(b) (1) and (2) are in the
alternative and do not stack, in that the penalty does not exceed
20 percent of any portion of an underpayment even if it is
attributable to both para'graphs. 'Sec. 1.6662i2(c), Income Tax
Regs.
For completeness, we consider the applicability of both.
- 38 -
Negligence for this purpose is a lack of due care or the
failure to do what a reasonable and ordinarily prudent person
would do under the circumstances, and it includes any failure to
make a reasonable attempt to comply with the income tax laws.
Marcello v. Commissioner,
380 F.2d 499,
506
(5th -Cir. 1967),
affg. in part and remanding in part 43 T.C. 168 (1964) and T.C.
Memo. 1964-299.
Disregard includes any careless, reckless, or
intentional disregard.
Sec. 6662(c).
Negligence is strongly
indicated where a taxpayer fails to make a reasonable attempt to
ascertain the correctness of a deduction which would seem to a
reasonable or prudent person to be "too good to be true" under
the circumstances.
299 F.3d 221,
Neonatology Associates, P.A. v. Commissioner,
2343-235
(3d Cir.
Pasternak v. Commissioner,
2002), affg.
990 F.2d 893,
115 T.C. 43
903
(6th Cir.
(2000);
1993),
affg. Donahue v. Commissioner, T.C. Memo. 1991-181; McCrary v'.
Commissioner, 92 T.C.
827,
849-850
3(b) (1) (ii), Income Tax Regs.
(1989); sec. 1.6662-
Negligence can also include any
failure to substantiate an item properly.
Sec. 1.6662-3(b) (1),
Income Tax Regs.
We find that petitioners were negligent because petitioner
failed to make a reasonable attempt to ascertain the correctness
of a deduction which would seem to a reasonable or prudent person
to be "too good to be true" under the circumstances.
A
reasonable or 'prudent person would have perceived as "too good to
~
39.-
be true" a deduction for a supposed charitable contribution where
the amounts deducted could be used to fund student loans for his
own children.
The same is true with respect to the avoidance of
capital gains taxes on the sales of stocks where ,the proceeds
remained under petitioner's control for use by his children.
To
the extent petitioner ascertained the validity of the charitable
deduction or capital gains exclusion from xélan's employees or
its printed materials, there was an obvious conflict of interest
on the part of persons promoting xélan's programs.
Commissioner, 91 T.C. 524, 565 (1988).
See Rybak v.
Any use of the Conner &
Winters opinion letter for this purpose was also not reasonable
in the circumstances.
The Conner & Winters letter referred to
the Foundation's student loan program as follows:
Xélan Foundation Programs
We are aware of several programs which the Directors of
the Foundation may undertake in furtherance of the
charitable activities of the Foundation.
We have no reason
to believe that a donor's participation in any of the
following programs will cause the foundation to lose its
status under Sections 501(c) (3), 509(a) (1) and
170(b) (1) (a) (iv) of the Code.
Although we have not examined
documents with respect to any specific program and do not
hereby render an opinion as to the tax effect with respect
to any such program, wermake the following general comments
regarding the following possible activities of the
Foundation:
*
3.
*
*
*
*
*
*
Educational Loans
The Foundation may support an educational loan program
whereby ,students may borrow college and graduate school
tuitiön and arelated expenses for education in an area.
- 40 -
related to the Foundation's charitable purposes."3 Each
student must agree to a loan agreement under which he or she
agrees to repay the loan, with interest, or alternatively
provide one year of service to a charitable organization or
charitable activity for each year of tuition received.
Such
agreement will be enforced. There can be no private
inurement with respect to such program.
[Emphasis added.]
Thus, while the letter specifically identified the student loan
program petitioner contemplated using, it expressly refrained
from offering any opinion concerning the tax effects of
participation in the program and confined itself merely to
describing certain features of the program.
If anything, the
Conner & Winters letter should have put a professionally educated
person such as petitioner on notice that further inquiry was
warranted concerning the student loan program.
Petitioner also testified that he consulted with his
accountant regarding the deduction, but there is nothing in the
record concerning the nature of those discussions or,
importantly, establishing that the accountant was given complete
information, including petitioner's intention to direct the use
of the proceeds from the contribution for student loans for his
children.
Without some evidence -that petitioner's discussions
with his accountant covered his anticipated participation in the
student loan program, there is no basis to conclude that
"There is no evidence that the Foundation either sought, or
that petitioner or Vinay provided, any information concerning how
Vinay's education was in an area related to the Foundation's
charitable purposes.
- 41 petitioner made a reasonable attempt to ascertain -the correctness
of the deduction.
Patin v. Commišsioner, 88 T.C. 10'86, 1130
(1987), affd. without published opinion 865 F.2d 1264
(5th Ci .
1989), affd. without published opinion sub nom. Hathenay v.
Commissioner, 856 F.2d 186 (4th Cir. 1988), affd. sub nom. Skeen
v.
Commissioner,
864 F.2d 93
(9th Cir.
1989), affd. sub nom.
Gomberg v. Commissioner, 868 F.2d 865 (6th Cir. 1989).
Finally, as our discussion of secti'on 170(f) (8) reflects,
petitioner failed to substantiate the charitable contribution as
required, which is an indication of negligence.
We accordingly find that, absent their showing reasonable
cause (considered infra), petitioners were negligent with respect
to the charitable contribution deduction claimed and the capital
gains and other investment income excluded in 1998 with respect
to the property transferred to petitioner's Foundation account.
Respondent has met his burden of production with respect to a
negligence penalty for the entire underpayment.
A substantial understatement of income tax exists if the
amount of tax required to be shown on the- return exceeds that
shown by 10 percent or by $5,000, whidhever amount is greater.
Sec. 6662(d) (1) (A).
We have sustained respondent's
determinations disallowing a charitable contribution deduction of
$263,933 and requiring inclusion of capital gains income·and
other investment income of $93,324 and $981, respectively.
The
-,42 -
resulting deficiency, which equals the understatement, is
$91,948--which exceeds 10 percent of $764,560, the amount
required to be shown on petitioners'.1998 return.
Respondent has
therefore satisfied his burden.of production regarding the
existence of a substantial understatement, and petitioners bear
the burden of showing any exculpatory factors.
Under section 66.62(d) (2) (B), any understatement for purposes
of the penalty for a substantial understatement of income tax
shall be reduced by that portion of the understatement which is
attributable to "the tax treatment of any item by the taxpayer if
there -is or was substantial authority for such treatment".
Authority for this,purpose m.ay include court cases, private
letter rulings, and administrative pronouncements published by
the Internal Revenue Service in the Internal Revenue Bulletin.
Sec.
1.6662-4(d) (3) (iii),
Income Tax Regs.
The weight of an
authority depends on its relevance and persuasiveness and the
type of document providing the authority.
4(d) (3) (ii),
Sec. 1.6662-
Income Tax Regs.
Petitioners contend that they had substantial authority for
the understatement,at issue, citing the inclusion of the
Foundation in Publication 78, the determination letter issued by
the Internal Revenue Service to the Foundation determining that
it qualified for tax exemption as an organization described in
- 43 -
section 501(c) (3), and Natl. Found.,
Cl. Ct. -486
Inc. v. United States, 13.
(1987)."
We disagree.
The inclusion of an organization in
Publication 78 "signifies that it has received a,ruling or
determination letter from the Service stating that contributions
by donors * * * are deductible as provided in section 170 of the
Code."
Rev.
Proc.
(emphasis added).
82-39,
sec.
2.03,
1982-2 C.B.
759,
760
The Foundation's inclusion in Publication 78
may constitute substantial authority that the organization to
which petitioners made a donation in 1998 satisfied section
170(c)
(a point that respondent does not dispute), but
•
petitioners would still be required to show that their charitable
contribution deduction satisfied other requirements of section
170".
The Foundation's determination letter, on which.petitioners
also rely, makes this point explicitly, stating:-
deduct contributions to you [the Foundation]
"Donors may
only to the extent
that their contributions are gifts; with no consideration
received" and citing Rev. Rul.
67-246,
1967-2 C.B.
104.
Consequently, neither Publication 78 nor the Foundation's
determination letter provides any authority that petitioners were
entitled to deduct a contribution where they anticipated
fact received,
consideration in exchange:
and in
Natl. Found., Inc. v.
"Petitioners also refer to "other authorities" on brief but
never name them.
- 44
-
United States, supra, likewise does not constitute authority for
petitioners' position.
As earlier discussed, the case is readily
distinguishable from petitioners' circumstances in that the court
there found that the donee organization exercised effective
control to ensure that distributions were for charitable
purposes.
By contrast, petitioner requested and the Foundation
complied with substantial distributions for personal purposes.
In sum, petitioners have failed, to show that they had substantial
authority for any portion of the understatement..
Finally, to the extent petitioners may be claiming that they
had reasonable cause in view of their reliance on -professional
advice, see sec. 6664(c)=; sec. 1.6664-4(b) (1), Income Tax Regs.,
we find that claim meritless.
The Conner & Winters opinion
letter expressly disavowed any opinion concerning a Foundation
donor's participation in the student loan program.
As for
petitioners' accountant, as noted there is no evidence that the
accountant was given necessary and accurate information
concerning petitioner's transactions with the Foundation to form
a professional judgment.
See Neonatology Associates, P.A. v.
Commissioner, 115 T.C. at 99.
For the foregoing reasons,, we sustain respondent's determination that petitioners are liable for an accuracy-related
penalty under section 6662 for negligence or for substantial
understatement of income tax.
Conclusion
Petitioners are not entitled to a charitable contribution
deduction under section 170 for their transfers of appreciated
stocks to the Foundation in 1998.
Petitioners must include in
gross income the capital gain realized when the Foundation sold
the appreciated stocks in 1998 and must include the investment
income generated in 1998 by the property in petitioner's
Foundation account.
Petitioners are liable for the accuracy-
related penalty under section 6662.
We have considered all other arguments made by the parties,
and to the extent not discussed, we conclude those arguments are
moot, without merit, or irrelevant.
To reflect the foregoing,
Decision will be entered
under Rule 155.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.