                                             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 organiza-
                                               tion 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. Pro-
                                               motional 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 charitable 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 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 docu-
                                               ments 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 charitable contribution
                                               deduction on account of the transfers and must include in

                                                                                                                                       151




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                                      152                136 UNITED STATES TAX COURT REPORTS                                          (151)


                                               gross income the capital gains realized upon X’s sales of the
                                               transferred stocks as well as the dividends and interest gen-
                                               erated by the assets in the segregated account. Held, alter-
                                               natively, 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,         for
                                      respondent.
                                         GALE, Judge: Respondent determined a deficiency of
                                      $91,948 and an accuracy-related penalty of $18,389 with
                                      respect to petitioners’ 1998 Federal income tax.
                                         The issues for decision are: (1) Whether petitioners are
                                      entitled to a charitable contribution deduction under section
                                      170 1 of $263,933 for purported transfers of appreciated
                                      stocks and cash to the xe´lan Foundation; (2) whether peti-
                                      tioners must include in gross income $93,324 of capital gain
                                      resulting from the sales of the appreciated stocks by the
                                      xe´lan Foundation in 1998 and $981 of interest and dividend
                                      income generated in 1998 by property purportedly trans-
                                      ferred by petitioners to the xe´lan 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 incor-
                                      porated herein by this reference. At the time the petition was
                                      filed, petitioners resided in Florida.
                                      xe´lan
                                         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, peti-
                                      tioner learned of xe´lan, 2 a financial planning company for
                                        1 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.
                                        2 According to a xe´ lan publication, the name xe´lan ‘‘[combines] ‘x’, the individual’s savings re-




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                                      (151)                         VIRALAM v. COMMISSIONER                                           153


                                      doctors. Petitioner attended a presentation promoting the
                                      financial planning programs of xe´lan and became a member
                                      in November 1997.
                                         xe´lan, also known as the Economic Association of Health
                                      Professionals, Inc., was a membership organization for doc-
                                      tors 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 xe´lan
                                      financial counselors.
                                         Payment of a $975 membership fee entitled a xe´lan
                                      member to the ‘‘xe´lan Tax Reduction Plan’’, including a
                                      questionnaire on which he or she provided personal financial
                                      information from which xe´lan made financial planning rec-
                                      ommendations. Members were also provided various pro-
                                      motional materials, including a Program Summary
                                      describing xe´lan programs and services, and the xe´lan Doc-
                                      tors Financial Education Program (Financial Education Pro-
                                      gram), which provided similar material in video and audio
                                      tape formats. 3 After joining xe´lan, petitioners received copies
                                      of the xe´lan Tax Reduction Plan and the Financial Education
                                      Program in December 1997 and, at some time before
                                      engaging in the transfers at issue, a copy of the Program
                                      Summary. Petitioner was familiar with these materials.
                                      xe´lan Foundation
                                         One of the financial planning strategies summarized in the
                                      xe´lan promotional materials was establishment through
                                      donations to the xe´lan Foundation (Foundation) of an
                                      account that the materials characterized as a ‘‘donor advised
                                      fund’’ or ‘‘family public charity’’ (Foundation account), by
                                      means of which a donor’s donations would be segregated for
                                      quired to finance lifestyle costs through life expectancy, with ‘e´lan’, the French word meaning
                                      a lifestyle of personal freedom.’’
                                         3 Petitioners objected, on the grounds of relevance, duplication, and, in one instance, lack of

                                      foundation, to the admission of most of xe´lan’s promotional materials and to materials from the
                                      files of Rick Jaye, the xe´lan financial counselor assigned to petitioners. We overrule petitioners’
                                      objections. The evidence is relevant because the promotional materials of xe´lan and the xe´lan
                                      Foundation bear upon petitioner’s intent and understanding when he transferred appreciated
                                      stocks to the xe´lan Foundation. The disputed exhibits are not unduly duplicative, as there are
                                      variations in the material that help to establish the chronology of events. As the evidence estab-
                                      lishes that Mr. Jaye was petitioners’ financial counselor at xe´lan, the materials that are stipu-
                                      lated to be from his files do not lack foundational evidence.




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                                      154                136 UNITED STATES TAX COURT REPORTS                                          (151)


                                      investment and future distribution as the donor might rec-
                                      ommend. 4 A xe´lan financial counselor recommended, on the
                                      basis of the personal financial information petitioners pro-
                                      vided, 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 a 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 created to benefit not only charitable
                                      causes, but also doctors and their families.’’ The Program
                                      Summary describes the Foundation as follows:
                                      The xe´lan 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’’ xe´lan 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 pro-
                                      viding pro bono services) they perform on behalf of their family public
                                      charities. * * *

                                                ´ lan materials variously characterized a potential Foundation donor’s segregated ac-
                                         4 The xe

                                      count to be maintained at the Foundation as a ‘‘family public charity’’, a ‘‘sub-foundation of the
                                      umbrella xe´lan 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 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’’, effec-
                                      tive for periods after those at issue. See Pension Protection Act of 2006 (PPA), Pub. L. 109–
                                      280, sec. 1231(a), 120 Stat. 1094. Likewise, secs. 170(f)(18) and 2522(c)(5), establishing certain
                                      restrictions on deductions of charitable contributions to donor advised funds (as defined in sec.
                                      4966) are effective for periods after those at issue. See PPA sec. 1234, 120 Stat. 1100.
                                         5 The 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. Announcement 2010–55, 2010–
                                      37 I.R.B. 346.




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                                      (151)                         VIRALAM v. COMMISSIONER                                           155


                                      The Financial Education Program also explained with ref-
                                      erence 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 accrues tax deferred. Any-
                                      time 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 xe´lan financial counselor wrote
                                      petitioner in April 1998 recommending that he ‘‘Establish a
                                      Foundation account for charitable giving, income tax reduc-
                                      tion 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 g 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 xe´lan financial counselor’s recommendation,
                                      petitioner took the initial steps to establish a Foundation
                                      account in April 1998. Using funds already on deposit with
                                      xe´lan, 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, desig-
                                      nating himself as the ‘‘fund advisor’’. Petitioner signed the
                                      application under a provision labeled ‘‘Fund Advisor State-
                                      ment’’, which stated:




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                                      I certify that I understand the nature of donor advised funds and will con-
                                      duct activities which satisfy the requirements of the Internal Revenue
                                      Code. I understand 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 xe´lan Foundation.

                                         The application allowed petitioner to choose among 12
                                      investment strategies for managing the assets contributed to
                                      his Foundation account. Petitioner chose a strategy directed
                                      at aggressive growth. 6
                                         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 ‘‘When can I start
                                      drawing monies out?’’, that a doctor could do so when he
                                      began performing community service work and that, to
                                      comply with the tax code, a formal request was required to
                                      be submitted to and approved by the Foundation’s board of
                                      directors.
                                         The brochure further warranted that ‘‘the xe´lan Founda-
                                      tion will not initiate charitable distributions from your fund,
                                      unless it is left with no advisor.’’
                                         After establishing his Foundation account, petitioner
                                      received a letter from the law firm of Conner & Winters,
                                      legal counsel to the Foundation. 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, resolu-
                                      tions 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. However, 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, including ‘‘donor advised
                                      distributions’’, ‘‘educational loans’’, and ‘‘charitable service
                                      [performed by a donor] for the Foundation’’. The letter
                                      expressly disclaimed any opinion on the tax effect of ‘‘any
                                         6 The application also had a section entitled ‘‘Proposed Charitable Purpose’’ wherein the appli-

                                      cant was requested to check off certain charitable purposes or to describe his charitable objec-
                                      tives. Petitioner left this section blank.




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                                      (151)                         VIRALAM v. COMMISSIONER                                           157


                                      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 Founda-
                                      tion accounts.
                                         Petitioner also received a letter from xe´lan’s chairman on
                                      May 26, 1998, thanking him for his participation in the
                                      Foundation program. Enclosed with this letter were sample
                                      student loan program participation forms and a sample dis-
                                      tribution 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                              Stock                        Value 1

                                               Aug. 25, 1998                   Republic Security Financial              $85,000
                                               Aug. 25, 1998                   Professionals Group, Inc.                 51,317
                                               Nov. 20–25, 1998                Various 2                                121,536
                                               Dec. 28, 1998                   Citrix Systems, Inc.                       4,580

                                                 Total                                                                  262,433
                                                1 Fair
                                                     market value as of the date of transfer.
                                                2 The 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 Founda-
                                      tion 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 acknowledg-
                                      ment letters described the stock transferred and its fair
                                      market value on the date of the transfer. Each letter also
                                      contained the following statement: ‘‘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 the Foundation’s records as petitioner’s Foundation
                                      account. The sales of the stocks yielded the following pro-
                                      ceeds:




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                                      158                136 UNITED STATES TAX COURT REPORTS                                           (151)


                                                                                                                           Net
                                               Date of sale                                  Stock                       proceeds

                                               Sept. 28, 1998                  Republic Security Financial               $73,795
                                               Sept. 28, 1998                  Professionals Group, Inc.                  40,151
                                               Dec. 3, 1998                    Various                                   106,203
                                               Dec. 30, 1998                   Citrix Systems, Inc.                        4,535

                                                 Total                                                                   224,684

                                      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 invest-
                                      ment fee of 1 percent of the account’s value. 7
                                      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
                                      value of the stocks transferred to the xe´lan Foundation in
                                      1998 ($262,433), plus the $1,400 setup fee paid to the
                                      Foundation and the initial $100 in cash deposited into peti-
                                      tioner’s Foundation account in that year. Petitioners’ 1998
                                      return was prepared by petitioners’ accountant, who had
                                      been providing accounting services to petitioners since 1984.
                                      Petitioner discussed the charitable contribution deduction
                                      with the accountant before petitioners signed the return.
                                      Petitioners did not include in income on the 1998 return any
                                      gain from the sales of the stocks that had been transferred
                                      to the Foundation, and the Foundation had sold, in 1998 nor
                                      any dividends or interest generated by the assets in peti-
                                      tioner’s Foundation account during that year.

                                        7 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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                                      (151)                         VIRALAM v. COMMISSIONER                                           159


                                      Distributions From Petitioner’s Foundation Account in Subse-
                                      quent 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. 8
                                         Also in 2001 petitioner requested that $17,247 be distrib-
                                      uted from his Foundation account to the University of
                                      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 institution. The
                                      distribution was made pursuant to a ‘‘distribution request’’
                                      form the Foundation sent to petitioner on April 25, 2001. As
                                      sent to petitioner, the form was dated July 9, 2001, and par-
                                      tially completed. Filled out were entries for the ‘‘amount of
                                      distribution’’: ‘‘$17,247’’; ‘‘name of charity’’: ‘‘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 peti-
                                      tioner 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
                                      the $17,247 loan for his tuition and expenses at the Univer-
                                      sity of Pennsylvania. The documents included a ‘‘Commit-
                                      ment Agreement’’ (commitment agreement) and an ‘‘Edu-
                                      cation Expense Repayment Agreement’’ (repayment agree-
                                      ment).
                                         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 Founda-
                                      tion for each year of educational expenses advanced. The
                                      commitment agreement stated that if Vinay did not under-
                                      take sufficient charitable work to repay the educational
                                      expenses advanced, he would repay the Foundation all edu-
                                         8 Petitioners claimed charitable contribution deductions for the distributions made by peti-

                                      tioner’s Foundation account to Shiva Vishnu Temple in 1999 and 2000 on their Federal income
                                      tax returns for those years but now concede that those deductions were improper.




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                                      cational expenses advanced that were not reduced by chari-
                                      table services, together with interest according to the terms
                                      of the repayment agreement. Finally, the commitment agree-
                                      ment 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
                                      Pennsylvania 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 Founda-
                                      tion the sums advanced plus annual interest equal to speci-
                                      fied Federal long-term rates commencing on the date of the
                                      agreement. Under 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.
                                         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, fees,
                                      and room and board for Vinay.
                                         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 2002 that resulted in transfers by the Foundation 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




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                                      (151)                         VIRALAM v. COMMISSIONER                                           161


                                      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’’.
                                      xe´lan paid the fees for petitioners’ legal representation
                                      during 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 chari-
                                      table contribution deduction for the transfers of stocks (and
                                      cash 9) 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. 10 This payment was credited to petitioner’s Founda-
                                      tion account. The Foundation thereupon waived all interest
                                      that had accrued under the terms of the repayment agree-
                                      ment and returned the commitment agreement and repay-
                                      ment agreement to Vinay marked ‘‘paid in full’’, along with
                                      a letter confirming that the $70,300 payment had fulfilled
                                      Vinay’s obligation to the Foundation.

                                                                                  OPINION

                                      Burden of Proof
                                        Petitioners argue that respondent bears the burden of
                                      proof in this proceeding pursuant to section 7491(a). How-
                                      ever, 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. Commissioner, 394 F.3d 1030, 1039
                                      (8th Cir. 2005), affg. T.C. Memo. 2003–212; Knudsen v.
                                      Commissioner, 131 T.C. 185, 188–189 (2008); see also Geiger
                                        9 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 ad-
                                      vanced any arguments for separate treatment of the setup fee, and we consequently do not dis-
                                      tinguish it in our analysis.
                                        10 We assume the $1 discrepancy between the $70,300 payment petitioner made to the Foun-

                                      dation in 2003 and the $70,299 figure reached by totaling the distributions the Foundation made
                                      to the University of Pennsylvania in 2001 and 2002 reflects rounding.




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                                      162                136 UNITED STATES TAX COURT REPORTS                                          (151)


                                      v. Commissioner, 279 Fed. Appx. 834, 835 (11th Cir. 2008),
                                      affg. T.C. Memo. 2006–271.
                                      Charitable Contribution Deduction
                                         Section 170(a)(1) allows a deduction for any charitable con-
                                      tribution, payment of which is made during the taxable year.
                                      Section 170(c)(2) defines a ‘‘charitable contribution’’ for this
                                      purpose to include a contribution or gift to or for the use of
                                      a foundation organized and operated exclusively for chari-
                                      table or educational purposes. 11
                                         In order for a transfer of property to a charitable organiza-
                                      tion to qualify for a charitable contribution deduction, (1) the
                                      transfer must be a completed gift; that is, the donor must
                                      have relinquished dominion and control over the donated
                                      property, Pollard v. Commissioner, 786 F.2d 1063, 1067 (11th
                                      Cir. 1986), affg. T.C. Memo. 1984–536; (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 contribu-
                                      tion 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 acknowledg-
                                      ment of the contribution having failed to describe or value
                                      the goods or services that petitioner expected to receive in
                                      consideration of 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 connec-
                                      tion 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 Natl.
                                      Found., Inc. v. United States, 13 Cl. Ct. 486 (1987). They
                                        11 As reflected in our findings, the parties have stipulated that the Foundation was a tax-ex-

                                      empt organization described in sec. 501(c)(3) during the periods relevant to this case.




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                                      (151)                         VIRALAM v. COMMISSIONER                                           163


                                      maintain that, consistent with the holding in that case, peti-
                                      tioner could only suggest that the Foundation make des-
                                      ignated 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 the promotion of another Foundation
                                      account feature—petitioner’s ability to arrange for distribu-
                                      tions of account funds to compensate himself or family mem-
                                      bers for performance of ‘‘good works’’—also supports the
                                      conclusion that petitioner maintained control of the assets in
                                      his Foundation account.
                                         Petitioner received the xe´lan 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
                                      Foundation account. 12 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’’ the
                                      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 individual
                                      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
                                      loan program would be available for his children’s use and
                                      that he was contemplating using the student loan program
                                        12 The Program Summary petitioner reviewed 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 pro-
                                      grams.’’




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                                      164                136 UNITED STATES TAX COURT REPORTS                                          (151)


                                      for his children. The significance of the student loan program
                                      in petitioner’s decision to make transfers to his Foundation
                                      account is corroborated by the fact that a sample student
                                      loan participation form was included with the first letter sent
                                      to petitioner (by xe´lan’s chairman) acknowledging petitioner’s
                                      establishment of a Foundation account.
                                         When he established his Foundation account in 1998, peti-
                                      tioner anticipated that each of his three children would incur
                                      8 years of college and graduate school expenses which he
                                      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 com-
                                      menced an examination of petitioners’ 1998 return and pro-
                                      posed 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. 13 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 defi-
                                      ciency 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
                                      the repayment of Vinay’s student loans. 14 Given these facts,
                                      we are persuaded that distributions for student loans to peti-
                                      tioners’ 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 peti-
                                        13 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. These deduction claims suggest that petitioners con-
                                      sidered the funds in petitioner’s Foundation account to be under his control in 1999 and 2000.
                                        14 On Sept. 5, 2003, petitioner directed an entity controlled by him and Vinay to pay the Foun-

                                      dation $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.




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                                      (151)                         VIRALAM v. COMMISSIONER                                           165


                                      tioner 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 quali-
                                      fications 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 relation-
                                      ship 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 subsequent years, provide substantial support
                                      for the conclusion that petitioner neither intended to, nor in
                                      fact did, cede dominion and control over the property trans-
                                      ferred 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 estab-
                                      lished 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 prop-
                                      erty 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.’’ Pollard v. Commis-
                                      sioner, T.C. Memo. 1984–536. In addition to petitioner’s ini-
                                      tial 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 purported legal obligations in the student
                                      loan documents as binding. Although the commitment agree-
                                      ment required Vinay to provide an annual report, there is no
                                      evidence that he did so. 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 providing that interest
                                      was to accrue commencing on the date the agreement was




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                                      166                136 UNITED STATES TAX COURT REPORTS                                          (151)


                                      entered. 15 The Foundation having disregarded the obliga-
                                      tions due to it from Vinay under two contracts executed in
                                      connection with Foundation account transactions, there is no
                                      reason to believe that the 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. The xe´lan promotional materials stated that
                                      ‘‘Donors [to a Foundation account] and their family members
                                      may work for and be compensated by their family public
                                      charities [i.e., the donor’s Foundation account] for good works
                                      * * * they perform on behalf of their family public charities.’’
                                      The materials elsewhere represented: ‘‘Anytime you want to
                                      you could take the money out of your family public charity
                                      and pay yourself compensation to do good works.’’
                                         While petitioner apparently did not seek a distribution
                                      from his Foundation account to compensate him or a family
                                      member for ‘‘good works’’, xe´lan’s representation 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 com-
                                      pensation for the performance of charitable services by him-
                                      self or family members has been treated as evidence of
                                      retained dominion and control. See New Dynamics Found. v.
                                      United States, 70 Fed. Cl. 782, 800–801 (2006). The materials
                                      in the record describe only in very general terms the stand-
                                      ards 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 compensa-
                                      tion for the performance of ‘‘good works’’. We are satisfied on
                                      this record that ‘‘good works’’ distributions were con-
                                      templated 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
                                        15 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.




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                                      (151)                         VIRALAM v. COMMISSIONER                                           167


                                      retained dominion and control over the property purportedly
                                      contributed to the Foundation.
                                         Petitioners contend that they did not have an impermis-
                                      sible 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 Natl. Found., Inc. v. United States, 13 Cl. Ct.
                                      486 (1987). Natl. Found., however, is entirely distinguish-
                                      able. The Claims Court there found that while a donor
                                      advised fund creator could suggest a particular charitable
                                      use, the tax-exempt organization administering the donor’s
                                      funds would honor it only if the requested contribution was
                                      ‘‘in consonance with § 501(c)(3) charitable purposes.’’ Id. at
                                      492. The court found substantial evidence that the National
                                      Foundation board of directors exercised effective control to
                                      ensure that distributions from its donor advised funds were
                                      for charitable, not personal, purposes. By contrast, petitioner
                                      requested, and the Foundation made, substantial distribu-
                                      tions from petitioner’s Foundation account for a personal use;
                                      namely, educational loans for his child. See Fausner v.
                                      Commissioner, 55 T.C. 620, 624 (1971) (taxpayer’s payment
                                      of children’s secondary school tuition is a personal, not a
                                      charitable, expenditure); Whitaker v. Commissioner, T.C.
                                      Memo. 1994–109 (to same effect for college tuition). More-
                                      over, the arrangements in Natl. Found. did not include an
                                      option whereby the donated funds could be distributed back
                                      to the donor or his family as compensation for the perform-
                                      ance of services deemed charitable by the foundation.
                                         Instead, the Foundation account arrangements more
                                      closely resemble those in New Dynamics Found. v. United
                                      States, supra. In that case, the Court of Federal Claims sus-
                                      tained the 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 mem-
                                      bers as compensation for the performance of charitable serv-
                                      ices or 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 over the donated funds and property.’’ Id. at 803.




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                                      168                136 UNITED STATES TAX COURT REPORTS                                           (151)


                                         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 peti-
                                      tioner’s subsequent ability to do so in practice all persuade
                                      us that petitioner never intended to, nor in fact did, relin-
                                      quish 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 trans-
                                      ferred to the Foundation in 1998 and is therefore not entitled
                                      to a deduction under section 170(a). 16
                                         Respondent argues in the alternative that, even if peti-
                                      tioners 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 requirements of sec-
                                      tion 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 contribu-
                                      tion by the donee organization that meets certain require-
                                      ments specified in section 170(f)(8)(B). Section 170(f)(8)(B)
                                      requires that the donee organization state in the acknowledg-
                                      ment ‘‘Whether the donee organization provided any goods or
                                      services in consideration, in whole or part, for’’ the contrib-
                                      uted property or cash. Sec. 170(f)(8)(B)(ii). 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)(B)(iii). 17 The
                                         16 Because we conclude that the student loan and ‘‘good works’’ features of petitioner’s Foun-

                                      dation account demonstrate that he retained sufficient dominion and control over the trans-
                                      ferred 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 re-
                                      tained control, including (i) the fact that petitioner 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 serv-
                                      ices 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.
                                         17 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.




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                                      (151)                         VIRALAM v. COMMISSIONER                                           169


                                      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 tax-
                                      payer’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 organiza-
                                      tion 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 trans-
                                      ferred the stocks to the Foundation in 1998 that the Founda-
                                      tion would make student loans to his children and that con-
                                      sequently the Foundation provided goods or services in
                                      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 receipt of 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. See Wayne Bolt & Nut Co. v. Commissioner, 93
                                      T.C. 500, 507 (1989). 18 Even assuming, arguendo, that
                                      respondent bears the burden of proving that petitioner
                                      expected a benefit in exchange for his transfers of the stocks
                                      to the Foundation, respondent has met that burden. 19 As our
                                      170(f)(8)(B)(iii).
                                         18 The notice of deficiency issued to petitioners merely states that the deductions claimed for

                                      ‘‘charitable contributions to the xe´lan Foundation * * * are not allowable because they were not
                                      charitable contributions within the meaning of section 170 of the Internal Revenue Code.’’ Be-
                                      cause 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 bur-
                                      den of proof he might bear on this issue. Thus, we find it unnecessary to decide whether re-
                                      spondent’s contention that petitioner received a benefit rendering his substantiation inadequate
                                      under sec. 170(f)(8) ‘‘requires the presentation of different evidence * * * or merely 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).
                                         19 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
                                                                                                     Continued




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                                      170                136 UNITED STATES TAX COURT REPORTS                                          (151)


                                      findings reflect, the preponderance of 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 cir-
                                      cumstantial evidence on this score, petitioner so testified.
                                         ‘‘Goods or services’’ for purposes of section 170(f)(8) means
                                      ‘‘cash, property, services, benefits, and privileges.’’ Sec.
                                      1.170A–13(f)(5), Income Tax Regs. 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 peti-
                                      tioners’ 1998 return and the loans were repaid (with interest
                                      forgiven) in 2003. The evidence as a whole persuades the
                                      Court that, but for respondent’s scrutiny of the 1998 return,
                                      petitioner would have continued to request and obtain stu-
                                      dent 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 pro-
                                      vided 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,
                                      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. 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).




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                                      (151)                         VIRALAM v. COMMISSIONER                                           171


                                      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.
                                      Commissioner, 374 F.3d 881 (9th Cir. 2004), affg. 118 T.C.
                                      528 (2002). ‘‘The deterrence value of section 170(f)(8)’s total
                                      denial of a deduction comports with the effective administra-
                                      tion of a self-assessment and self-reporting system.’’ Id. at
                                      887.
                                         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 20 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 Endow-
                                      ment, 477 U.S. at 117, and section 1.170A–1(h), Income Tax
                                      Regs. However, having failed to satisfy a compliance provi-
                                      sion 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 lan-
                                      guage.’’).
                                      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 peti-
                                      tioner transferred them to the Foundation is includible in
                                      petitioners’ gross income for that year, as well as $981 of
                                      interest and dividends generated by the property in peti-
                                      tioner’s Foundation account in 1998. We agree with
                                      respondent.
                                        20 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 present 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.




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                                      172                136 UNITED STATES TAX COURT REPORTS                                          (151)


                                           The Federal income tax consequences of property owner-
                                      ship generally depend upon beneficial ownership, rather than
                                      possession of mere legal title. Speca v. Commissioner, 630
                                      F.2d 554, 556–557 (7th Cir. 1980), affg. T.C. Memo. 1979–
                                      120; Beirne v. Commissioner, 61 T.C. 268, 277 (1973).
                                      ‘‘ ‘[C]ommand over property or enjoyment of its economic
                                      benefits’ * * *, which is the mark of true ownership, is a
                                      question of fact to be determined from all of the attendant
                                      facts and circumstances.’’ Monahan v. Commissioner, 109
                                      T.C. 235, 240 (1997) (quoting Hang v. Commissioner, 95 T.C.
                                      74, 80 (1990)). As outlined in our previous discussion of peti-
                                      tioners’ 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 in 1998
                                      that he would be able to direct that the assets in his Founda-
                                      tion 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 pur-
                                      pose 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 prin-
                                      cipal.’’ P.R. Farms, Inc. v. Commissioner, 820 F.2d 1084,
                                      1086 (9th Cir. 1987) (citing Helvering v. Horst, 311 U.S. 112,
                                      116–117 (1940)), affg. T.C. Memo. 1984–549; see also
                                      Monahan v. Commissioner, supra at 239–240. We see no rea-
                                      son 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




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                                      misstatement. See sec. 6662(a) and (b)(1)–(3). 21 Section
                                      6662(a) imposes a penalty equal to 20 percent of that portion
                                      of any underpayment of tax attributable to negligence or dis-
                                      regard of rules or regulations, sec. 6662(b)(1), or any substan-
                                      tial understatement of income tax, sec. 6662(b)(2). 22 Gen-
                                      erally, no penalty shall be imposed under section 6662, how-
                                      ever, 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 pro-
                                      ceeding with respect to any penalty imposed by the Internal
                                      Revenue Code. In order to meet that burden, the Commis-
                                      sioner must offer sufficient evidence to indicate that it is
                                      appropriate to impose the penalty. See Higbee v. Commis-
                                      sioner, 116 T.C. 438, 446 (2001). Once the Commissioner
                                      meets his burden of production, the taxpayer bears the bur-
                                      den of proving error in the determination to impose a pen-
                                      alty, including proving reasonable cause, substantial
                                      authority, or other exculpatory factors. See id. at 446–447.
                                         Negligence for this purpose is a lack of due care or the
                                      failure to do what a reasonable and ordinarily prudent per-
                                      son 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 correct-
                                      ness of a deduction which would seem to a reasonable or pru-
                                      dent person to be ‘‘too good to be true’’ under the cir-
                                      cumstances. Neonatology Associates, P.A. v. Commissioner,
                                      299 F.3d 221, 234–235 (3d Cir. 2002), affg. 115 T.C. 43
                                      (2000); Pasternak v. Commissioner, 990 F.2d 893, 903 (6th
                                      Cir. 1993), affg. Donahue v. Commissioner, T.C. Memo. 1991–
                                        21 Respondent did not pursue the substantial valuation misstatement penalty at trial or on

                                      brief, and we accordingly deem it abandoned. See Rule 151(e)(4) and (5); Cluck v. Commissioner,
                                      105 T.C. 324, 325 n.1 (1995); Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989).
                                        22 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 attrib-
                                      utable to both paragraphs. Sec. 1.6662–2(c), Income Tax Regs. For completeness, we consider
                                      the applicability of both.




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                                      174                136 UNITED STATES TAX COURT REPORTS                                              (151)


                                      181; McCrary v. Commissioner, 92 T.C. 827, 849–850 (1989);
                                      sec. 1.6662–3(b)(1)(ii), Income Tax Regs. 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 correct-
                                      ness of a deduction which would seem to a reasonable or pru-
                                      dent person to be ‘‘too good to be true’’ under the cir-
                                      cumstances. A reasonable or prudent person would have per-
                                      ceived as ‘‘too good to 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 peti-
                                      tioner ascertained the validity of the charitable contribution
                                      deduction or capital gains exclusion from xe´lan’s employees
                                      or its printed materials, there was an obvious conflict of
                                      interest on the part of persons promoting xe´lan’s programs.
                                      See Rybak v. Commissioner, 91 T.C. 524, 565 (1988). Any use
                                      of the Conner & Winters opinion letter for this purpose was
                                      also not reasonable in the circumstances. The Conner & Win-
                                      ters letter referred to the Foundation’s student loan program
                                      as follows:
                                      Xe´lan Foundation Programs
                                         We are aware of several programs which the Directors of the Foundation
                                      may undertake in furtherance of the charitable activities of the Founda-
                                      tion. 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, we make the following general comments regarding the following
                                      possible activities of the Foundation:

                                                                      *        *      *       *   *       *   *
                                      3. Educational Loans
                                        The Foundation may support an educational loan program whereby stu-
                                      dents may borrow college and graduate school tuition and related expenses
                                      for education in an area related to the Foundation’s charitable purposes.[23]

                                         23 There is no evidence that the Foundation either sought, or that petitioner or Vinay pro-

                                      vided, any information concerning how Vinay’s education was in an area related to the Founda-
                                      tion’s charitable purposes.




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                                      (151)                         VIRALAM v. COMMISSIONER                                           175


                                      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 pri-
                                      vate 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 account-
                                      ant regarding the deduction, but there is nothing in the
                                      record concerning the nature of those discussions or, impor-
                                      tantly, 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
                                      petitioner made a reasonable attempt to ascertain the
                                      correctness of the deduction. See Patin v. Commissioner, 88
                                      T.C. 1086, 1130 (1987), affd. without published opinion 865
                                      F.2d 1264 (5th Cir. 1989), affd. without published opinion
                                      sub nom. Hatheway 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 section 170(f)(8) reflects, peti-
                                      tioner 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.




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                                      176                     136 UNITED STATES TAX COURT REPORTS                                         (151)


                                         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, whichever amount is
                                      greater. Sec. 6662(d)(1)(A). We have sustained respondent’s
                                      determinations disallowing a charitable contribution deduc-
                                      tion of $263,933 and requiring inclusion of capital gains
                                      income and other investment income of $93,324 and $981,
                                      respectively. The 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 under-
                                      statement, and petitioners bear the burden of showing any
                                      exculpatory factors.
                                         Under section 6662(d)(2)(B), any understatement for pur-
                                      poses of the penalty for a substantial understatement of
                                      income tax shall be reduced by that portion of the under-
                                      statement 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 may 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 pro-
                                      viding the authority. Sec. 1.6662–4(d)(3)(ii), 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 deter-
                                      mining that it qualified for tax exemption as an organization
                                      described in section 501(c)(3), and Natl. Found., Inc. v.
                                      United States, 13 Cl. Ct. 486 (1987). 24
                                         We disagree. The inclusion of an organization in Publica-
                                      tion 78 ‘‘signifies that it has received a ruling or determina-
                                      tion letter from the Service stating that contributions by
                                      donors * * * are deductible as provided in section 170 of the
                                      Code.’’ Rev. Proc. 82–39, sec. 2.03, 1982–2 C.B. 759, 760
                                      (emphasis added). The Foundation’s inclusion in Publication
                                           24 Petitioners   also refer to ‘‘other authorities’’ on brief but never name them.




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                                      78 may constitute substantial authority that the organization
                                      to which petitioners made a donation in 1998 satisfied sec-
                                      tion 170(c) (a point that respondent does not dispute), but
                                      petitioners would still be required to show that their chari-
                                      table contribution deduction satisfied other requirements of
                                      section 170. The Foundation’s determination letter, on which
                                      petitioners also rely, makes this point explicitly, stating:
                                      ‘‘Donors may deduct contributions to you [the Foundation]
                                      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, and in fact received, consideration in
                                      exchange. Natl. Found., Inc. v. United States, supra, likewise
                                      does not constitute authority for petitioners’ position. As ear-
                                      lier discussed, the case is readily distinguishable from peti-
                                      tioners’ circumstances in that the court there found that the
                                      donee organization exercised effective control to ensure that
                                      distributions were for charitable purposes. By contrast, peti-
                                      tioner requested and the Foundation complied with substan-
                                      tial 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 pro-
                                      gram. As for petitioners’ accountant, as noted there is no evi-
                                      dence 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 deter-
                                      mination that petitioners are liable for an accuracy-related
                                      penalty under section 6662 for negligence or for substantial
                                      understatement of income tax.




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                                      178                136 UNITED STATES TAX COURT REPORTS                                          (151)


                                      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 par-
                                      ties, and to the extent not discussed, we conclude those argu-
                                      ments are moot, without merit, or irrelevant.
                                         To reflect the foregoing,
                                                                         Decision will be entered under Rule 155.

                                                                               f




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