151

SETTY GUNDANNA AND PRABHAVATHI KATTA VIRALAM, 

PETITIONERS v. COMMISSIONER OF INTERNAL

REVENUE, RESPONDENT

Docket No. 21355–03. Filed February 14, 2011. 

In 1998 P–H transferred stocks and cash to X, an organization described in I.R.C. sec. 501(c) that was not a private 

foundation. X sent P–H acknowledgment letters for the stock 

transfers which stated that no goods or services were provided 

for the ‘‘donation’’ of the stocks. X sold the stocks in 1998. X 

maintained a segregated account for P–H in its records, 

reflecting the stocks and cash received, the proceeds from the 

sales of the stocks and their reinvestment, the dividends and 

interest generated by the assets in the account, and the 

disbursements from the account in subsequent years. Promotional materials provided to P–H by X represented that P–

H would be able to direct the distribution of the funds in the 

account for purported 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 documents that obligated him to repay the amounts transferred, 

plus interest, in cash or by providing designated amounts of 

charitable services. R issued a notice of deficiency for 1998 

disallowing the charitable contribution deduction claimed, 

requiring the inclusion in Ps’ gross income of capital gains 

realized upon the sales of the stocks by X in 1998 after the 

transfers as well as the dividends and interest generated by 

the account assets in 1998, and determining a penalty under 

I.R.C. sec. 6662(a) and (b)(1) and (2). Held: P–H retained 

dominion and control over the property transferred to X. 

Accordingly, Ps are not entitled to any charitable contribution 

deduction on account of the transfers and must include in 

152 136 UNITED STATES TAX COURT REPORTS (151) 

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 regross income the capital gains realized upon X’s sales of the 

transferred stocks as well as the dividends and interest generated by the assets in the segregated account. Held, alternatively, Ps are not entitled to any charitable contribution 

deduction for failure to comply with the substantiation 

requirements of I.R.C. sec. 170(f)(8). Held, further, Ps are 

liable for a penalty under I.R.C. sec. 6662(a) and (b)(1) or (2). 

Michael C. Durney, for petitioners. 

Thomas A. Dombrowski and Mark A. Weiner, 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 petitioners 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 transferred 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 incorporated 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, petitioner learned of xe ́lan, 2 a financial planning company for 

(151) VIRALAM v. COMMISSIONER 153

quired to finance lifestyle costs through life expectancy, with ‘e ́lan’, the French word meaning 

a lifestyle of personal freedom.’’

3Petitioners 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 establishes that Mr. Jaye was petitioners’ financial counselor at xe ́lan, the materials that are stipulated to be from his files do not lack foundational evidence. 

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 doctors during the years relevant to this case. It provided 

member doctors with financial planning services, including 

pension plans, insurance products, tax reduction and asset 

protection strategies, and investment management. These 

financial services were provided through a network of 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 recommendations. Members were also provided various promotional materials, including a Program Summary 

describing xe ́lan programs and services, and the xe ́lan Doctors Financial Education Program (Financial Education Program), 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 

154 136 UNITED STATES TAX COURT REPORTS (151) 

4The xe ́lan materials variously characterized a potential Foundation donor’s segregated account to be maintained at the Foundation as a ‘‘family public charity’’, a ‘‘sub-foundation of the 

umbrella 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’’, effective 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. 

5The 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. 

investment and future distribution as the donor might recommend. 4 A xe ́lan financial counselor recommended, on the 

basis of the personal financial information petitioners provided, that petitioner establish a Foundation account. 

For the periods relevant to this case, the Foundation was 

recognized by the Commissioner as an organization described 

in section 501(c)(3), having received a determination letter to 

that effect on March 20, 1998 (determination letter). The 

Foundation was listed as a public charity in Publication 78, 

Cumulative List of Organizations described in Section 170(c) 

of the Internal Revenue Code of 1986, published in January 

1999. 5 The Commissioner issued 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 providing pro bono services) they perform on behalf of their family public 

charities. * * *

(151) VIRALAM v. COMMISSIONER 155

The Financial Education Program also explained with reference to Foundation accounts that 

Your family then is the advisor to that fund as to the way the money is 

invested. And the growth on the invested money accrues tax deferred. Anytime you want to you could take the money out of your family public 

charity and pay yourself compensation to do good works. 

The Foundation also offered Foundation account holders a 

student loan program whereby Foundation account funds 

could be disbursed as loans for college and graduate school 

tuition and related expenses. The program’s terms further 

provided that the loans could be repaid (with interest) either 

through repayments generally commencing 5 years after 

graduation or by the recipient’s providing charitable services 

for designated periods. A xe ́lan financial counselor wrote 

petitioner in April 1998 recommending that he ‘‘Establish a 

Foundation account for charitable giving, income tax reduction planning, estate tax reduction, educational funding, and 

future retirement planning.’’ (Emphasis added.) 

Petitioners had three children, and petitioner advised 

Foundation personnel in the questionnaire he completed in 

late 1997 that he anticipated paying for 8 years of college 

and 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, designating himself as the ‘‘fund advisor’’. Petitioner signed the 

application under a provision labeled ‘‘Fund Advisor Statement’’, which stated: 

156 136 UNITED STATES TAX COURT REPORTS (151) 

6The application also had a section entitled ‘‘Proposed Charitable Purpose’’ wherein the applicant was requested to check off certain charitable purposes or to describe his charitable objectives. Petitioner left this section blank. 

I certify that I understand the nature of donor advised funds and will conduct 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 Foundation 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, resolutions of its board of directors, and representations made to 

the Commissioner of Internal Revenue in connection with the 

Foundation’s application for recognition of section 501(c)(3) 

tax-exempt status. 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 

(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 Foundation 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 distribution request form. 

Upon establishing his Foundation account, petitioner made 

several transfers of stocks to the Foundation. The transfers 

are summarized as follows.

Date of transfer 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

1Fair market value as of the date of transfer. 

2The stocks transferred on Nov. 20–25, 1998, consisted of 

shares of 25 companies. 

The transferred stocks were recorded in the Foundation’s 

records in a subaccount denominated the Viralam Family 

Charitable Trust (referred to herein as petitioner’s Foundation account). 

After each of the transfers summarized above, petitioner 

received an acknowledgment letter from the Foundation that 

was labeled ‘‘Receipt for Gift of Stock’’. These acknowledgment letters described the stock transferred and its fair 

market value on the date of the transfer. 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 proceeds:

158 136 UNITED STATES TAX COURT REPORTS (151) 

7The 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. 

Date of sale Stock

Net

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 investment 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 petitioner’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 petitioner’s Foundation account during that year. 

(151) VIRALAM v. COMMISSIONER 159

8Petitioners claimed charitable contribution deductions for the distributions made by petitioner’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. 

Distributions From Petitioner’s Foundation Account in Subsequent 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 distributed 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 partially 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 petitioner for his signature, with instructions that it be returned 

to the Foundation with certain loan documents to be 

executed by Vinay, as described below. 

On July 6, 2001, Vinay executed documents with respect to 

the $17,247 loan for his tuition and expenses at the University of Pennsylvania. The documents included a ‘‘Commitment Agreement’’ (commitment agreement) and an ‘‘Education Expense Repayment Agreement’’ (repayment agreement). 

In the commitment agreement Vinay agreed to participate 

in the Foundation’s ‘‘Educational Funding Program’’ and, in 

return for receiving educational loans from the Foundation, 

to provide 2,000 hours of charitable work for the Foundation for each year of educational expenses advanced. The 

commitment agreement stated that if Vinay did not undertake sufficient charitable work to repay the educational 

expenses advanced, he would repay the Foundation all eduVerDate 0ct 09 2002 11:32 May 30, 2013 Jkt 372897 PO 20009 Frm 00009 Fmt 3851 Sfmt 3851 V:\FILES\VIRALAM.136 SHEILA
160 136 UNITED STATES TAX COURT REPORTS (151) 

cational expenses advanced that were not reduced by charitable services, together with interest according to the terms 

of the repayment agreement. Finally, the commitment agreement stated that ‘‘the student will provide regular reports, at 

least annually, of his or her progress in the course of study 

and intended work, as well as, his or her plan to meet the 

obligations of the Agreement.’’

The repayment agreement acknowledged cash advances on 

Vinay’s behalf by the Foundation to the University of 

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 Foundation the sums advanced plus annual interest equal to specified 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 

(151) VIRALAM v. COMMISSIONER 161

9The disputed charitable contribution deduction reflects 1998 transfers of stocks with a fair 

market value of $262,433, plus a $1,400 setup fee, and $100 in cash. The parties have not advanced any arguments for separate treatment of the setup fee, and we consequently do not distinguish it in our analysis. 

10We assume the $1 discrepancy between the $70,300 payment petitioner made to the Foundation in 2003 and the $70,299 figure reached by totaling the distributions the Foundation made 

to the University of Pennsylvania in 2001 and 2002 reflects rounding. 

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 charitable contribution deduction for the transfers of stocks (and 

cash 9) to the Foundation and determining an accuracyrelated 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 Foundation account. The Foundation thereupon waived all interest 

that had accrued under the terms of the repayment agreement and returned the commitment agreement and repayment agreement to Vinay marked ‘‘paid in full’’, along with 

a 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). However, the burden of proof has no practical consequence in this 

case, as there is no evidentiary tie. Our findings with respect 

to all factual issues are based upon a preponderance of the 

evidence. See Blodgett v. 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 

162 136 UNITED STATES TAX COURT REPORTS (151) 

11 As reflected in our findings, the parties have stipulated that the Foundation was a tax-exempt organization described in sec. 501(c)(3) during the periods relevant to this case. 

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 contribution, 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 charitable or educational purposes. 11

In order for a transfer of property to a charitable organization 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 contribution by the donee organization that meets the requirements 

of section 170(f)(8)(B), sec. 170(f)(8). 

Respondent contends that petitioners are not entitled to a 

charitable contribution deduction for the stock transfers to 

the Foundation because petitioners never surrendered 

dominion and control over the property or, alternatively, 

because petitioners failed to substantiate the deduction as 

required by section 170(f)(8), the Foundation’s acknowledgment of the contribution having 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 connection with establishing his Foundation account. Petitioners 

further contend that petitioner’s Foundation account satisfied 

the requirements for a donor advised fund as set out in Natl. 

Found., Inc. v. United States, 13 Cl. Ct. 486 (1987). They 

(151) VIRALAM v. COMMISSIONER 163

12The 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 programs.’’

maintain that, consistent with the holding in that case, petitioner could only suggest that the Foundation make designated charitable contributions from his Foundation account 

and suggest an investment strategy for the assets in the 

account and that these factors are insufficient to establish 

that petitioner retained control over the property transferred 

to the Foundation. Finally, petitioners contend that they did 

not receive any substantial benefit in return for petitioner’s 

contribution to the Foundation and properly substantiated 

the charitable contribution deduction claimed. 

We agree with respondent that petitioner retained 

dominion and control over the property transferred to the 

Foundation and held in his Foundation account. We reach 

this conclusion principally on the basis of the use of funds in 

petitioner’s Foundation account for student loans to his son. 

We also find that the promotion of another Foundation 

account feature—petitioner’s ability to arrange for distributions of account funds to compensate himself or family members 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 

164 136 UNITED STATES TAX COURT REPORTS (151) 

13For 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 considered the funds in petitioner’s Foundation account to be under his control in 1999 and 2000. 

14On Sept. 5, 2003, petitioner directed an entity controlled by him and Vinay to pay the Foundation $70,300, the principal balance of the loans to Vinay (excluding accrued interest). Upon 

receipt, the Foundation waived all accrued interest and declared the loans paid in full. 

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, petitioner 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 commenced an examination of petitioners’ 1998 return and proposed to disallow their deduction for the contributions to the 

Foundation. Disregarding payment of the Foundation’s 

startup and annual management fees, the distributions made 

from petitioner’s Foundation account in 1999 through 2003 

for purposes other than Vinay’s student loans totaled 

$15,500. 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 deficiency issued on September 16, 2003. No distributions for 

student loans were made from petitioner’s Foundation 

account in 2003. Indeed, on September 5, 2003, just before 

issuance of the notice of deficiency, petitioner arranged for 

the repayment of Vinay’s student loans. 14 Given these facts, 

we are persuaded that distributions for student loans to petitioners’ 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 petiVerDate 0ct 09 2002 11:32 May 30, 2013 Jkt 372897 PO 20009 Frm 00014 Fmt 3851 Sfmt 3851 V:\FILES\VIRALAM.136 SHEILA
(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 qualifications or otherwise exercised any independent judgment in 

selecting him for a student loan. In the circumstances, it is 

obvious that the selection of Vinay as a beneficiary of the 

Foundation’s student loan program arose from his relationship to petitioner and as a result of petitioner’s direction. 

Petitioner’s understanding, at the time he transferred the 

stocks to his Foundation account in 1998, that the account’s 

assets could be used to make student loans to his children, 

and the Foundation’s perfunctory acquiescence in making 

such loans in subsequent years, provide substantial support 

for the conclusion that petitioner neither intended to, nor in 

fact did, cede dominion and control over the property transferred to the Foundation in 1998. 

Petitioners, however, point to petitioner’s transfer of legal 

title to the stocks he contributed to the Foundation and the 

‘‘Fund Advisor Statement’’ petitioner signed when he established the Foundation account, which stated that he ‘‘fully 

relinquished’’ ownership of the stocks to the Foundation. In 

petitioners’ view, these formalities establish that petitioner 

had fully relinquished dominion and control over the property transferred to the Foundation in 1998. 

We disagree. The determination of whether dominion and 

control has been surrendered for purposes of a charitable 

contribution deduction under section 170 ‘‘must be based 

upon all the facts of a particular case.’’ Pollard v. Commissioner, T.C. Memo. 1984–536. In addition to petitioner’s initial understanding of his ability to direct the use of his 

Foundation account funds for his children’s student loans, 

and the Foundation’s subsequent course of conduct which 

confirmed that understanding, we note that the Foundation 

did not treat the purported legal obligations in the student 

loan documents as binding. Although the commitment agreement required Vinay to provide an annual report, there is no 

evidence that he did so. 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 

166 136 UNITED STATES TAX COURT REPORTS (151) 

15Petitioners’ own estimate of the interest that had accrued on the Foundation account loans 

to Vinay at the time they were repaid was $7,922. 

entered. 15 The Foundation having disregarded the obligations due to it from Vinay under two contracts executed in 

connection with Foundation account transactions, there is no 

reason to believe 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 compensation for the performance of charitable services by himself 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 standards to be applied by the Foundation’s board of directors in 

determining whether a donor’s Foundation account funds 

should be paid out to him or a family member as compensation for the performance of ‘‘good works’’. We are satisfied on 

this record that ‘‘good works’’ distributions were contemplated by petitioner and the Foundation in 1998 as a 

means for petitioner to retrieve his purported contributions 

in the future. Consequently, we find that the possibility of 

such distributions supports the conclusion that petitioner 

(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 impermissible degree of dominion and control over their Foundation 

account because it was a donor advised fund similar to the 

arrangements found not to have resulted in a retention of 

donor control in Natl. Found., Inc. v. United States, 13 Cl. Ct. 

486 (1987). Natl. Found., however, is entirely distinguishable. 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 distributions 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). Moreover, 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 performance 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 sustained 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 members as compensation for the performance of charitable services 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. 

168 136 UNITED STATES TAX COURT REPORTS (151) 

16 Because we conclude that the student loan and ‘‘good works’’ features of petitioner’s Foundation account demonstrate that he retained sufficient dominion and control over the transferred property to preclude a deduction under sec. 170(a), we find it unnecessary to consider 

whether other features of the Foundation account arrangements constituted impermissible retained control, including (i) the fact that 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 services provided to petitioner; and (iii) the fact that distributions were made from the account to 

pay petitioners’ legal fees for their representation in the examination of their 1998 return and 

the prosecution of this case. 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. 

In sum, the Foundation’s representations concerning the 

student loan program, petitioner’s understanding at the time 

of the 1998 transfers of his ability to direct the use of his 

Foundation account for the noncharitable, purely personal 

purpose of funding student loans for his children, and petitioner’s subsequent ability to do so in practice all persuade 

us that petitioner never intended to, nor in fact did, relinquish dominion and control over the property transferred to 

the Foundation. This conclusion finds further support in the 

‘‘good works’’ option for distribution to petitioner from the 

Foundation account. Accordingly, we hold that petitioner 

retained dominion and control over the property he transferred to the Foundation in 1998 and is therefore not entitled 

to a deduction under section 170(a). 16

Respondent argues in the alternative that, even if petitioners were found to have ceded dominion and control of the 

property they transferred to the Foundation, their claimed 

charitable contribution deduction is not allowed because they 

did not comply with the substantiation requirements of section 170(f)(8). We agree. 

Section 170(f)(8)(A) provides that no deduction shall be 

allowed under section 170(a) for any contribution of $250 or 

more unless the taxpayer substantiates the contribution with 

a contemporaneous written acknowledgment of the contribution by the donee organization that meets certain requirements specified in section 170(f)(8)(B). Section 170(f)(8)(B) 

requires that the donee organization state in the acknowledgment ‘‘Whether the donee organization provided any goods or 

services in consideration, in whole or part, for’’ the contributed 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 

(151) VIRALAM v. COMMISSIONER 169

170(f)(8)(B)(iii). 

18The 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.’’ Because the evidence adduced so clearly establishes that petitioner anticipated receipt of benefits 

in exchange for his transfer of the stocks to the Foundation, respondent has satisfied any burden of proof he might bear on this issue. Thus, we find it unnecessary to decide whether respondent’s contention that petitioner received a benefit rendering his substantiation inadequate 

under sec. 170(f)(8) ‘‘requires the presentation of different evidence * * * or 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). 

19Petitioners 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

regulations clarify that a donee organization is treated as 

having provided goods or services in consideration for the 

taxpayer’s payment if the taxpayer expects to receive goods 

or services in exchange for the payment at the time it is 

made, including where the goods or services are provided in 

a year other than the year when the taxpayer makes the 

payment. 

A donee organization provides goods or services in consideration for a taxpayer’s payment if, at the time the taxpayer makes the payment to the 

donee organization, the taxpayer receives or expects to receive goods or 

services in exchange for that payment. Goods or services a donee organization provides in consideration for a payment by a taxpayer include goods 

or services provided in a year other than the year in which the taxpayer 

makes the payment to the donee organization. [Sec. 1.170A–13(f)(6), 

Income Tax Regs.] 

Respondent argues that petitioner expected when he transferred the stocks to the Foundation in 1998 that the Foundation would make student loans to his children and that consequently the Foundation provided goods or services in 

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 

170 136 UNITED STATES TAX COURT REPORTS (151) 

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). 

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 circumstantial evidence on this score, petitioner so testified. 

‘‘Goods or services’’ for purposes of section 170(f)(8) means 

‘‘cash, property, services, benefits, and privileges.’’ 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 petitioners’ 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 student loans for all three children from his Foundation 

account. Thus, under the regulations, petitioner’s expectation 

in 1998 that the Foundation would provide student loans to 

his children in subsequent years means that the Foundation 

is deemed to have provided goods or services in consideration 

for the donated stocks. See sec. 1.170A–13(f)(6), Income Tax 

Regs. 

The written acknowledgment necessary under section 

170(f)(8) to substantiate petitioners’ charitable contribution 

was required to state whether goods or services were provided by the Foundation in consideration for the stocks 

transferred to it and if so to describe them and provide a 

good faith estimate of their value. See sec. 170(f)(8)(B). The 

Foundation acknowledgment letters offered by petitioners as 

substantiation of their claimed donations of stock each state, 

(151) VIRALAM v. COMMISSIONER 171

20Petitioners 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. 

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 administration 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 Endowment, 477 U.S. at 117, and section 1.170A–1(h), Income Tax 

Regs. However, having failed to satisfy a compliance provision designed to foster disclosure of ‘‘dual payment’’ or quid 

pro quo contributions, petitioners may not now claim dual 

payment treatment. See Addis v. Commissioner, supra at 887 

(‘‘A partial deduction is foreclosed by the statutory language.’’). 

Capital Gains and Investment Income

Respondent determined that $93,324 in long-term capital 

gain generated by the sales of the stocks in 1998 after petitioner transferred them to the Foundation is includible in 

petitioners’ gross income for that year, as well as $981 of 

interest and dividends generated by the property in petitioner’s Foundation account in 1998. We agree with 

respondent. 

172 136 UNITED STATES TAX COURT REPORTS (151) 

The Federal income tax consequences of property ownership 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 petitioners’ entitlement to a charitable contribution deduction, 

although petitioner transferred legal title to various stocks to 

the Foundation in 1998, petitioner retained dominion and 

control over the stocks transferred. He understood that the 

stocks would be managed according to an investment 

strategy he designated, which might include their being sold 

and the proceeds invested differently. He understood in 1998 

that he would be able to direct that the assets in his Foundation account be distributed to his children as student loans, 

and the Foundation complied with his direction that the 

account assets be applied in this manner in 2001 and 2002. 

The funds so applied and remaining available for that purpose included the proceeds of the sales of the transferred 

stocks as well as interest and dividends generated by the 

investment of those proceeds. Moreover, ‘‘interest earned on 

investment is taxable to the person who controls the principal.’’ P.R. Farms, Inc. v. 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 reason a similar rule should not apply to dividends. Because 

petitioner retained dominion and control of the assets in his 

Foundation account, we sustain respondent’s determination 

concerning the capital gains and interest and dividend 

income in 1998. 

Section 6662 Penalty

Respondent also determined that petitioners are liable for 

an accuracy-related penalty for negligence, substantial 

understatement of income tax, or substantial valuation 

(151) VIRALAM v. COMMISSIONER 173

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). 

22The penalties under sec. 6662(b)(1) and (2) are in the alternative and do not stack, in that 

the penalty does not exceed 20 percent of any portion of an underpayment even if it is attributable to both paragraphs. Sec. 1.6662–2(c), Income Tax Regs. For completeness, we consider 

the applicability of both. 

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 disregard of rules or regulations, sec. 6662(b)(1), or any substantial understatement of income tax, sec. 6662(b)(2). 22 Generally, no penalty shall be imposed under section 6662, however, with respect to any portion of an underpayment if it is 

shown that there was reasonable cause for such portion and 

that the taxpayer acted in good faith with respect to such 

portion. Sec. 6664(c). Pursuant to section 7491(c), the 

Commissioner has the burden of production in any court proceeding with respect to any penalty imposed by the Internal 

Revenue Code. In order to meet that burden, the Commissioner must offer sufficient evidence to indicate that it is 

appropriate to impose the penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner 

meets his burden of production, the taxpayer bears the burden of proving error in the determination to impose a penalty, 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 person would do under the circumstances, and it includes any 

failure to make a reasonable attempt to comply with the 

income tax laws. Marcello v. Commissioner, 380 F.2d 499, 

506 (5th Cir. 1967), affg. in part and remanding in part 43 

T.C. 168 (1964) and T.C. Memo. 1964–299. Disregard 

includes any careless, reckless, or intentional disregard. Sec. 

6662(c). Negligence is strongly indicated where a taxpayer 

fails to make a reasonable attempt to ascertain the correctness of a deduction which would seem to a reasonable or prudent person to be ‘‘too good to be true’’ under the circumstances. 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–

174 136 UNITED STATES TAX COURT REPORTS (151) 

23There is no evidence that the Foundation either sought, or that petitioner or Vinay provided, any information concerning how Vinay’s education was in an area related to the Foundation’s charitable purposes. 

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 correctness of a deduction which would seem to a reasonable or prudent person to be ‘‘too good to be true’’ under the circumstances. A reasonable or prudent person would have perceived as ‘‘too good to be true’’ a deduction for a supposed 

charitable contribution where the amounts deducted could be 

used to fund student loans for his own children. The same 

is true with respect to the avoidance of capital gains taxes 

on the sales of stocks where the proceeds remained under 

petitioner’s control for use by his children. To the extent petitioner ascertained the validity of the charitable 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 & Winters 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 Foundation. We have no reason to believe that a donor’s participation in any of 

the following programs will cause the foundation to lose its status under 

Sections 501(c)(3), 509(a)(1) and 170(b)(1)(a)(iv) of the Code. Although we 

have not examined documents with respect to any specific program and do 

not hereby render an opinion as to the tax effect with respect to any such 

program, 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 students may borrow college and graduate school tuition and related expenses 

for education in an area related to the Foundation’s charitable purposes.[23]

(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 private inurement with respect to such program. 

[Emphasis added.] 

Thus, while the letter specifically identified the student loan 

program petitioner contemplated using, it expressly refrained 

from offering any opinion concerning the tax effects of 

participation in the program and confined itself merely to 

describing certain features of the program. If anything, the 

Conner & Winters letter should have put a professionally 

educated person such as petitioner on notice that further 

inquiry was warranted concerning the student loan program. 

Petitioner also testified that he consulted with his accountant regarding the deduction, but there is nothing in the 

record concerning the nature of those discussions or, importantly, establishing that the accountant was given complete 

information, including petitioner’s intention to direct the use 

of the proceeds from the contribution for student loans for his 

children. Without some evidence that petitioner’s discussions 

with his accountant covered his anticipated participation in 

the student loan program, there is no basis to conclude that 

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, petitioner failed to substantiate the charitable contribution as 

required, which is an indication of negligence. 

We accordingly find that, absent their showing reasonable 

cause (considered infra), petitioners were negligent with 

respect to the charitable contribution deduction claimed and 

the capital gains and other investment income excluded in 

1998 with respect to the property transferred to petitioner’s 

Foundation account. Respondent has met his burden of 

production with respect to a negligence penalty for the entire 

underpayment. 

176 136 UNITED STATES TAX COURT REPORTS (151) 

24Petitioners also refer to ‘‘other authorities’’ on brief but never name them. 

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 deduction 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 understatement, and petitioners bear the burden of showing any 

exculpatory factors. 

Under section 6662(d)(2)(B), any understatement for purposes of the penalty for a substantial understatement of 

income tax shall be reduced by that portion of the understatement which is attributable to ‘‘the tax treatment of any 

item by the taxpayer if there is or was substantial authority 

for such treatment’’. Authority for this purpose 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 providing 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 determining 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 Publication 78 ‘‘signifies that it has received a ruling or determination letter from the Service stating that contributions by 

donors * * * are deductible as provided in section 170 of the 

Code.’’ Rev. Proc. 82–39, sec. 2.03, 1982–2 C.B. 759, 760 

(emphasis added). The Foundation’s inclusion in Publication 

(151) VIRALAM v. COMMISSIONER 177

78 may constitute substantial authority that the organization 

to which petitioners made a donation in 1998 satisfied section 170(c) (a point that respondent does not dispute), but 

petitioners would still be required to show that their charitable contribution deduction satisfied other requirements of 

section 170. The Foundation’s determination letter, on which 

petitioners also rely, makes this point explicitly, stating: 

‘‘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 earlier discussed, the case is readily distinguishable from petitioners’ circumstances in that the court there found that the 

donee organization exercised effective control to ensure that 

distributions were for charitable purposes. By contrast, petitioner requested and the Foundation complied with substantial distributions for personal purposes. In sum, petitioners 

have failed to show that they had substantial authority for 

any portion of the understatement. 

Finally, to the extent petitioners may be claiming that they 

had reasonable cause in view of their reliance on professional 

advice, see sec. 6664(c); sec. 1.6664–4(b)(1), Income Tax 

Regs., we find that claim meritless. The Conner & Winters 

opinion letter expressly disavowed any opinion concerning a 

Foundation donor’s participation in the student loan program. As for petitioners’ accountant, as noted there is no evidence that the accountant was given necessary and accurate 

information concerning petitioner’s transactions with the 

Foundation to form a professional judgment. See Neonatology 

Associates, P.A. v. Commissioner, 115 T.C. at 99. 

For the foregoing reasons, we sustain respondent’s determination that petitioners are liable for an accuracy-related 

penalty under section 6662 for negligence or for substantial 

understatement of income tax.

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 parties, and to the extent not discussed, we conclude those arguments are moot, without merit, or irrelevant. 

To reflect the foregoing, 

Decision will be entered under Rule 155

f .