t c memo united_states tax_court mississippi state university alumni inc petitioner v commissioner of internal revenue respondent docket no filed date james k hasson jr john w bonds jr and amanda b scott for petitioner lourdes gonzalez de mendoza and charles p hanfman for respondent memorandum findings_of_fact and opinion colvin judge respondent determined deficiencies in petitioner's federal_income_tax of dollar_figure for the tax_year ending date dollar_figure for the tax_year ending date and dollar_figure for the tax_year ending date the issue for decision is whether petitioner's income from an affinity credit card program is a royalty excluded by sec_512 from the tax on unrelated_business_taxable_income we hold that it is section references are to the internal_revenue_code in effect for the years in issue rule references are to the tax_court rules_of_practice and procedure findings_of_fact some of the facts have been stipulated and are so found a petitioner and mississippi state university petitioner the state of mississippi operates mississippi state university msu in the town of mississippi state mississippi petitioner's principal office was in mississippi state mississippi when it filed the petition in this case petitioner is msu's alumni organization petitioner informs alumni about msu solicits gifts from alumni and supporters and organizes alumni chapters petitioner uses direct mail and telemarketing to raise funds for msu petitioner requests contributions from msu alumni and sends them mississippi state alumnus magazine alumnus and information about homecoming class reunions and chapter events petitioner has about chapters petitioner keeps a mailing list of msu alumni so msu and petitioner can communicate with them petitioner has kept these records on its computer since during the years in issue petitioner updated its alumni mailing list daily petitioner reports to msu's office of university relations which is headed by msu's vice president for advancement petitioner is exempt from federal_income_tax under sec_501 petitioner's employees petitioner had about to full-time employees from to petitioner also employed students part time msu generally paid petitioner's employees steve c grafton grafton was petitioner's executive director from date to date he reported to msu's vice president for advancement and to petitioner's board_of directors he usually worked to hours a week during the years in issue frances carr carr has worked for petitioner since around she processed annual fund gifts made address changes on the data base and produced lists labels and diskettes during the years in issue student employees assisted her during the years in issue petitioner hired a marketing coordinator in see paragraph f below b peoples bank trust peoples bank trust pb t a bank the principal office of which is in tupelo mississippi was engaged in the credit card business including issuing affinity credit cards an affinity credit card is a card designed for and marketed to members of a group or organization pb t received finance_charges merchant fees and interchange income from affinity credit cards it had issued in pb t told petitioner it would like to issue affinity credit cards for petitioner later in petitioner sent letters to several financial institutions including pb t seeking proposals for an affinity credit card program the letter detailed the major features petitioner wanted in any proposal edwin brown brown a vice president of pb t answered petitioner's letter and represented pb t in affinity credit card negotiations with petitioner pb t wanted permission to use petitioner's mailing list marks and logos 1respondent contends that petitioner initiated the first contact with pb t we have found otherwise on the basis of grafton’s and edwin brown's testimony respondent adduced no evidence to the contrary c the affinity credit card agreement on date petitioner and pb t agreed agreement that pb t would administer an affinity card program targeted to petitioner's members terms of the agreement the agreement was to be effective for years thereafter it would be automatically renewed for terms of year unless either party notified the other in writing at least days before the end of the initial or current renewal term that it would not renew the agreement pb t agreed to apply its customary credit policies to credit card applications from petitioner's members cardholder agreements between pb t and the cardholders were to govern cards that pb t issued pb t offered the visa classic and mastercard red and ochre under the agreement pb t agreed to charge each cardholder an annual fee of dollar_figure to use an interest rate of dollar_figure percent and to consult with petitioner before raising the rate pb t agreed to provide the following services at no cost to the cardholders dollar_figure air common carrier insurance collision damage waiver on automobile rental emergency cash service and a travel service pb t agreed to offer credit life_insurance credit disability insurance and unemployment insurance to cardholders at the cardholder's expense pb t agreed to pay petitioner cents for each cardholder transaction and dollar_figure for each card membership and annual fee paid to pb t the agreement did not say whether the payments were intended to be royalties or business income pb t agreed not to assess merchant discount charges or processing fees on purchases from petitioner by alumni and on gifts made to the msu annual fund by cardholders if the transaction was charged to the affinity credit card petitioner received thousands of dollars of contributions through this arrangement pb t agreed to give petitioner space for four lines with characters up to six times a year on pb t's monthly statements to cardholders without cost to petitioner or cardholders to promote alumni activities the agreement said that petitioner was not a partner of or joint venturer with pb t and that petitioner did not agree to bear any loss pb t might suffer in the affinity credit card program endorsement and promotional materials petitioner agreed to state in a letter or other message that pb t wrote and sent and bearing petitioner's executive director's name or a facsimile of his signature that pb t was the exclusive provider of the affinity credit cards pb t agreed to prepare and pay for all endorsement and marketing material and activities pb t agreed to submit to petitioner for advance approval each endorsement and related marketing material the agreement did not require petitioner to keep copies of credit card applications or provide them to alumni license to use intangible_property the agreement gave pb t the exclusive right to use petitioner's name on the affinity credit cards and in related marketing materials msu gave pb t permission to use msu's registered trademark the walking bulldog on the affinity credit cards and related marketing material msu did not charge petitioner or pb t for pb t's use of the msu trademark because msu wanted petitioner to receive all of the payments from pb t for the affinity credit card program petitioner agreed to use its best efforts to keep msu's permission to use the trademark membership lists and updates pb t agreed that all membership lists petitioner provided were to remain petitioner's property and confidential pb t agreed to use petitioner's mailing lists only for the affinity credit card unless pb t had petitioner's written consent to use them for other purposes pb t agreed to give address changes it received from cardholders to petitioner monthly at no charge d performance under the agreement establishing affinity credit card accounts pb t processed applications established and loaded accounts on its computer system produced credit cards accepted and posted transactions generated statements and processed payments petitioner did none of this work endorsements solicitations and promotions pb t drafted and sent letters to promote the affinity credit cards to petitioner's members in march or date in date pb t drafted and sent letters endorsing the affinity credit card to parents of msu students that letter stated that petitioner offered the credit cards in cooperation with pb t and urged parents to apply for cards for their students each letter was printed on petitioner's letterhead and had a facsimile of grafton's signature pb t developed solicitation materials during the years in issue grafton reviewed these materials for accuracy quality style and consistency with petitioner's position it took him to minutes to review an endorsement letter prepared by pb t he did not make changes to those letters at petitioner's suggestion pb t mailed promotional material to msu's faculty and staff on date petitioner billed pb t dollar_figure for big_number envelopes dollar_figure for big_number sheets of stationery and dollar_figure for big_number address labels for faculty and staff of msu that petitioner provided to pb t for this mailing mailing lists and updates petitioner gave pb t copies of petitioner's list of the names and addresses of its members twice during the years in issue on 8½-inch computer diskettes the lists had about big_number names pb t could not operate the diskettes and paid an outside company to convert them to a format it could use carr made these copies of the mailing list diskettes for pb t in less than minutes to generate the two lists for pb t carr used the computer_program and the procedure that she used to generate similar lists for petitioner pb t sent address changes for cardholders to petitioner about once a month petitioner added the new addresses to its data base advertising by pb t petitioner asked pb t to advertise the credit cards in alumnus and affairs of state a newsletter not further described in the record petitioner began to actively sell advertising for alumnus in pb t prepared and paid for advertisements for the credit card program in alumnus for the fall of fall of and spring and fall of pb t advertised the card in the student newspaper and sports programs during and pb t bought advertising for the affinity credit card in msu’s football programs once in conjunction with a football game during the years in issue and without petitioner's help msu let pb t set up a table on msu's campus to distribute credit card applications in the fall of pb t paid a well-known msu football sports announcer to endorse the affinity credit card he was not an employee or agent of petitioner pb t used his photograph and signature in print advertisements it prepared pb t produced radio advertisements and posters pb t hired students to insert affinity credit card applications in bags at the msu bookstore payments by pb t pb t paid for data processing marketing and royalties related to the affinity credit card and paid mailing companies for services needed to market the credit card by direct mail pb t paid petitioner according to the terms of the agreement petitioner's activities petitioner did not mass mail any credit card applications or marketing materials petitioner did not ask pb t to expedite any affinity credit card applications or to increase any person's credit limit petitioner did not process credit card applications or decide to whom to issue a card petitioner did not make any payments to pb t pb t gave credit card application forms to petitioner which petitioner kept in its office to give to alumni on request petitioner mailed application forms to one or two alumni who requested them petitioner also put application forms in the lobby of the msu alumni center petitioner's representatives took some application forms to local alumni chapter meetings and put a few of them on tables with notices copies of alumnus fund solicitation information and other materials about msu and petitioner if alumni requested information from petitioner petitioner mailed materials to the alumni which probably included a credit card application petitioner did not let pb t representatives speak at alumni meetings about the affinity credit card program grafton met with pb t representatives at least once but fewer than four times during the years in issue to discuss the affinity credit card program and to hear pb t's ideas for expanding the program from date to date petitioner gave messages to pb t to print on the monthly credit card statements the messages announced campus events such as homecoming and super bulldog weekend msu's office of university relations wrote an article about the affinity credit card in the fall edition of alumnus e petitioner's sale of merchandise with the msu seal generally petitioner did not let anyone use its mailing list however petitioner contracted with wayneco a commercial company for wayneco to sell items bearing msu's seal such as rings watches lamps crystal clocks grandfather clocks and chairs to msu's alumni petitioner contracted with wayneco for wayneco to sell seiko watches in lamps in and waterford crystal clocks in petitioner had the right to review promotional materials that wayneco prepared petitioner agreed to a sponsor wayneco's offering of the items b get msu's approval to use msu's seal on the items and related promotional material c allow wayneco to use facsimile signatures of an official of petitioner to promote the items and d give wayneco i mailing labels with names and addresses of all living alumni and parents of msu undergraduates ii samples of its letterhead and envelope for wayneco to reproduce iii copies of msu's official seal and iv a letter from an official of petitioner's on its letterhead stating that petitioner had chosen wayneco to supply the items wayneco agreed to pay petitioner dollar_figure for each watch dollar_figure for each lamp and dollar_figure for each clock that wayneco sold under the agreement with petitioner the agreement states that the payments are royalties petitioner compiled and sent mailing list labels to wayneco wayneco paid all other costs political candidates and other vendors asked for permission to use petitioner's mailing list petitioner denied all requests except wayneco's and pb t’s during the years in issue 2income that petitioner received from the sale of this merchandise is not at issue in this case f marketing coordinator creation of the position on date the last month of the second of years at issue grafton asked dr billy c ward ward msu's vice president for advancement for permission to hire a marketing coordinator for petitioner grafton estimated that this person's work would produce enough funding to pay his or her own salary grafton told ward the marketing coordinator would generally assist petitioner's executive director and would develop an advertising program for petitioner's magazine manage a new msu art sale program expand the affinity credit card program coordinate the marketing program for merchandise-for-resale such as watches lamps etc oversee petitioner's alumni travel program with outside travel companies generate revenue for petitioner and help to plan coordinate and especially to market petitioner's other activities including but not limited to homecoming alumni trips tent parties open houses the annual leadership conference annual business meetings the msu staff summer party class reunions the annual alumni awards banquet black alumni day government appreciation day the faculty awards program the faculty staff christmas open house and other alumni activities ward authorized grafton to hire a marketing coordinator hiring of elizabeth libba andrews petitioner hired elizabeth b libba andrews andrews as marketing coordinator in date the second month of the final year in issue she spent most of her time from date to date developing an advertising program for alumnus during that time she also developed new alumni programs participated in strategic planning and helped manage petitioner andrews spent a negligible amount of time as petitioner's contact person for the affinity credit card program brown met with her once at petitioner's office and once at the bank they spoke on the phone around four times about the affinity credit card program and six times about the sale of advertising andrews sold advertising in alumnus to pb t for the affinity credit card program on the same terms as applied to other advertisers she sent advertising contracts to brown in february and date petitioner and pb t signed the date contract andrews suggested that the contract be changed to allow petitioner to include a larger message in the monthly billing statements andrews answered some questions from alumni about the affinity credit card in date an alumnus complained to petitioner about the affinity credit card program andrews contacted brown about the alumnus' complaint and wrote the alumnus a letter to maintain good will with him andrews and some of the other supervisors shared several assistants who worked for petitioner the record does not suggest that the assistants worked on the credit card program grafton prepared budgets for petitioner with categories for various expenses he had no budget category for the affinity credit card program petitioner paid andrews dollar_figure during her first year she was petitioner's associate director at the time of trial g agreement petitioner and pb t signed a replacement affinity credit card agreement in date agreement it made two changes to the agreement it provided a procedure for pb t to transfer member accounts and receivables to another bank if petitioner or pb t did not want to renew the agreement and it said the payments from pb t to petitioner were royalties andrews contacted several universities to seek ideas and suggestions relating to an addendum to the contract h sale of olympic coins universal coins a canadian business contacted pb t to ask if pb t would like to participate in an olympic coin program universal coins offered to pay pb t to insert material promoting the olympic coin program in credit card statements on date brown wrote andrews a letter in which he described the olympic coin program pb t offered to split commissions with petitioner for orders placed by petitioner's members neither pb t nor petitioner received any money from universal coins under the olympic coin program i direct mail computer services letter in date after the years in issue chuck smith smith president of direct mail computer services sent the following letter to petitioner gentlemen i am in receipt of your request concerning name list rental rates during the period of rental rates for nonprofit institutions have remained static for several years including the period in question at dollar_figure m names rented with a dollar_figure m surcharge for sortation to the zip code level this is essentially a universal price which is heavily documented throughout the list rental industry in such publications as standard rates and data etc j petitioner's federal tax returns petitioner timely filed forms return of organization exempt from income_tax and forms 990-t exempt_organization business income_tax return for the years in issue on its forms for the years in issue petitioner reported that pb t had paid it the following amounts of royalties dollar_figure for dollar_figure for and dollar_figure for petitioner did not report these amounts as unrelated_business_taxable_income on the forms 990-t that it filed for those years petitioner reported that it had received dollar_figure of advertising income for dollar_figure for and none for on its forms 990-t for and petitioner reported taxable_income from the sale of merchandise including rings and watches petitioner reported commission income on insurance on forms 990-t for and opinion a taxation of unrelated_business_income and royalties sec_511 imposes a tax on the unrelated_business_taxable_income ubti of certain tax-exempt organizations petitioner is subject_to tax on its ubti under sec_511 because it is tax exempt under sec_501 as a general_rule income is ubti if the income arises from a trade_or_business the trade_or_business is regularly carried on and the trade_or_business is not substantially related to the organization's tax-exempt purpose sec_512 89_tc_7 royalties are excluded from ubti sec_512 whether income is a royalty is decided on the basis of all the facts and circumstances 53_f3d_120 5th cir sec_1_512_b_-1 income_tax regs the taxpayer bears the burden_of_proof rule a a royalty is a payment for the right to use valuable intangible_property rights it is not a payment for services rendered by the owner of the property texas farm bureau v united_states f 3d pincite 86_f3d_1526 9th cir affg tcmemo_1993_199 and affg in part and revg in part on other grounds and remanding 103_tc_307 94_tc_60 revd on other grounds 942_f2d_309 6th cir the u s court_of_appeals for the ninth circuit discussed the degree of activity the recipient of a royalty under sec_512 may conduct as follows thus to the extent the commissioner claims that a tax-exempt_organization can do nothing to acquire such fees eg providing a rate sheet listing the fee charged for use of each copyrighted design or retaining the right to approve how the design is used and marketed the commissioner is incorrect however to the extent that sierra club appears to argue that a royalty is any payment for_the_use_of a property right--such as a copyright--regardless of any additional services that are performed in addition to the owner simply permitting another to use the right at issue we disagree sierra club inc v commissioner supra pincite thus we must carefully review the actions by an organization to ensure that fees are paid for_the_use_of intangible_property and not for services see alumni association of the univ of or inc v commissioner tcmemo_1996_63 3in that case the u s court_of_appeals for the ninth circuit reversed our grant of partial summary_judgment and remanded the case for trial on the issue of whether the income generated by an affinity credit card program was a royalty because the tax_court did not view facts regarding the program in the light most favorable to the commissioner 86_f3d_1526 9th cir affg tcmemo_1993_199 and affg in part and revg in part on other grounds and remanding 103_tc_307 oregon state univ alumni association inc v commissioner tcmemo_1996_34 respondent contends that petitioner's income from the affinity credit card program during the years in issue arises from a trade_or_business which petitioner regularly carried on and which is substantially unrelated to its tax-exempt purpose and that petitioner's affinity credit card income is not a royalty under sec_512 for reasons discussed below we hold that the payments at issue are royalties in light of this holding we need not decide whether petitioner's affinity credit card program is a trade_or_business b whether pb t paid petitioner to use valuable intangible_property rights pb t obtained the right to use valuable intangible_property rights in the and agreements under the agreements pb t could use petitioner's name its letterhead the signature of its executive director on promotional materials a list of names and addresses of petitioner's members and msu's walking bulldog trademark payments for the right to use these items may be royalties see sierra club inc v commissioner supra alumni association of the univ of or inc v commissioner 4respondent’s position is consistent with tech adv mem date in which respondent took the position that income from an affinity credit card arrangement received by a sec_501 organization is unrelated_business_taxable_income under sec_512 supra oregon state univ alumni association inc v commissioner supra respondent points out that msu gave pb t permission to use the walking bulldog trademark without charging pb t or petitioner and contends that this means pb t did not pay to use it respondent's contention takes msu's permission out of context when viewed in context it is clear that msu handled it this way so pb t's payments to use the walking bulldog trademark would go to petitioner not to let pb t use the walking bulldog without cost we conclude that pb t paid petitioner for the right to use valuable intangible_property rights c whether pb t's payments were for services respondent contends that pb t paid petitioner to perform services relating to the affinity credit card program and contends that petitioner performed a large number of services for pb t we disagree petitioner's activities were minimal and infrequent were not conducted like a commercial business and were not services for which pb t paid petitioner's use of the program for its exempt purposes respondent mischaracterizes some of petitioner's activities as services for pb t or credit card promotional activities for example respondent refers to the messages petitioner included in the credit card bills as promotional materials even though they were used only to promote petitioner's activities to its members the messages were not used to promote the card respondent characterizes petitioner's maintenance and updating of its mailing list as a substantial service for pb t and as administration of its affinity credit card program we disagree these actions are more fairly viewed as part of petitioner's communication to its members which is central to its exempt_purpose pb t's access to petitioner's intangible_property respondent contends that petitioner's providing its mailing list to pb t was a service we disagree the mailing list was valuable intangible_property alumni association of the univ of or inc v commissioner supra oregon state univ alumni association inc v commissioner supra see also sierra club inc v commissioner tcmemo_1993_199 providing the list to pb t was essential to pb t's use of that property respondent also contends that petitioner's agreement to use its best efforts to maintain msu's permission to use the walking bulldog was a service we disagree msu had already decided to let pb t use the msu trademark for the credit card agreement no activity by petitioner was required even if petitioner had to act so that pb t could continue to use the walking bulldog trademark that effort would have been undertaken to provide intangible_property to pb t not to provide a service similarly contrary to respondent's contention the facts that pb t substantially agreed to the terms outlined by petitioner's initial letter and the program generated increasing income for petitioner each year do not speak to whether the income was a royalty activities of msu and pb t respondent contends that the article in alumnus written about the credit card program is an activity by petitioner we disagree the article was written by the office of university relations not petitioner respondent points out that the article said additional information on the bulldog card can be obtained by calling the msu alumni association or the peoples bank and contends that this shows petitioner was marketing the credit card program we disagree it merely means that the author was telling readers that petitioner had information about the credit card program respondent contends that petitioner permitted pb t to distribute credit card applications at a football game we have not so found because the record indicates that msu not petitioner permitted pb t to conduct this activity respondent suggests that petitioner was involved in employing msu students to insert credit card applications in bags at the msu bookstore there is no basis in the record for respondent's suggestion petitioner's marketing coordinator respondent contends that petitioner's hiring of a marketing coordinator shows that the payments at issue were for services because grafton projected that the person hired could generate enough funds to pay his or her own salary we disagree it is not surprising that the marketing coordinator for a fundraising organization would raise more money than he or she was paid respondent contends that andrews regularly devoted a substantial amount of time to the credit card program we disagree andrews grafton and brown testified without contradiction that andrews worked only a negligible amount of time on the credit card program andrews' effort to sell advertising for the credit card program to pb t was not a service to pb t it was an effort to increase petitioner's advertising revenue respondent implies that the fact that andrews suggested changes to the agreement so petitioner could get more use from the message included in the monthly billing statement and contacted other universities to seek ideas for the addendum for the contract were services for pb t we disagree this was work she did to assist petitioner in its dealings with pb t endorsement and review of marketing materials respondent points out that petitioner endorsed the program and reviewed marketing materials prepared by pb t respondent contends that these actions were services to pb t for purposes of sec_512 we disagree pb t or advertising firms hired by pb t wrote endorsement messages over a facsimile of grafton's signature which were printed on petitioner's letterhead petitioner did not write or pay for the letters grafton spent only to minutes reviewing each endorsement letter and he did not change the letters an organization's review of marketing materials which bear its name is reasonably related to protecting the organization's name and does not disqualify payments from being royalties alumni association of the univ of or inc v commissioner supra oregon state univ alumni association inc v commissioner supra sierra club inc v commissioner tcmemo_1993_199 the commissioner has ruled that endorsement of products through the use of likenesses and signatures of professional athletes does not prevent payments from being royalties revrul_81_ 1981_2_cb_135 that ruling discusses two situations the first situation is substantially like this case in which the income from the endorsement of products use of signatures and trademarks and review of licensed products is a royalty id the second situation involves much more activity such as personal appearances the commissioner ruled that income in that situation is not a royalty id we conclude that petitioner's review of marketing material and endorsement of the program were not services to pb t credit card application forms respondent contends that petitioner helped pb t market the affinity credit cards that petitioner's employees regularly took credit card applications to chapter meetings we have not so found because the record does not indicate how often petitioner's employees took applications to chapter meetings or how often chapters met petitioner had application forms available for members took an unspecified number of application forms to some meetings with its other membership information and mailed some in response to specific requests from members we disagree that petitioner's actions are fairly characterized as marketing or services for pb t or that pb t paid petitioner for these minimal actions these actions are too insignificant to preclude a finding that petitioner's income from the credit card program is a royalty advertising respondent contends that alumnus did not accept paid advertising before on the basis of the fact that andrews and deann williams wrote letters which refer to the date issue of alumnus as the first to accept paid advertising grafton who unlike andrews worked for petitioner before testified that alumnus accepted paid advertising in and possibly earlier pb t bought a 4-page color advertisement featuring the person who broadcasts msu football games in the fall issue of alumnus and paid for artwork for the ad respondent speculates that pb t paid only petitioner's costs for advertising in alumnus but the record does not so indicate respondent contends that petitioner and pb t had an understanding that petitioner would participate in advertising the credit cards this contention is at odds with the contracts between pb t and petitioner and grafton’s and brown’s testimony that there was no unwritten understanding petitioner did not participate in advertising the credit cards mailing list with msu students and faculty respondent contends that petitioner gathered and gave to pb t the names and addresses of msu faculty and the parents of msu students that those names were not in petitioner's data base and that doing so was a service to pb t respondent's contention is speculative and based in part on the fact that petitioner billed pb t for big_number envelopes and sheets of petitioner's stationery and for big_number mailing labels for the msu faculty and staff there was no testimony about this bill a handwritten note on it says that it was for stationery and supplies it does not say that it was for services olympic gold coin program respondent contends that petitioner's participation in the olympic gold coin program shows that the payments from pb t were not royalties we disagree pb t received a solicitation from a vendor and offered to share with petitioner any commissions for orders it received from petitioner's members there were no orders there is no evidence that petitioner did anything except receive a letter from pb t offering to split the commissions from the program analysis and conclusion pb t paid petitioner for its endorsement and to use its mailing list and msu's walking bulldog trademark pb t did not pay for services related to operating a credit card business petitioner's activities were almost entirely limited to a giving pb t access to those intangibles b achieving some direct member-related benefits such as messages on cardholder statements and indirect benefits such as increased advertising revenues for alumnus and c protecting petitioner's good will with its members such as by reviewing mailings and responding to occasional inquiries respondent contends that petitioner's activities were as extensive as those of organizations that received income which was not a royalty such as in texas farm bureau v united_states f 3d pincite 833_f2d_717 7th cir affg 87_tc_747 and 693_f2d_525 5th cir we disagree petitioner's activities to support the affinity credit card program were far less substantial than the activities performed by the taxpayers in those cases the organization in texas farm bureau in addition to providing its logo name and mailing list provided clerical and administrative services telephones office supplies and other goods and services necessary to conduct an insurance_business texas farm bureau v united_states supra pincite in fraternal order of police v commissioner supra the taxpayer published a magazine for which the taxpayer could appoint the executive editor prepare editorials and feature articles control solicitations of business listings and the bank account and decide whether an article appearing in the magazine could be reprinted elsewhere the u s court_of_appeals for the seventh circuit held that the organization's income from business listings was commercial advertising and was not a royalty because the organization conducted it like a commercial venture id pincite the taxpayer in louisiana credit_union league dealt with commercial insurance vendors debt collectors and electronic data processing services for its members the u s court_of_appeals for the fifth circuit said that the taxpayer-- did everything short of actually selling the insurance and collecting the debts itself it selected the companies whose products and services would be endorsed actively marketed and promoted those products and services to member credit unions and performed the day-to-day administrative tasks essential to the insurance and debt collection operations louisiana credit_union league v united_states supra pincite the u s court_of_appeals said that more comprehensive involvement would be difficult to imagine id unlike the organizations in texas farm bureau v united_states supra fraternal order of police v commissioner supra and louisiana credit_union league v united_states supra petitioner did not perform business services petitioner's activities relating to the affinity credit card program were minimal pb t paid petitioner to use intangible_property not to obtain business services as the u s court_of_appeals for the ninth circuit said to hold otherwise would require us to hold that any activity on the part of the owner of intangible_property to obtain a royalty renders the payment for_the_use_of that right ubti and not a royalty sierra club inc v commissioner f 3d pincite we conclude that pb t's payments to petitioner under the affinity credit card contracts were for_the_use_of valuable intangible_property rights not for services d petitioner's use of its mailing list respondent contends that like the taxpayer in 942_f2d_309 6th cir and 650_f2d_1178 petitioner regularly rented its mailing list respondent argues that under those cases income from petitioner's mailing lists is not a royalty we disagree in disabled am veterans v united_states f 2d pincite the court of claims held that the disabled american veterans dav conducted a trade_or_business of renting its mailing list and that it was not royalty from to dav rented parts of its donor list times disabled am veterans v commissioner f 2d pincite in doing so dav followed the usual practices of the direct mail industry id dav prepared rate cards showing the rates it charged to customers id dav employed two staff personnel full time to administer its list rentals id petitioner did not use list brokers employ anyone to administer its mailing list rental or otherwise try to rent its mailing lists like the taxpayer in disabled am veterans v united_states supra respondent points out that the agreement ran for years and petitioner regularly received income from the program we disagree that this fact shows that pb t's payments to petitioner were not royalties because royalties are often paid regularly over several years see eg 80_tc_768 cloward instrument corp v commissioner tcmemo_1986_345 affd 842_f2d_1294 9th cir petitioner had agreements with wayneco in and for wayneco to use petitioner's mailing list to sell affinity items to petitioner's members petitioner’s agreements with wayneco and pb t are not remotely like dav’s list rental_activity respondent contends that the date letter chuck smith sent to petitioner shows that petitioner actively rented its mailing lists during the years in issue we disagree in that letter petitioner requested list rental rates for date to date it does not show that petitioner was renting its lists during the years in issue the taxpayer in 86_f3d_1526 9th cir set the rental rates rented its mailing lists and had the right to review requests to rent the lists and to approve the proposed mailing material and schedule for each mailing but took no other action the u s court_of_appeals for the ninth circuit held that payments for rental of mailing lists were royalties because the taxpayer did not provide any services with the mailing lists id petitioner's conduct was more like that of the taxpayer in sierra club than that in disabled am veterans like the taxpayer in sierra club petitioner maintained its mailing lists to further its tax-exempt function sierra club inc v commissioner f 3d pincite petitioner employed carr to maintain the lists on a computer data base like the taxpayer in sierra club petitioner set rental rates and had the right to approve mailing material but unlike the taxpayer in both disabled am veterans cases it did very little else to support the credit card program pb t prepared and mailed all of the promotional materials respondent points out that petitioner reported the wayneco payments from the sale of merchandise such as watches and rings as taxable_income but not its income from the affinity credit card program petitioner reported its income from the sale of merchandise as ubti but treated its income from the credit cards as a royalty the record does not show why petitioner treated the wayneco payments and the payments at issue differently however the fact that petitioner did not treat the wayneco payments and the affinity credit card program payments consistently does not deprive the payments at issue of status as a royalty respondent speculates that the credit card fosters less affinity towards msu by its members than the items for sale with the walking bulldog trademark because those are likely to be viewed by members more often than a credit card that is kept in a wallet we disagree ward and grafton testified without contradiction that the credit cards and the items bearing the msu walking bulldog trademark encourage good will between petitioner's members and msu nothing in the record supports respondent's view e failure to refer to pb t's payments to petitioner as royalties in the agreement respondent contends that the payments at issue are not royalties because the agreement did not call them royalties respondent contends that under 378_f2d_771 3d cir vacating and remanding 44_tc_549 petitioner may not assert that payments under the agreement were royalties when the danielson_rule applies a taxpayer may not disavow unambiguous terms of an agreement to achieve different tax results unless mistake undue influence fraud duress or other ground exists to set_aside the agreement id pincite danielson does not apply here because petitioner is not disavowing any terms of its agreements with pb t the agreement does not characterize the payments it does not say the payments were or were not royalties or income from a trade_or_business petitioner's position that the payments are royalties is consistent with the agreement f whether sec_513 applies sec_513 exempts from tax amounts earned by certain tax-exempt organizations from the trade_or_business of exchanging or renting mailing lists to other tax-exempt organizations sec_513 provides in general --in the case of an organization which is described in sec_501 and contributions to which are deductible under paragraph or of sec_170 the term unrelated_trade_or_business does not include-- b any trade_or_business which consists of-- i exchanging with another such organization names and addresses of continued sec_513 is effective for exchanges and rentals of member lists after date respondent contends that the enactment of sec_513 implies that renting mailing lists is generally a trade_or_business respondent asks us to infer from the enactment of sec_513 that congress generally views gross_income from the licensing of mailing lists as ubti unless excepted by sec_513 we do not draw that inference the inference asserted by respondent is rejected in the legislative_history of sec_513 a colloquy between congressmen daniel rostenkowski d-ill chairman of the ways_and_means_committee and john duncan r-tenn ranking republican member of the ways_and_means_committee occurred in the house of representatives on the day of the adoption of the conference_report accompanying the bill which included sec_513 chairman rostenkowski's comments were as follows i also have discussed with congressman duncan the issue of whether the provision of the bill which excludes certain income from unrelated_trade_or_business income creates any inference under present law we have reached a common understanding regarding the following specific issue continued donors to or members of such organization or ii renting such names and addresses to another such organization tax_reform_act_of_1986 publaw_99_514 sec a 100_stat_2085 the question relates to section of the bill which excludes from unrelated_trade_or_business income revenues from the use of a tax-exempt organization's mailing list by another such organization section of the bill which specifically exempts certain such revenues from the tax on unrelated_business_income in the future carries no inference whatever that mailing list revenues beyond its scope or prior to its effective date should be considered taxable to an exempt_organization cong rec date it is at best hazardous to infer the intent of an earlier congress from a later one see 489_us_101 361_us_304 see sierra club inc v commissioner f 3d pincite n where the u s court_of_appeals for the ninth circuit said it would not rely on enactment of sec_513 to infer legislative intent of congress in originally enacting sec_512 respondent relies on a concurring opinion in disabled am veterans v commissioner f 2d pincite martin j concurring which states congress in enacting sec_513 obviously felt that the court of claims decision in dav1 was the proper interpretation of royalties for purposes of sec_512 with respect to the payments received by an exempt_organization from a commercial organization the acceptance of dav's position that the monies it receives from list rental are royalties under sec_512 would totally eviscerate sec_513 we draw no inference from the enactment of sec_513 as to whether the affinity program at issue is a trade_or_business g whether royalty treatment is consistent with the purpose of the tax on unrelated_business_income respondent contends that the affinity credit card program at issue here leads to unfair competition between tax-exempt organizations and taxable businesses and that congress intended to subject that income to the tax on unrelated_business_income we disagree the tax on unrelated_business_income was enacted to prevent tax-exempt organizations from unfairly using their tax-exempt status to compete with commercial businesses 475_us_834 respondent contends that petitioner's activities relating to the affinity credit card were like the insurance activities at issue in 477_us_105 in that case the supreme court held that the american bar endowment abe conducted a trade_or_business creating the kind of unfair competition that led to the enactment of sec_512 id pincite we disagree that the facts are similar abe provided group_insurance policies to its members id pincite abe actively administered the insurance program id abe chose insurers negotiated premium rates with insurers compiled lists 6see sierra club inc v commissioner f 3d pincite n of its members solicited and collected premiums from its members sent premiums to the insurer kept files on each policyholder answered members' questions about insurance policies and screened claims for benefits id the supreme court found that this arrangement created unfair competition because abe's members could deduct part of their premium payment as a charitable_contribution unlike abe petitioner did not compete with any taxable entity pb t not petitioner competed with other credit card issuers we conclude that petitioner did not engage in any activity which congress intended to subject_to the tax on unrelated_business_income h conclusion petitioner’s income from the affinity credit card program in the years in issue is a royalty excluded by sec_512 from the unrelated_business_income_tax to reflect the foregoing decision will be entered under rule


tcmemo_2009_133 united_states tax_court paul rudnick petitioner v commissioner of internal revenue respondent docket no filed date paul rudnick pro_se margaret burow for respondent memorandum findings_of_fact and opinion marvel judge respondent determined a deficiency of dollar_figure and a sec_6662 a accuracy-related_penalty of dollar_figure with respect to petitioner’s federal_income_tax 1unless otherwise indicated all section references are to the internal_revenue_code and all rule references are to the tax_court rules_of_practice and procedure after concessions the issues for decision are whether and to what extent petitioner is entitled to certain deductions claimed on his schedule a itemized_deductions whether and to what extent petitioner is entitled to business_expense deductions claimed with respect to a business activity known as eglobal call solutions whether petitioner is liable for the 10-percent additional tax under sec_72 on early distributions from qualified_retirement_plans and whether petitioner is liable for the sec_6662 accuracy-related_penalty findings_of_fact some of the facts have been stipulated we incorporate the stipulation of facts and supplemental stipulation of facts into our findings by this reference petitioner resided in california when he petitioned this court before petitioner was employed as president of a software development company five-by-five networks inc five- 2respondent concedes the dollar_figure dividend income adjustment respondent also concedes that petitioner is entitled to a home mortgage interest_deduction of dollar_figure and petitioner concedes that he is not entitled to the remaining home mortgage interest_deduction of dollar_figure respondent concedes that petitioner is entitled to dollar_figure of deductions claimed on schedule c profit or loss from business for a business activity known as 4-play and petitioner concedes that he is not entitled to the remainder of those deductions claimed by-five networks before and during petitioner was involved in various business ventures related to software development and telephone call centers in vietnam and the united_states petitioner’s testimony at trial petitioner testified regarding his involvement with several business entities during and although we find that petitioner was engaged in a business activity during under the name eglobal call solutions petitioner did not introduce documents to establish the relationship if any between eglobal call solutions and other business activities mentioned during his testimony we are not willing to make findings_of_fact regarding those business activities based solely on petitioner’s uncorroborated testimony however we summarize petitioner’s testimony to provide a framework for our holdings that summary is set forth below five-by-five network sec_3 started a software development center in vietnam sometime around date or date when five-by-five networks ran out of money petitioner acquired as severance from his employment with five-by-five network sec_4 the 3the record does not show what kind of entity five-by-five networks was nor does the record show who owned it 4the record does not show in which year or this occurred or whether petitioner included the value of the software program in his income right sec_5 to a software development program that the vietnam center was developing specifically petitioner acquired the rights to two assets--i-contact integrated software that assisted with internet sales and hey-voice call center software that provided an automated list of options over the telephone however when petitioner acquired the rights to the software it was not ready for immediate use after receiving the rights to the software from five-by-five networks petitioner arranged for employees at a vietnam call center to integrate the software petitioner had acquired from five-by-five networks into a software program called integrated agent desktop integrated agent desktop was necessary for petitioner’s business to operate development and testing of integrated agent desktop occurred from early through date in date integrated agent desktop was brought online in beta version and in date it was formally launched around august or date integrated agent desktop underwent a major revision in approximately date or date petitioner also obtained6 for dollar_figure the rights to several assets from eglobal call networks inc eglobal call networks a 5the record does not disclose how or in what name petitioner acquired the rights 6the record does not disclose how or in what name petitioner acquired the assets corporation that was in the business of selling calling cards those assets included a voice over ip network router in vietnam fiber optic links from san francisco to hong kong and from hong kong to vietnam and billing equipment in san francisco petitioner made a downpayment of dollar_figure to eglobal call networks and paid the balance of the purchase_price by giving eglobal call networks cash to keep its business afloat petitioner and eglobal call networks did not execute any agreement or bill of sale formalizing the purchase after the purchase petitioner began operating the assets jointly with eglobal call networks during petitioner effected several transactions using the name eglobal call networks for example on february and date petitioner transacted with business wire using eglobal call networks’s account petitioner also placed an order with source voice data systems solutions under the name eglobal call networks and signed loan documents as president of eglobal call networks in addition petitioner had some control of eglobal call networks’s checking account and used eglobal call networks to transfer money to vietnam 7petitioner did not introduce any bank records to document his investment nor did he explain the relationship between eglobal call solutions the business he operated and eglobal call networks petitioner also formed a company called eglobal vietnam ltd eglobal vietnam petitioner needed eglobal vietnam in order to conduct business in vietnam eglobal vietnam operated the call center in vietnam although petitioner provided funding to eglobal vietnam he held no ownership_interest in eglobal vietnam entered into a lease agreement with quang trung software city development co for a facility in vietnam eglobal vietnam also contracted with quang trung software city development co to construct a call center facility in vietnam in date eglobal vietnam moved into the newly constructed call center facility and in date the call center started generating customer traffic in date eglobal call solutions began to generate revenue during eglobal call solutions’s revenue came from two customers tata consulting and h_r block eglobal call solutions earned_income when employees of the two customers contacted the call center in vietnam for technical support involving software operation petitioner employed a bookkeeper in vietnam to help keep his business records the bookkeeper used quickbooks to keep 8petitioner did not introduce any documentation regarding the formation and ownership of eglobal vietnam 9petitioner did not explain the relationship between eglobal call solutions eglobal call networks and eglobal vietnam but his testimony implied that eglobal call solutions income was generated by the business activity in vietnam records and petitioner reviewed the records when he visited vietnam the bookkeeper provided petitioner information from the quickbooks records to complete his tax returns in vietnamese authorities raided the vietnam facility because unbeknownst to petitioner a manager of eglobal vietnam was operating without a required license during the raid the authorities seized various business records petitioner’s return petitioner a cash_basis taxpayer prepared his form_1040 u s individual_income_tax_return return petitioner’s schedule a attached to his return showed the following schedule a expenses amount dollar_figure medical and dental expense sec_1 taxes state_and_local_income_taxes real_estate_taxes personal_property_taxes home mortgage interest and points gifts to charity gifts by cash or check other than cash or check job expenses and most other miscellaneous deduction sec_2 big_number unreimbursed employee_expenses attorney’s and accountant’s fees big_number big_number big_number big_number big_number big_number 1after the application of the 5-percent floor under sec_213 2amounts reflect deductions as reported before application of the 2-percent limitation under sec_67 on the schedule c profit or loss from business for eglobal call solutions attached to his return petitioner reported gross_receipts of dollar_figure and the following schedule c expenses schedule c expenses advertising commissions and fees contract labor employee benefit programs insurance legal and professional services office expenses rent or lease other business property supplies taxes and licenses travel meals and entertainment utilities wages amount dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number 1amount reflects the deductions for meals and entertainment_expenses as reported before application of the 50-percent limitation under sec_274 petitioner who was not yet reported dollar_figure of taxable pension and annuity income on his return petitioner attached to his return form_5329 additional taxes on qualified_plans including iras and other tax-favored accounts on form_5329 petitioner reported early distributions of dollar_figure that were subject_to the sec_72 additional tax and early distributions of dollar_figure that were not subject_to sec_72 additional taxdollar_figure 10it appears that there is a mistake on petitioner’s form_5329 he was supposed to report on line all early continued in a notice_of_deficiency dated date respondent disallowed the medical and dental expenses unreimbursed employee_expenses attorney’s and accountant’s fees and part of the home mortgage interest and points reported on petitioner’s schedule a respondent also disallowed all deductions relating to eglobal call solutions claimed on petitioner’s schedule cdollar_figure respondent also determined that petitioner was liable for sec_72 additional tax of dollar_figure and a sec_6662 accuracy-related_penalty of dollar_figure petitioner timely petitioned this court and a trial was held after trial we kept the record open to allow petitioner to introduce additional evidence to substantiate his schedule a and schedule c deductions specifically we instructed petitioner to arrange for respondent to conduct a telephone interview of the bookkeeper in vietnam to obtain health insurance records to substantiate his medical_expenses and to provide and bank statements with respect to the eglobal call solutions account and his personal account petitioner did not provide any continued distributions included in income and then of those distributions reported on line report on line the distributions that are not subject_to the additional tax 11respondent also disallowed all expenses claimed on a separate schedule c relating to a business called 4-play however the parties have resolved this issue by agreement additional evidence nor did he file a posttrial brief with the court i exhibits 6-p 7-p and 8-p opinion at trial we reserved ruling on petitioner’s exhibits 6-p 7-p and 8-p exhibit 6-p is a computer spreadsheet showing various expenses for a 12-month_period respondent objected to exhibit 6-p on grounds of authenticity best evidence and hearsay and because it was prepared in anticipation of litigation in his brief respondent contends that exhibit 6-p is an improper summary chart or calculation under rule of the federal rules of evidence because the underlying documents used to prepare the spreadsheet were not made available to respondent and petitioner provided no testimony regarding the preparation of the spreadsheet rule of the federal rules of evidence provides that the contents of voluminous writings that cannot conveniently be examined in court may be presented in the form of a chart summary or calculation it also provides that the originals or duplicates of the summarized writings must be made available for examination or copying or both by other parties at a reasonable_time_and_place exhibit 6-p does not show the year to which the spreadsheet relates or who prepared the spreadsheet petitioner did not present any credible testimony about the source of the amounts shown in the spreadsheet or what the expenses represented in addition even though we gave petitioner a posttrial opportunity to provide to respondent and to the court documentation substantiating the expenses he claimed petitioner did not take advantage of the opportunity because petitioner did not produce the underlying documentation that exhibit 6-p purportedly summarized as required by rule of the federal rules of evidence we conclude that exhibit 6-p is inadmissible at trial respondent also objected to exhibits 7-p and 8-p on the basis of relevancy because they related to and not exhibit 7-p is a credit card statement showing charges for date petitioner argued at trial that exhibit 7-p is relevant because he paid the credit card statement in however petitioner did not prove that he paid the credit card statement in we conclude that exhibit 7-p is not relevant and therefore is inadmissible exhibit 8-p consists of copies of the following receipts radioshack receipt dated date paid in cash san francisco international airport parking receipt dated date paid in cash and dougherty shell receipt dated date paid_by credit card we conclude that the san francisco international airport parking receipt is not relevant because it was paid in however because the other receipts reflect payments in we shall admit exhibit 8-p ii burden_of_proof in general the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer bears the burden of proving otherwise rule a 290_us_111 petitioner does not contend that sec_7491 which shifts the burden_of_proof to respondent if its requirements are met applies and petitioner has not produced evidence to show he meets the requirements of sec_7491 the burden_of_proof with respect to the deficiency in his tax therefore remains on petitioner iii schedule a deductions a medical_expenses expenses paid during the taxable_year not_compensated_for_by_insurance_or_otherwise for medical_care of the taxpayer shall be allowed as a deduction to the extent that such expenses exceed percent of adjusted_gross_income sec_213 a deduction is allowed only with respect to medical_expenses actually paid during the taxable_year regardless of when the incident or event which occasioned the expenses occurred sec_1_213-1 income_tax regs petitioner deducted dollar_figure of medical_expenses on his schedule a in support of this deduction petitioner introduced into evidence several documents evidencing that he underwent outpatient surgery in date those documents included documents titled outpatient surgery postoperative orders discharge instructions anesthesia risk information and consent to surgery special procedures anesthesia three explanation of benefit forms from petitioner’s health insurer and a medical invoice for dollar_figure petitioner however introduced no credible_evidence to prove that he paid any medical_expenses in although we allowed petitioner an opportunity after trial to offer substantiation of the medical_expenses he allegedly paid in petitioner failed to do so because petitioner did not prove he paid any medical_expenses in we sustain respondent’s determination disallowing petitioner’s medical_expense_deduction b unreimbursed employee_expenses a taxpayer may deduct unreimbursed employee_expenses as an ordinary and necessary business_expense under sec_162 79_tc_1 however an employee cannot deduct such expenses to the extent that the employee is entitled to reimbursement from his or her employer for expenditures related to his or her status as an employee id pincite along with other miscellaneous_itemized_deductions 12although petitioner provided several forms from his health insurer petitioner testified that the cost of his procedure was disallowed by his insurer because he had not paid the premiums unreimbursed employee_expenses are subject_to the 2-percent of adjusted_gross_income limitation under sec_67 petitioner claimed a dollar_figure deduction for unreimbursed employee_expenses petitioner testified that some of the unreimbursed employee_expenses related to his employment with five-by-five networks and were expenses not paid_by five-by-five networks petitioner however did not introduce any credible_evidence that he actually paid any employee_expenses or that he was not entitled to reimbursement from five-by-five networks for those expenses in addition petitioner did not introduce any credible_evidence regarding that part of his unreimbursed employee expense deduction that did not relate to his employment with five-by-five networks because petitioner failed to prove he is entitled to a deduction for unreimbursed employee_expenses we sustain respondent’s determination disallowing the deduction c attorney’s and accountant’s fees petitioner claimed a dollar_figure deduction for attorney’s and accountant’s fees as other miscellaneous_itemized_deductions petitioner testified that at least some of those fees related to two lawsuits involving his neighbor one dealing with a sprinkler system and the other involving a dispute over petitioner’s tree petitioner did not introduce documentation of his legal expenses from the attorney representing him in those matters nor did he introduce any credible_evidence establishing that he actually paid any fees to a professional or that the fees if paid were deductibledollar_figure because petitioner failed to introduce credible_evidence to prove that he paid attorney’s and accountant’s fees during and that the fees if paid were deductible we sustain respondent’s determination disallowing the deduction iv schedule c deductions for eglobal call solutions sec_162 permits a taxpayer to deduct the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying_on_a_trade_or_business see 403_us_345 in order for a taxpayer to be engaged in a trade_or_business the taxpayer must be involved in the activity with continuity and regularity and the taxpayer’s primary purpose for engaging in the activity must be for income or profit 480_us_23 an expense is ordinary if it is normal usual or customary within a particular trade business or industry or arises from a transaction of common or frequent occurrence in the type of business involved 308_us_488 an expense is necessary if it is appropriate and helpful for the development of the business 13legal expenses that are personal are not deductible sec_262 see commissioner v lincoln sav loan association supra pincite 320_us_467 sec_262 disallows deductions for personal living or family_expenses see also sec_1_162-17 income_tax regs when a taxpayer establishes that he paid_or_incurred a deductible expense but does not establish the amount of the expense we may estimate the amount allowable in some circumstances the cohan_rule see 39_f2d_540 2d cir there must be sufficient evidence in the record however to permit us to conclude that the taxpayer paid_or_incurred a deductible expense in at least the amount allowed see 245_f2d_559 5th cir in estimating the amount allowable we bear heavily upon the taxpayer who failed to maintain required records and to substantiate deductions as the code requires see cohan v commissioner supra pincite for certain kinds of business_expenses such as travel meals and entertainment_expenses sec_274 overrides the cohan_rule see 50_tc_823 affd per curiam 412_f2d_201 2d cir sec_1 5t a temporary income_tax regs fed reg date under sec_274 a taxpayer must satisfy strict substantiation requirements before a deduction is allowable see also sec_6001 sec_1_6001-1 e income_tax regs respondent does not dispute that petitioner had a business or that he was involved in that business with continuity and regularity and for profit respondent contends however that petitioner has not substantiated the expenses he claimed on his schedule c relating to eglobal call solutions and that petitioner has provided only self-serving testimony that he is entitled to the deductions in addition respondent contends that the limited documentation introduced into evidence appears to reflect the payment of startup expenditures that are not deductible under sec_195 sec_195 provides that except as otherwise provided therein no deduction is allowed for startup expenditures see also 93_tc_684 affd in part and remanded in part per order 10th cir date sec_195 defines startup expenditures to mean any amount_paid or incurred in connection with i investigating the creation or acquisition of an active trade_or_business or ii creating an active trade_or_business or iii any activity engaged in for profit and for the production_of_income before the day on which the active trade_or_business begins in anticipation of becoming an active trade_or_business which if paid_or_incurred in connection with the operation of an existing active trade_or_business would be allowed as a deduction for the taxable_year in which paid or incurreddollar_figure under sec_195 an acquired trade_or_business is treated as beginning when the taxpayer acquires itdollar_figure although petitioner testified he acquired various assets during he also testified that the software assets he acquired were still under development until approximately date when a revision of the integrated software was completed according to petitioner the vietnam call center did not begin to service customers until date and did not generate any revenue until date even if we accept petitioner’s general and very vague testimony as credible and assume that the vietnam call center’s business activity was a part of petitioner’s schedule c business eglobal call solutions the testimony reveals that call center did not begin to function until date at the earliest and did not generate revenue until date consequently we conclude on the record sec_195 was amended by the american_jobs_creation_act_of_2004 publaw_108_357 118_stat_1651 effective for amounts paid_or_incurred after date under sec_195 as in effect both before and after the amendment a taxpayer may elect to treat startup expenditures as deferred expenses that may be amortized as provided therein and the amortization period cannot begin any earlier than the month in which the active trade_or_business begins it does not appear that petitioner elected to amortize any startup expenditures with respect to eglobal call solutions and petitioner does not argue that he made the election 15petitioner testified that he acquired various assets we infer from this testimony that he did not acquire an active trade_or_business during or before before us that any expenses paid before date were nondeductible startup expenditures under sec_195 we turn now to specific expenses petitioner deducted on the schedule c for eglobal call solutions a advertising petitioner claimed a dollar_figure deduction for advertising expenses on his schedule c to substantiate the advertising expenses petitioner introduced into evidence several documents including an invoice dated date from business wire addressed to eglobal call networks showing a paid membership fee of dollar_figure a confirmation dated date of a dollar_figure payment with petitioner’s credit card for promoting an internet web site address described as www eglobalcallsolutions com showing the company name as eglobalcall networks inc an invoice dated date from business wire for dollar_figure a confirmation dated date of a dollar_figure payment with petitioner’s credit card for promoting the internet web site www eglobalcallsolutions com and an invoice for dollar_figure dated date from focus print n copy primarily for brochures ‘eglobalcall solutions’ that was stamped paid because the business wire invoices show that the amounts were paid on behalf of eglobal call networks and not eglobal call solutions or petitioner himself we cannot determine whether they were paid_by petitioner or whether they related to eglobal call solutions and although the payment for promoting eglobal call solutions’s internet web site and the payment for the focus print n copy invoice appear to relate to eglobal call solutions all of the expenses were paid before date in addition to the expenses discussed above petitioner testified that most of the advertising expenses related to the purchase of four customer lists at dollar_figure each petitioner testified that he paid for the customer lists by wire transfers from his personal checking account but even after we gave petitioner a second opportunity to substantiate the payments after trial petitioner never introduced evidence of the wire transfers that he claims he made nor did he submit any other documentation to establish he paid for the customer listsdollar_figure all of the documentation of advertising expenses in the record relates to expenses paid before petitioner’s business became operational see eg feerick v commissioner tcmemo_1991_330 we conclude therefore that petitioner has failed to prove he paid deductible advertising expenses during 16petitioner testified that in the beginning he used his personal checking account to pay expenses but then he started using one of eglobal call networks’s checking accounts 17even if petitioner were able to substantiate that he paid for four customer lists it appears that petitioner would not be entitled a full deduction in for those payments customer lists are generally considered sec_197 intangibles that must be amortized over a 15-year period sec_197 d c ii sec_1_197-2 income_tax regs and we sustain respondent’s determination disallowing the deduction b commissions and fees petitioner claimed a dollar_figure deduction for commissions and fees on his schedule c petitioner testified that this deduction represented payments made by check to two people who helped him generate deals petitioner however testified that he did not have copies of the checks or any other evidence to show whether or when he paid any commissions or fees petitioner’s testimony about the commissions and fees he supposedly paid is insufficient for the court to make an estimate of this expense under the cohan_rule see 939_f2d_874 9th cir affg in part and revg in part tcmemo_1989_390 we conclude therefore that petitioner failed to substantiate the deduction he claimed for commissions and fees and we sustain respondent’s determination disallowing the deduction c contract labor petitioner claimed a dollar_figure deduction for contract labor on his schedule c petitioner testified that this deduction probably represented payments to people he paid_by the hour he testified that he would have paid those people from the eglobal call solutions account that he had set up with u s bank petitioner did not have those bank statements because he claimed that the bank statements were seized by vietnamese authorities in the raid on his office even if we accept as credible petitioner’s testimony regarding the raid in vietnam we are not convinced that all relevant business records were in vietnam or were seized in the raid moreover we gave petitioner an opportunity after trial to obtain duplicate bank records from u s bank but he did not do so we conclude therefore that petitioner failed to substantiate that he paid any contract labor expenses during and we sustain respondent’s determination disallowing the deduction d employee benefit programs petitioner claimed a dollar_figure deduction for employee_benefits on his schedule c petitioner testified that this expense included cash payments to the vietnamese government for health insurance however petitioner did not present any credible_evidence to prove the nature amount and purpose of the health insurance he allegedly paid in consequently we conclude that petitioner failed to substantiate the deduction he claimed for employee_benefits and we sustain respondent’s determination e insurance petitioner claimed a dollar_figure deduction for insurance on his schedule c petitioner testified that the insurance expense mostly represented insurance that he paid on his automobile in vietnam however petitioner did not introduce any documentation or other credible_evidence to prove that he paid insurance or that he even had an insurable interest in a vehicle in vietnam consequently we conclude that petitioner has failed to substantiate the deduction he claimed for an insurance expense and we sustain respondent’s determination f legal and professional services petitioner claimed a dollar_figure deduction for legal and professional services on his schedule c in support of this deduction petitioner introduced into evidence an invoice dated date from sedgwick detert moran arnold llp and affiliated entities for professional services through date petitioner testified the invoice related to expenses_incurred in establishing the organization and dissolving his relationship with five-by-five networks however petitioner did not introduce any evidence substantiating that he paid the invoice in or showing that the professional services related to eglobal call solutions consequently we conclude that petitioner has failed to substantiate the deduction he claimed for legal and professional services and we sustain respondent’s determination g office expenses petitioner claimed an dollar_figure deduction for office expenses on his schedule c petitioner testified that the office expenses included payments for utilities in both his vietnam and u s offices petitioner also testified that he made the payments from either his personal checking account or the account established under the name eglobal call solutions but petitioner could not produce any canceled checks bank statements or other payment records as we have already stated several times petitioner was given an opportunity to obtain his bank statements after trial and present them to respondent and the court but petitioner did not do so petitioner also introduced into evidence various receipts such as receipts from staples radioshack compusa fry’s electronics and the u s postal service that may have been included in office expenses however because we have no way of determining whether those receipts represented business or personal expenses we cannot conclude that those receipts substantiate petitioner’s office expense deductiondollar_figure we conclude that petitioner has failed to substantiate his deduction for office expenses and we sustain respondent’s determination h rent or lease for other business property petitioner claimed an dollar_figure deduction for rent or lease for other business property petitioner testified that the property in question included land in vietnam on which petitioner 18several of the receipts showed purchases of items that were personal and not related to eglobal call solutions for example one receipt from fry’s electronics included a purchase of a euro pro shark professional iron and another included a purchase of a dvd entitled matrix revolutions constructed a building petitioner testified that in he paid about dollar_figure to quang trung software city development co for the lease in support of his testimony petitioner introduced into evidence an unsigned copy of a lease that showed eglobal vietnam as the lessor petitioner testified that although the lease showed eglobal vietnam as the lessor petitioner paid the rent petitioner claimed that he had bank statements that would prove those payments but he did not introduce any documentation at trial to substantiate the lease payments he allegedly made although we gave petitioner a posttrial opportunity to produce the documentation he claimed he had petitioner did not do so we conclude that petitioner has failed to substantiate the deduction for rent or lease expenses for other business property and we sustain respondent’s determination i supplies petitioner claimed a dollar_figure deduction for supplies petitioner testified that he deducted amounts spent for generic office supplies used in his vietnam and u s offices although petitioner introduced into evidence various receipts we cannot determine from a review of those receipts whether they reflect business or personal purchases because petitioner did not introduce any evidence that would allow us to estimate the supplies petitioner purchased for eglobal call solutions we will not apply the cohan_rule see norgaard v commissioner f 2d pincite we conclude that petitioner has failed to substantiate the deduction for supplies and we sustain respondent’s determination j taxes and licenses petitioner claimed a dollar_figure deduction for taxes and licenses on his schedule c petitioner testified that the taxes and licenses expense included a license fee that he paid to the vietnamese government however because petitioner introduced no evidence that he actually paid any license fee in or that a license fee was required the cohan_rule is not applicable here consequently we conclude that petitioner has failed to substantiate his deduction for taxes and licenses and we sustain respondent’s determination k travel petitioner claimed a dollar_figure deduction for travel petitioner testified that the travel expense related primarily to his vietnam trips and that he also attended a call center conference in orlando florida petitioner introduced into evidence two credit card statements showing purchases from china air that he credibly testified were for airplane tickets to vietnam however the first credit card statement shows a china air purchase on date and the second shows two china air purchases on february and date of dollar_figure each the china air purchases occurred before the vietnam call center became operational in approximately date at best these travel_expenses are nondeductible startup expenditures under sec_195 see supra pp petitioner also introduced in evidence a rental car receipt from orlando florida where he supposedly attended a call center conference petitioner did not present corroborating evidence regarding the conference nor did he show that the car rental was for business purposes consequently we conclude that petitioner failed to prove that he is entitled to deduct the rental car expense see sec_274 petitioner also introduced into evidence numerous receipts for gasoline purchases because petitioner did not produce any mileage or travel logs to substantiate that the gasoline purchases related to his activities in eglobal call solutions we conclude that he has failed to prove that the gasoline purchases reflected on the receipts are deductible see id we sustain respondent’s determination l meals and entertainment petitioner claimed a dollar_figure deduction for meals and entertainment_expenses petitioner introduced into evidence restaurant receipts that he claims were for various meetings although petitioner provided some testimony regarding the meal receipts petitioner introduced no documentation to show with whom he met during these so-called meetings or whether the meetings were related to his business activities petitioner has not substantiated by adequate_records or by sufficient evidence corroborating his own statement the business_purpose of the expenses as required under sec_274 consequently we conclude that petitioner has failed to substantiate the deduction for meals and entertainment_expenses and we sustain respondent’s determination m utilities petitioner claimed a dollar_figure deduction for utilities petitioner testified that the utilities expenses primarily represented the electricity cost in vietnamdollar_figure because petitioner did not provide any credible_evidence that he paid electricity bills in vietnam we conclude that petitioner has failed to substantiate the deduction for utilities we sustain respondent’s determination n wages petitioner claimed a dollar_figure deduction for wages petitioner testified that all wages were paid in cash to employees in vietnam petitioner also testified that the records 19petitioner testified that the utility costs for his u s activities were de_minimis in comparison to his utility costs in vietnam of the wages paid to employees were included in the quickbooks accounting_records seized by vietnamese authorities petitioner did not introduce any other evidence to prove that he paid wages to employees in vietnam petitioner did not testify as to how many employees he had or the amounts of their wages and he made no effort to document this deduction by obtaining duplicate bank records we conclude therefore that petitioner has failed to substantiate the deduction for wages and we sustain respondent’s determinationdollar_figure o other documents and receipts petitioner introduced in evidence additional documents and receipts to substantiate his expenses claimed on the schedule c to the extent we did not specifically address the documents or receipts in this opinion we conclude that the documents or receipts do not substantiate that petitioner was entitled to a business_expense deduction for eglobal call solutions v sec_72 additional tax sec_72 imposes an additional tax of percent on the portion of a distribution from a qualified_retirement_plan that is includable in gross_income unless the distribution falls under one of the exceptions in sec_72 under certain 20in his testimony petitioner made several references to a minimum monthly payment of dollar_figure to eglobal vietnam for various expenses including wages associated with the vietnam call center petitioner has failed to substantiate he made monthly payments as alleged circumstances the sec_72 additional tax does not apply to distributions made to cover the costs of medical_care or of higher education expenses sec_72 e sec_72 provides an exception to the sec_72 additional tax for distributions made to the employee to the extent such distributions do not exceed the amount allowable as a deduction under sec_213 to the employee for amounts paid during the taxable_year for medical_care we have already found that petitioner is not entitled to a deduction for medical_expenses claimed on his schedule a under sec_213 because petitioner could not substantiate that he paid any medical_expenses in thus petitioner is not eligible for the sec_72 exception to the additional tax because his distribution exceeds the amount allowable as a deduction under sec_213 sec_72 provides an exception to the sec_72 additional tax for distributions from individual retirement plans used for qualified_higher_education_expenses of the taxpayer for the taxable_year this exception applies to qualified_higher_education_expenses the taxpayer paid for the taxpayer’s children sec_72 qualified_higher_education_expenses generally include expenses for tuition fees books supplies and equipment required for the enrollment or attendance at an eligible_educational_institution sec_72 sec_529 petitioner contends that he paid expenses related to his children’s college education and therefore he is entitled to the sec_72 exception for at least part of his distributions however petitioner did not introduce any evidence other than his uncorroborated testimony regarding any higher education payments he allegedly made on behalf of his two children without some documentation to support petitioner’s general testimony we cannot conclude that petitioner used the distribution to pay college education expenses or that the expenses even if paid are qualified_higher_education_expenses within the meaning of sec_529 see sec_72dollar_figure because petitioner failed to prove that he qualifies for any exception under sec_72 we sustain respondent’ sec_21even if petitioner were able to substantiate that he used the distribution from his qualified_retirement_plan to pay his children’s qualified_higher_education_expenses he would likely not qualify for the sec_72 exception because his distribution apparently was not a distribution from an individual_retirement_plan see eg uscinski v commissioner tcmemo_2005_124 see also h rept pincite 1997_4_cb_319 the internal_revenue_code defines individual_retirement_plan as an individual_retirement_account or annuity described in sec_408 and b sec_7701 petitioner attached to his return two forms 1099-r distributions from pensions annuities retirement or profit- sharing plans iras insurance contracts etc which show that petitioner’s distribution was not a distribution from an individual_retirement_account or annuity moreover on his return petitioner did not report receiving any distribution from an individual_retirement_account or annuity determination that petitioner is liable for the sec_72 additional tax on the distribution from his qualified_retirement_plan vi sec_6662 accuracy-related_penalty respondent contends that petitioner is liable for the accuracy-related_penalty under sec_6662 on the ground that there was a substantial_understatement_of_income_tax in sec_6662 and b authorizes the commissioner to impose a 20-percent penalty if there is a substantial_understatement_of_income_tax a substantial_understatement_of_income_tax with respect to an individual taxpayer exists if for any taxable_year the amount of the understatement for the taxable_year exceeds percent of the tax required to be shown on the return for the taxable_year or dollar_figure whichever is greater sec_6662 respondent bears the initial burden of production with respect to petitioner’s liability for the sec_6662 penalty in that respondent must first produce sufficient evidence to establish that the imposition of the sec_6662 penalty is appropriate sec_7491 if respondent satisfies his initial burden of production the burden of producing evidence to refute respondent’s evidence and to establish that petitioner is not liable for the sec_6662 penalty shifts to petitioner see 116_tc_438 respondent has carried his burden of production by showing that petitioner substantially understated his federal_income_tax because respondent has met his burden of production petitioner must come forth with sufficient evidence to persuade the court that respondent’s determination is incorrect see id pincite petitioner also bears the burden of producing evidence to demonstrate reasonable_cause under sec_6664 see id petitioner has not introduced any credible_evidence that respondent’s accuracy-related_penalty determination is incorrect or that petitioner had reasonable_cause for the substantial_understatement of his income_tax therefore we sustain respondent’s determination that petitioner is liable for the sec_6662 accuracy-related_penalty to reflect the foregoing decision will be entered under rule