setty gundanna and prabhavathi katta viralam petitioners v commissioner of internal revenue respondent docket no filed date in p-h transferred stocks and cash to x an organiza- tion described in sec_501 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 x maintained a segregated account for p-h in its records reflecting the stocks and cash received the proceeds from the sales of the stocks and their reinvestment the dividends and interest generated by the assets in the account and the disbursements from the account in subsequent years pro- motional materials provided to p-h by x represented that p- h would be able to direct the distribution of the funds in the account for purported charitable purposes including student loans and as compensation_for the performance of charitable services by p-h or members of his family p-h anticipated at the time of the transfers of the stocks to x that account funds could be used for student loans to his children ps claimed a charitable_contribution_deduction on their federal_income_tax return equal to the fair_market_value of the stocks and the cash transferred to x in and x transferred at p-h’s request a total of dollar_figure from the account to an educational_institution in payment of the college tuition and related expenses of p-h’s son p-h’s son executed loan docu- ments that obligated him to repay the amounts transferred plus interest in cash or by providing designated amounts of charitable services r issued a notice_of_deficiency for 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 after the transfers as well as the dividends and interest generated by the account assets in and determining a penalty under sec_6662 and b and 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 verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports gross_income the capital_gains realized upon x’s sales of the transferred stocks as well as the dividends and interest gen- erated by the assets in the segregated account held alter- natively ps are not entitled to any charitable_contribution_deduction for failure to comply with the substantiation requirements of sec_170 held further ps are liable for a penalty under sec_6662 and b or michael c durney for petitioners thomas a dombrowski and mark a weiner respondent for gale judge respondent determined a deficiency of dollar_figure and an accuracy-related_penalty of dollar_figure with respect to petitioners’ federal_income_tax the issues for decision are whether petitioners are entitled to a charitable_contribution_deduction under sec_170 of dollar_figure for purported transfers of appreciated stocks and cash to the xe lan foundation whether peti- tioners must include in gross_income dollar_figure of capital_gain resulting from the sales of the appreciated stocks by the xe lan foundation in and dollar_figure of interest and dividend income generated in by property purportedly trans- ferred by petitioners to the xe lan foundation and whether petitioners are liable for an accuracy-related_penalty under sec_6662 findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incor- porated herein by this reference at the time the petition was filed petitioners resided in florida xe lan petitioners are both medical doctors petitioner setty gundanna viralam petitioner owned a 50-percent interest in a medical practice which he sold in for dollar_figure generating a taxable gain of dollar_figure in that year in late when negotiating the sale of his medical practice peti- tioner learned of xe lan a financial planning company for 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 according to a xe lan publication the name xe lan combines ‘x’ the individual’s savings re- verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner doctors petitioner attended a presentation promoting the financial planning programs of xe lan and became a member in date xe lan also known as the economic association of health professionals inc was a membership_organization for doc- tors during the years relevant to this case it provided member doctors with financial planning services including pension plans insurance products tax reduction and asset protection strategies and investment management these financial services were provided through a network of xe lan financial counselors payment of a dollar_figure membership fee entitled a xe lan member to the xe lan tax reduction plan including a questionnaire on which he or she provided personal financial information from which xe lan made financial planning rec- ommendations members were also provided various pro- motional materials including a program summary describing xe lan programs and services and the xe lan doc- tors financial education program financial education pro- gram which provided similar material in video and audio tape formats after joining xe lan petitioners received copies of the xe lan tax reduction plan and the financial education program in date and at some time before engaging in the transfers at issue a copy of the program summary petitioner was familiar with these materials xe lan foundation one of the financial planning strategies summarized in the xe lan promotional materials was establishment through donations to the xe lan foundation foundation of an account that the materials characterized as a donor_advised_fund or family public charity foundation account by means of which a donor’s donations would be segregated for quired to finance lifestyle costs through life expectancy with ‘e lan’ the french word meaning a lifestyle of personal freedom petitioners objected on the grounds of relevance duplication and in one instance lack of foundation to the admission of most of xe lan’s promotional materials and to materials from the files of rick jaye the xe lan financial counselor assigned to petitioners we overrule petitioners’ objections the evidence is relevant because the promotional materials of xe lan and the xe lan foundation bear upon petitioner’s intent and understanding when he transferred appreciated stocks to the xe lan foundation the disputed exhibits are not unduly duplicative as there are variations in the material that help to establish the chronology of events as the evidence estab- lishes that mr jaye was petitioners’ financial counselor at xe lan the materials that are stipu- lated to be from his files do not lack foundational evidence verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports investment and future distribution as the donor might rec- ommend a xe lan financial counselor recommended on the basis of the personal financial information petitioners pro- vided that petitioner establish a foundation account for the periods relevant to this case the foundation was recognized by the commissioner as an organization described in sec_501 having received a determination_letter to that effect on date determination_letter the foundation was listed as a public charity in publication cumulative list of organizations described in sec_170 of the internal_revenue_code_of_1986 published in date the commissioner issued a determination in that the foundation was not a private_foundation within the meaning of sec_509 the promotional materials characterized foundation accounts as a tax reduction program and stated that the foundation was created to benefit not only charitable causes but also doctors and their families the program summary describes the foundation as follows the xe lan foundation is a public charity that enables doctors to contribute pre-tax earnings to their own family public_charities that are subaccounts of the umbrella xe lan foundation charity growth on contributions within the family public charity accounts accrue sic tax deferred doctor donors may direct the use of funds accumulated within their family public charity accounts to finance charitable projects including personal teaching research pro bono works and college and graduate scholarship programs donors and their family members may work for and be compensated by their family public_charities for good works teaching research or pro- viding pro bono services they perform on behalf of their family public_charities the xe lan materials variously characterized a potential foundation donor’s segregated ac- count to be maintained at the foundation as a family public charity a sub-foundation of the umbrella xe lan foundation or a donor_advised_fund we shall refer to the account maintained by the foundation segregating property petitioner transferred to it and the income generated by and disbursements from those segregated assets as petitioner’s foundation account any reference to a donor_advised_fund herein does not denote the term as defined in sec_4966 which establishes a definition of and certain rules applicable to a donor_advised_fund effec- tive for periods after those at issue see pension_protection_act of ppa publaw_109_280 120_stat_1094 likewise sec_170 and sec_2522 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 the foundation continued to be listed in publication at the time of trial however the commissioner issued an examination_report in proposing revocation of the foundation’s exempt status and that status was revoked on date announcement 2010_37_irb_346 verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner the financial education program also explained with ref- erence to foundation accounts that your family then is the advisor to that fund as to the way the money is invested and the growth on the invested money accrues tax deferred any- time you want to you could take the money out of your family public charity and pay yourself compensation to do good works the foundation also offered foundation account holders a student_loan program whereby foundation account funds could be disbursed as loans for college and graduate school tuition and related expenses the program’s terms further provided that the loans could be repaid with interest either through repayments generally commencing years after graduation or by the recipient’s providing charitable services for designated periods a xe lan financial counselor wrote petitioner in date recommending that he establish a foundation account for charitable giving income_tax reduc- tion planning estate_tax reduction educational funding and future retirement planning emphasis added petitioners had three children and petitioner advised foundation personnel in the questionnaire he completed in late that he anticipated paying for years of college and g for each of his children at a cost of approximately dollar_figure 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 date using funds already on deposit with xe lan petitioner paid a dollar_figure setup fee to establish a foundation account and made a dollar_figure initial contribution to the account on date petitioner submitted an application to establish a donor_advised_fund to the foundation desig- nating himself as the fund advisor petitioner signed the application under a provision labeled fund advisor state- ment which stated verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports i certify that i understand the nature of donor advised funds and will con- duct activities which satisfy the requirements of the internal_revenue_code i understand that in order to qualify as a deductible contribution for income_tax purposes the ownership and custody of my donated funds and property will be fully relinquished to the xe lan foundation the application allowed petitioner to choose among investment strategies for managing the assets contributed to his foundation account petitioner chose a strategy directed at aggressive growth petitioner received and reviewed a brochure describing the features of the foundation program entitled a new approach to charitable giving and savings the brochure stated in response to the question when can i start drawing monies out that a doctor could do so when he began performing community service work and that to comply with the tax code a formal request was required to be submitted to and approved by the foundation’s board_of directors the brochure further warranted that the xe lan founda- tion will not initiate charitable distributions from your fund unless it is left with no advisor after establishing his foundation account petitioner received a letter from the law firm of conner winters legal counsel to the foundation the letter expressed an opinion that it was more_likely_than_not that a contributor would be entitled to a deduction for a charitable_contribution to the foundation the letter represented that the opinion expressed therein was based on an examination of the foundation’s certificate of incorporation its bylaws resolu- tions of its board_of directors and representations made to the commissioner of internal revenue in connection with the foundation’s application_for recognition of sec_501 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 the application also had a section entitled proposed charitable purpose wherein the appli- cant was requested to check off certain charitable purposes or to describe his charitable objec- tives petitioner left this section blank verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner specific charitable or other activity of the foundation or any donor with respect to the foundation no attorney at conner winters had any contact with petitioners at any time before the opinion letter was sent conner winters sent similar letters to other doctors who established founda- tion accounts petitioner also received a letter from xe lan’s chairman on date thanking him for his participation in the foundation program enclosed with this letter were sample student_loan program participation forms and a sample dis- tribution request form upon establishing his foundation account petitioner made several transfers of stocks to the foundation the transfers are summarized as follows date of transfer date date nov date total stock republic security financial professionals group inc variou sec_2 citrix systems inc value dollar_figure big_number big_number big_number big_number fair_market_value as of the date of transfer the stocks transferred on nov consisted of shares of companies the transferred stocks were recorded in the foundation’s records in a subaccount denominated the viralam family charitable_trust referred to herein as petitioner’s founda- tion account after each of the transfers summarized above petitioner received an acknowledgment letter from the foundation that was labeled receipt for gift of stock these acknowledg- ment letters described the stock transferred and its fair_market_value on the date of the transfer each letter also contained the following statement no goods or services were provided for this donation petitioner’s aggregate basis in the transferred stocks was dollar_figure the foundation subsequently sold all of the stocks during and invested the proceeds again segregating them in the foundation’s records as petitioner’s foundation account the sales of the stocks yielded the following pro- ceeds verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports date of sale date date date date total stock republic security financial professionals group inc various citrix systems inc net_proceeds dollar_figure big_number big_number big_number big_number the assets in petitioner’s foundation account generated dollar_figure in dividends and interest in the foundation sent petitioner a monthly accounting of his foundation account between date and date dollar_figure was deducted from petitioner’s foundation account for management and administration fees consisting of a one-time fee equal to percent of the value of the stock petitioner transferred to the account and an annual invest- ment fee of percent of the account’s value charitable_contribution_deduction for stock transfers to foundation petitioners timely filed a joint federal_income_tax return for in addition to reporting a dollar_figure gain from the sale of petitioner’s medical practice they claimed a charitable_contribution_deduction of dollar_figure equal to the fair_market_value of the stocks transferred to the xe lan foundation in dollar_figure plus the dollar_figure setup fee paid to the foundation and the initial dollar_figure in cash deposited into peti- tioner’s foundation account in that year petitioners’ return was prepared by petitioners’ accountant who had been providing accounting services to petitioners since petitioner discussed the charitable_contribution_deduction with the accountant before petitioners signed the return petitioners did not include in income on the return any gain from the sales of the stocks that had been transferred to the foundation and the foundation had sold in nor any dividends or interest generated by the assets in peti- tioner’s foundation account during that year the parties have stipulated that the annual investment fee wa sec_1 percent whereas the foundation brochure in evidence refers to the fee a sec_1 percent we consider the discrepancy immaterial for purposes of deciding the case verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner distributions from petitioner’s foundation account in subse- quent years in accordance with petitioner’s requests the foundation made distributions from his foundation account of dollar_figure dollar_figure dollar_figure and dollar_figure to the shiva vishnu temple in and respectively and distributions of dollar_figure and dollar_figure to the sarada foundation in and respectively also in petitioner requested that dollar_figure be distrib- uted from his foundation account to the university of pennsylvania in connection with the foundation’s student_loan program as a loan to his son vinay to cover the cost of vinay’s tuition and room and board at that institution the distribution was made pursuant to a distribution request form the foundation sent to petitioner on date as sent to petitioner the form was dated date and par- tially completed filled out were entries for the amount of distribution dollar_figure name of charity university of pennsylvania and the purpose of distribution student_loan for vinay s viralam the form had been signed as approved by a foundation official and was forwarded to peti- tioner for his signature with instructions that it be returned to the foundation with certain loan documents to be executed by vinay as described below on date vinay executed documents with respect to the dollar_figure loan for his tuition and expenses at the univer- sity of pennsylvania the documents included a commit- ment agreement commitment agreement and an edu- cation expense repayment agreement repayment agree- ment in the commitment agreement vinay agreed to participate in the foundation’s educational funding program and in return for receiving educational loans from the foundation to provide big_number hours of charitable work for the founda- tion for each year of educational expenses advanced the commitment agreement stated that if vinay did not under- take sufficient charitable work to repay the educational expenses advanced he would repay the foundation all edu- petitioners claimed charitable_contribution deductions for the distributions made by peti- tioner’s foundation account to shiva vishnu temple in and on their federal_income_tax returns for those years but now concede that those deductions were improper verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports cational expenses advanced that were not reduced by chari- table services together with interest according to the terms of the repayment agreement finally the commitment agree- ment stated that the student will provide regular reports at least annually of his or her progress in the course of study and intended work as well as his or her plan to meet the obligations of the agreement the repayment agreement acknowledged cash advances on vinay’s behalf by the foundation to the university of pennsylvania for tuition fees and on-campus room and board for the period beginning date the repayment agreement provided that vinay would repay to the founda- tion the sums advanced plus annual interest equal to speci- fied federal long-term rates commencing on the date of the agreement under the agreement the obligation to repay principal and interest could be satisfied either by vinay’s performance of charitable services at the rate of big_number 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 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 date petitioner submitted the completed distribution request form and loan documents and on date the foundation made a distribution of dollar_figure to the university of pennsylvania for tuition fees and room and board for vinay also in date respondent commenced an examination of petitioners’ return on date 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 after their transfer to the foundation petitioner submitted four additional distribution requests in 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 dollar_figure dollar_figure dollar_figure and dollar_figure on january may july and date respectively the distributions verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner petitioner requested from his foundation account in and for vinay’s university of pennsylvania expenses totaled dollar_figure on date dollar_figure or 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 return and the fees for petitioners’ counsel in this proceeding on date respondent issued petitioners a notice_of_deficiency for disallowing their claimed chari- table contribution deduction for the transfers of stocks and cash to the foundation and determining an accuracy- related penalty eleven days earlier petitioner arranged for an entity he and vinay controlled to pay the foundation dollar_figure the total of the distributions to the university of pennsylvania on vinay’s behalf from petitioner’s foundation account this payment was credited to petitioner’s founda- tion account the foundation thereupon waived all interest that had accrued under the terms of the repayment agree- ment and returned the commitment agreement and repay- ment agreement to vinay marked paid in full along with a letter confirming that the dollar_figure payment had fulfilled vinay’s obligation to the foundation burden_of_proof opinion petitioners argue that respondent bears the burden_of_proof in this proceeding pursuant to sec_7491 how- ever the burden_of_proof has no practical consequence in this case as there is no evidentiary tie our findings with respect to all factual issues are based upon a preponderance_of_the_evidence see 394_f3d_1030 8th cir affg tcmemo_2003_212 131_tc_185 see also geiger the disputed charitable_contribution_deduction reflects transfers of stocks with a fair_market_value of dollar_figure plus a dollar_figure setup fee and dollar_figure in cash the parties have not ad- vanced any arguments for separate treatment of the setup fee and we consequently do not dis- tinguish it in our analysis we assume the dollar_figure discrepancy between the dollar_figure payment petitioner made to the foun- dation in and the dollar_figure figure reached by totaling the distributions the foundation made to the university of pennsylvania in and reflects rounding verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports v commissioner 279_fedappx_834 11th cir affg tcmemo_2006_271 charitable_contribution_deduction sec_170 allows a deduction for any charitable con- tribution payment of which is made during the taxable_year sec_170 defines a charitable_contribution for this purpose to include a contribution or gift to or for_the_use_of a foundation organized and operated exclusively for chari- table or educational_purposes in order for a transfer of property to a charitable organiza- tion to qualify for a charitable_contribution_deduction the transfer must be a completed_gift that is the donor must have relinquished dominion and control_over the donated property 786_f2d_1063 11th cir affg tcmemo_1984_536 the contribution must have been made with donative_intent and without the expectation of a substantial benefit in return 477_us_105 and a contribution of dollar_figure or more must be substantiated by a contemporaneous written acknowledgment of the contribu- tion by the donee organization that meets the requirements of sec_170 sec_170 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 sec_170 the foundation’s acknowledg- ment of the contribution having failed to describe or value the goods or services that petitioner expected to receive in consideration of the contribution petitioners contend that they relinquished to the foundation all control_over the transferred property citing petitioner’s certification to that effect in the fund advisor statement he executed in connec- tion with establishing his foundation account petitioners further contend that petitioner’s foundation account satisfied the requirements for a donor_advised_fund as set out in natl found inc v united_states cl_ct they as reflected in our findings the parties have stipulated that the foundation was a tax-ex- empt organization described in sec_501 during the periods relevant to this case verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner maintain that consistent with the holding in that case peti- tioner could only suggest that the foundation make des- ignated charitable_contributions from his foundation account and suggest an investment strategy for the assets in the account and that these factors are insufficient to establish that petitioner retained control_over the property transferred to the foundation finally petitioners contend that they did not receive any substantial benefit in return for petitioner’s contribution to the foundation and properly substantiated the charitable_contribution_deduction claimed we agree with respondent that petitioner retained dominion and control_over the property transferred to the foundation and held in his foundation account we reach this conclusion principally on the basis of the use of funds in petitioner’s foundation account for student loans to his son we also find that the promotion of another foundation account feature-petitioner’s ability to arrange for distribu- tions of account funds to compensate himself or family mem- bers for performance of good works -also supports the conclusion that petitioner maintained control of the assets in his foundation account petitioner received the xe lan promotional materials and was familiar with their contents the materials petitioner reviewed identified certain scholarship programs as one of the undertakings to which a donor could direct funds in his foundation account 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 the program summary petitioner reviewed stated that donors to the foundation with foundation accounts may direct the use of funds accumulated within their family public charity accounts to finance charitable projects including college and graduate scholarship pro- grams verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports 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 peti- tioner anticipated that each of his three children would incur years of college and graduate school expenses which he estimated would approximate dollar_figure 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 years until respondent com- menced an examination of petitioners’ return and pro- posed to disallow their deduction for the contributions to the foundation disregarding payment of the foundation’s startup and annual management fees the distributions made from petitioner’s foundation account in through for purposes other than vinay’s student loans totaled dollar_figure the distributions for vinay’s student loans during that period totaled dollar_figure or approximately 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 date and formally did so in a notice of defi- ciency issued on date no distributions for student loans were made from petitioner’s foundation account in indeed on date just before issuance of the notice_of_deficiency petitioner arranged for the repayment of vinay’s student loans given these facts we are persuaded that distributions for student loans to peti- tioners’ children would have continued to constitute the predominant use of the assets in petitioner’s foundation account but for the scrutiny of the internal_revenue_service the foundation’s approval of petitioner’s son as a student_loan beneficiary was perfunctory the foundation sent peti- for two of these distributions-dollar_figure and dollar_figure distributed to shiva vishnu temple in and respectively-petitioners claimed charitable_contribution deductions on their federal_income_tax returns for those years these deduction claims suggest that petitioners con- sidered the funds in petitioner’s foundation account to be under his control in and on date petitioner directed an entity controlled by him and vinay to pay the foun- dation dollar_figure 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 verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner tioner a distribution request form on which the approval for a student_loan for vinay had already been signed by a foundation official before petitioner executed the form there is no evidence that the foundation reviewed vinay’s quali- fications or otherwise exercised any independent judgment in selecting him for a student_loan in the circumstances it is obvious that the selection of vinay as a beneficiary of the foundation’s student_loan program arose from his relation- ship to petitioner and as a result of petitioner’s direction petitioner’s understanding at the time he transferred the stocks to his foundation account in that the account’s assets could be used to make student loans to his children and the foundation’s perfunctory acquiescence in making such loans in subsequent years provide substantial support for the conclusion that petitioner neither intended to nor in fact did cede dominion and control_over the property trans- ferred to the foundation in petitioners however point to petitioner’s transfer of legal_title to the stocks he contributed to the foundation and the fund advisor statement petitioner signed when he estab- lished the foundation account which stated that he fully relinquished ownership of the stocks to the foundation in petitioners’ view these formalities establish that petitioner had fully relinquished dominion and control_over the prop- erty transferred to the foundation in we disagree the determination of whether dominion and control has been surrendered for purposes of a charitable_contribution_deduction under sec_170 must be based upon all the facts of a particular case pollard v commis- sioner tcmemo_1984_536 in addition to petitioner’s ini- tial understanding of his ability to direct the use of his foundation account funds for his children’s student loans and the foundation’s subsequent course of conduct which confirmed that understanding we note that the foundation did not treat the purported legal obligations in the student_loan documents as binding although the commitment agree- ment required vinay to provide an annual report there is no evidence that he did so more significantly when petitioner repaid the principal_amount of vinay’s student loans the foundation waived all accrued interest notwithstanding the terms of the repayment agreement providing that interest was to accrue commencing on the date the agreement was verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports entered the foundation having disregarded the obliga- tions due to it from vinay under two contracts executed in connection with foundation account transactions there is no reason to believe that the foundation would enforce any rights it held against petitioner by virtue of his execution of the fund advisor statement a second feature of petitioner’s foundation dealings also contributes to the conclusion that he did not relinquish dominion and control_over the property transferred to the foundation the xe lan promotional materials stated that donors to a foundation account and their family members may work for and be compensated by their family public_charities ie the donor’s foundation account for good works they perform on behalf of their family public_charities the materials elsewhere represented anytime you want to you could take the money out of your family public charity and pay yourself compensation to do good works while petitioner apparently did not seek a distribution from his foundation account to compensate him or a family_member for good works xe lan’s representation to him that he would be able to do so is further evidence that the foundation intended and petitioner understood when he made the transfers that he could retrieve the transferred property or its proceeds through this technique a donor_advised_fund creator’s option to receive fund assets as com- pensation for the performance of charitable services by him- self or family members has been treated as evidence of retained dominion and control see 70_fedclaims_782 the materials in the record describe only in very general terms the stand- ards to be applied by the foundation’s board_of directors in determining whether a donor’s foundation account funds should be paid out to him or a family_member as compensa- tion for the performance of good works we are satisfied on this record that good works distributions were con- templated by petitioner and the foundation in 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 petitioners’ own estimate of the interest that had accrued on the foundation account loans to vinay at the time they were repaid was dollar_figure verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner retained dominion and control_over the property purportedly contributed to the foundation petitioners contend that they did not have an impermis- sible degree of dominion and control_over their foundation account because it was a donor_advised_fund similar to the arrangements found not to have resulted in a retention of donor control in natl found inc v united_states cl_ct natl found however is entirely distinguish- able the claims_court there found that while a donor_advised_fund creator could suggest a particular charitable use the tax-exempt_organization administering the donor’s funds would honor it only if the requested contribution was in consonance with sec_501 charitable purposes id pincite the court found substantial evidence that the national foundation board_of directors exercised effective_control to ensure that distributions from its donor advised funds were for charitable not personal purposes by contrast petitioner requested and the foundation made substantial distribu- tions from petitioner’s foundation account for a personal_use namely educational loans for his child see 55_tc_620 taxpayer’s payment of children’s secondary school tuition is a personal not a charitable expenditure whitaker v commissioner tcmemo_1994_109 to same effect for college tuition more- over the arrangements in natl found did not include an option whereby the donated funds could be distributed back to the donor or his family as compensation_for the perform- ance of services deemed charitable by the foundation instead the foundation account arrangements more closely resemble those in new dynamics found v united_states supra in that case the court of federal claims sus- tained the commissioner’s denial of tax-exempt status for an organization administering purported donor advised funds among the features of those donor advised funds cited by the court as grounds for denial of tax-exempt status were the practices of distributing fund assets to donors’ family mem- bers as compensation_for the performance of charitable serv- ices or to donors’ children as scholarships such practices which enabled donors to direct purportedly donated funds to personal uses contributed to the court’s conclusion that the donors in question did not truly relinquish ownership and control_over the donated funds and property id pincite verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports in sum the foundation’s representations concerning the student_loan program petitioner’s understanding at the time of the transfers of his ability to direct the use of his foundation account for the noncharitable purely personal purpose of funding student loans for his children and peti- tioner’s subsequent ability to do so in practice all persuade us that petitioner never intended to nor in fact did relin- quish dominion and control_over the property transferred to the foundation this conclusion finds further support in the good works option for distribution to petitioner from the foundation account accordingly we hold that petitioner retained dominion and control_over the property he trans- ferred to the foundation in and is therefore not entitled to a deduction under sec_170 respondent argues in the alternative that even if peti- tioners were found to have ceded dominion and control of the property they transferred to the foundation their claimed charitable_contribution_deduction is not allowed because they did not comply with the substantiation requirements of sec_170 we agree sec_170 provides that no deduction shall be allowed under sec_170 for any contribution of dollar_figure or more unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment of the contribu- tion by the donee organization that meets certain require- ments specified in sec_170 sec_170 requires that the donee organization state in the acknowledg- ment whether the donee organization provided any goods or services in consideration in whole or part for the contrib- uted property or cash sec_170 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 the because we conclude that the student_loan and good works features of petitioner’s foun- dation account demonstrate that he retained sufficient dominion and control_over the trans- ferred property to preclude a deduction under sec_170 we find it unnecessary to consider whether other features of the foundation account arrangements constituted impermissible re- tained control including i the fact that petitioner was entitled to elect the investment strategy for the assets in his foundation account ii the fact that periodic distributions were made from petitioner’s foundation account to compensate the foundation for investment management serv- ices provided to petitioner and iii the fact that distributions were made from the account to pay petitioners’ legal fees for their representation in the examination of their return and the prosecution of this case 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 verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner regulations clarify that a donee organization is treated as having provided goods or services in consideration for the taxpayer’s payment if the taxpayer expects to receive goods or services in exchange for the payment at the time it is made including where the goods or services are provided in a year other than the year when the taxpayer makes the payment a donee organization provides goods or services in consideration for a tax- payer’s payment if at the time the taxpayer makes the payment to the donee organization the taxpayer receives or expects to receive goods or services in exchange for that payment goods or services a donee organiza- tion provides in consideration for a payment by a taxpayer include goods or services provided in a year other than the year in which the taxpayer makes the payment to the donee organization sec_1_170a-13 income_tax regs respondent argues that petitioner expected when he trans- ferred the stocks to the foundation in that the founda- tion would make student loans to his children and that con- sequently the foundation provided goods or services in consideration of petitioner’s transfers within the meaning of the statute and regulations petitioners contend that respondent bears the burden_of_proof on the issue of their receipt of benefits in exchange for their contributions because it is a new_matter within the meaning of rule a that was not raised in the notice_of_deficiency and which requires the presentation of different evidence see 93_tc_500 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 as our f b iii the notice_of_deficiency issued to petitioners merely states that the deductions claimed for charitable_contributions to the xe lan foundation are not allowable because they were not charitable_contributions within the meaning of sec_170 of the internal_revenue_code be- cause the evidence adduced so clearly establishes that petitioner anticipated receipt of benefits in exchange for his transfer of the stocks to the foundation respondent has satisfied any bur- den of proof he might bear on this issue thus we find it unnecessary to decide whether re- spondent’s contention that petitioner received a benefit rendering his substantiation inadequate under sec_170 requires the presentation of different evidence or merely clarifies or develops the original determination see 93_tc_500 see also 112_tc_183 petitioners also appear to suggest that respondent bears the burden of showing that the fair market values of the goods or services they received equaled or exceeded the values of the continued verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports findings reflect the preponderance_of_the_evidence shows that petitioner anticipated at the time he transferred stocks to the foundation that the foundation would extend student loans to his children in addition to the abundant cir- cumstantial evidence on this score petitioner so testified goods or services for purposes of sec_170 means cash property services benefits and privileges sec_1_170a-13 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 percent of the distributions from petitioner’s foundation account exclusive of distributions to pay the foundation’s management fees in the first years after its creation until respondent began an examination of peti- tioners’ return and the loans were repaid with interest forgiven in the evidence as a whole persuades the court that but for respondent’s scrutiny of the return petitioner would have continued to request and obtain stu- dent loans for all three children from his foundation account thus under the regulations petitioner’s expectation in 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 income_tax regs the written acknowledgment necessary under sec_170 to substantiate petitioners’ charitable_contribution was required to state whether goods or services were pro- vided by the foundation in consideration for the stocks transferred to it and if so to describe them and provide a good_faith estimate of their value see sec_170 the foundation acknowledgment letters offered by petitioners as substantiation of their claimed donations of stock each state stocks transferred so that a deduction for any excess of the stocks’ values over the fair market values of the consideration received is foreclosed see sec_1_170a-1 income_tax regs we disagree to establish petitioners’ noncompliance with sec_170 respondent need only show that petitioner expected to receive a benefit in exchange for his donations to the foundation see 374_f3d_881 9th cir affg 118_tc_528 verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner inaccurately that no goods or services were provided for this donation petitioners’ substantiation therefore fails to comply with sec_170 sec_170 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 374_f3d_881 9th cir affg 118_tc_528 the deterrence value of sec_170’s total denial of a deduction comports with the effective administra- tion of a self-assessment and self-reporting system id pincite petitioners contend belatedly on brief that the value of the student_loan benefit provided to petitioner’s son was small in relation to the value of petitioner’s contribution to the foundation and that they should be entitled to a partial deduction equal to the amount by which the donated stocks’ values exceeded the value of the student_loan benefit citing the dual payment rule_of united_states v am bar endow- ment u s pincite and sec_1_170a-1 income_tax regs however having failed to satisfy a compliance provi- sion designed to foster disclosure of dual payment or quid pro quo contributions petitioners may not now claim dual payment treatment see addis v commissioner supra pincite a partial deduction is foreclosed by the statutory lan- guage capital_gains and investment_income respondent determined that dollar_figure in long-term_capital_gain generated by the sales of the stocks in after peti- tioner transferred them to the foundation is includible in petitioners’ gross_income for that year as well as dollar_figure of interest and dividends generated by the property in peti- tioner’s foundation account in we agree with respondent petitioners assert that the value of vinay’s student_loan benefit is equal to the interest waived upon repayment of the loans in discounted to present_value in 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 verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports the federal_income_tax consequences of property owner- ship generally depend upon beneficial_ownership rather than possession of mere legal_title 630_f2d_554 7th cir affg tcmemo_1979_120 61_tc_268 ‘ 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 109_tc_235 quoting 95_tc_74 as outlined in our previous discussion of peti- tioners’ entitlement to a charitable_contribution_deduction although petitioner transferred legal_title to various stocks to the foundation in 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 that he would be able to direct that the assets in his founda- tion account be distributed to his children as student loans and the foundation complied with his direction that the account assets be applied in this manner in and the funds so applied and remaining available for that pur- pose included the proceeds of the sales of the transferred stocks as well as interest and dividends generated by the investment of those proceeds moreover interest earned on investment is taxable to the person who controls the prin- cipal 820_f2d_1084 9th cir citing 311_us_112 affg tcmemo_1984_549 see also monahan v commissioner supra pincite we see no rea- son a similar rule should not apply to dividends because petitioner retained dominion and control of the assets in his foundation account we sustain respondent’s determination concerning the capital_gains and interest and dividend income in sec_6662 penalty respondent also determined that petitioners are liable for an accuracy-related_penalty for negligence substantial_understatement_of_income_tax or substantial valuation verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner misstatement see sec_6662 and b - sec_6662 imposes a penalty equal to percent of that portion of any underpayment_of_tax attributable to negligence or dis- regard of rules or regulations sec_6662 or any substan- tial understatement of income_tax sec_6662 gen- erally no penalty shall be imposed under sec_6662 how- ever with respect to any portion of an underpayment if it is shown that there was reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion sec_6664 pursuant to sec_7491 the commissioner has the burden of production in any court pro- ceeding with respect to any penalty imposed by the internal_revenue_code in order to meet that burden the commis- sioner must offer sufficient evidence to indicate that it is appropriate to impose the penalty see 116_tc_438 once the commissioner meets his burden of production the taxpayer bears the bur- den of proving error in the determination to impose a pen- alty cause substantial_authority or other exculpatory factors see id pincite including proving reasonable negligence for this purpose is a lack of due care or the failure to do what a reasonable and ordinarily prudent per- son would do under the circumstances and it includes any failure to make a reasonable attempt to comply with the income_tax laws marcello v commissioner 380_f2d_499 5th cir affg in part and remanding in part 43_tc_168 and tcmemo_1964_299 disregard includes any careless reckless or intentional disregard sec_6662 negligence is strongly indicated where a taxpayer fails to make a reasonable attempt to ascertain the correct- ness of a deduction which would seem to a reasonable or pru- dent person to be too good to be true under the cir- cumstances 299_f3d_221 3d cir affg 115_tc_43 990_f2d_893 6th cir affg donahue v commissioner tcmemo_1991_ respondent did not pursue the substantial_valuation_misstatement penalty at trial or on brief and we accordingly deem it abandoned see rule e and 105_tc_324 n 92_tc_661 the penalties under sec_6662 and are in the alternative and do not stack in that the penalty does not exceed percent of any portion of an underpayment even if it is attrib- utable to both paragraphs sec_1_6662-2 income_tax regs for completeness we consider the applicability of both verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports 92_tc_827 sec_1_6662-3 income_tax regs negligence can also include any failure to substantiate an item properly sec_1_6662-3 income_tax regs we find that petitioners were negligent because petitioner failed to make a reasonable attempt to ascertain the correct- ness of a deduction which would seem to a reasonable or pru- dent person to be too good to be true under the cir- cumstances a reasonable or prudent person would have per- ceived as too good to be true a deduction for a supposed charitable_contribution where the amounts deducted could be used to fund student loans for his own children the same is true with respect to the avoidance of capital_gains taxes on the sales of stocks where the proceeds remained under petitioner’s control for use by his children to the extent peti- tioner ascertained the validity of the charitable_contribution_deduction or capital_gains exclusion from xe lan’s employees or its printed materials there was an obvious conflict of interest on the part of persons promoting xe lan’s programs see 91_tc_524 any use of the conner winters opinion letter for this purpose was also not reasonable in the circumstances the conner win- ters letter referred to the foundation’s student_loan program as follows xe lan foundation programs we are aware of several programs which the directors of the foundation may undertake in furtherance of the charitable activities of the founda- tion we have no reason to believe that a donor’s participation in any of the following programs will cause the foundation to lose its status under sec_501 sec_509 and sec_170 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 educational loans the foundation may support an educational loan program whereby stu- dents may borrow college and graduate school tuition and related expenses for education in an area related to the foundation’s charitable purposes there is no evidence that the foundation either sought or that petitioner or vinay pro- vided any information concerning how vinay’s education was in an area related to the founda- tion’s charitable purposes verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner each student must agree to a loan agreement under which he or she agrees to repay the loan with interest or alternatively provide one year_of_service to a charitable_organization or charitable activity for each year of tuition received such agreement will be enforced there can be no pri- vate inurement with respect to such program emphasis added thus while the letter specifically identified the student_loan program petitioner contemplated using it expressly refrained from offering any opinion concerning the tax effects of participation in the program and confined itself merely to describing certain features of the program if anything the conner winters letter should have put a professionally educated person such as petitioner on notice that further inquiry was warranted concerning the student_loan program petitioner also testified that he consulted with his account- ant regarding the deduction but there is nothing in the record concerning the nature of those discussions or impor- tantly establishing that the accountant was given complete information including petitioner’s intention to direct the use of the proceeds from the contribution for student loans for his children without some evidence that petitioner’s discussions with his accountant covered his anticipated participation in the student_loan program there is no basis to conclude that petitioner made a reasonable attempt to ascertain the correctness of the deduction see 88_tc_1086 affd without published opinion 865_f2d_1264 5th cir affd without published opinion sub nom hatheway v commissioner 856_f2d_186 4th cir affd sub nom 864_f2d_93 9th cir affd sub nom 868_f2d_865 6th cir finally as our discussion of sec_170 reflects peti- tioner failed to substantiate the charitable_contribution as required which is an indication of negligence we accordingly find that absent their showing reasonable_cause considered infra petitioners were negligent with respect to the charitable_contribution_deduction claimed and the capital_gains and other investment_income excluded in 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 verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports a substantial_understatement_of_income_tax exists if the amount of tax required to be shown on the return exceeds that shown by percent or by dollar_figure whichever amount is greater sec_6662 we have sustained respondent’s determinations disallowing a charitable_contribution deduc- tion of dollar_figure and requiring inclusion of capital_gains income and other investment_income of dollar_figure and dollar_figure respectively the resulting deficiency which equals the understatement is dollar_figure-which exceeds percent of dollar_figure the amount required to be shown on petitioners’ return respondent has therefore satisfied his burden of production regarding the existence of a substantial under- statement and petitioners bear the burden of showing any exculpatory factors under sec_6662 any understatement for pur- poses of the penalty for a substantial_understatement_of_income_tax shall be reduced by that portion of the under- statement which is attributable to the tax treatment of any item by the taxpayer if there is or was substantial_authority for such treatment authority for this purpose may include court cases private letter rulings and administrative pronouncements published by the internal_revenue_service in the internal_revenue_bulletin sec_1_6662-4 income_tax regs the weight of an authority depends on its relevance and persuasiveness and the type of document pro- viding the authority sec_1_6662-4 income_tax regs petitioners contend that they had substantial_authority for the understatement at issue citing the inclusion of the foundation in publication the determination_letter issued by the internal_revenue_service to the foundation deter- mining that it qualified for tax exemption as an organization described in sec_501 and natl found inc v united_states cl_ct we disagree the inclusion of an organization in publica- tion signifies that it has received a ruling or determina- tion letter from the service stating that contributions by donors are deductible as provided in sec_170 of the code revproc_82_39 sec_2 1982_2_cb_759 emphasis added the foundation’s inclusion in publication petitioners also refer to other authorities on brief but never name them verdate 0ct date jkt po frm fmt sfmt v files viralam sheila viralam v commissioner may constitute substantial_authority that the organization to which petitioners made a donation in satisfied sec_170 a point that respondent does not dispute but petitioners would still be required to show that their chari- table contribution deduction satisfied other requirements of sec_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 revrul_67_246 1967_2_cb_104 consequently neither publication nor the foundation’s determination_letter provides any authority that petitioners were entitled to deduct a contribution where they anticipated and in fact received consideration in exchange natl found inc v united_states supra likewise does not constitute authority for petitioners’ position as ear- lier discussed the case is readily distinguishable from peti- tioners’ circumstances in that the court there found that the donee organization exercised effective_control to ensure that distributions were for charitable purposes by contrast peti- tioner requested and the foundation complied with substan- tial distributions for personal purposes in sum petitioners have failed to show that they had substantial_authority for any portion of the understatement finally to the extent petitioners may be claiming that they had reasonable_cause in view of their reliance on professional advice see sec_6664 sec_1_6664-4 income_tax regs we find that claim meritless the conner winters opinion letter expressly disavowed any opinion concerning a foundation donor’s participation in the student_loan pro- gram as for petitioners’ accountant as noted there is no evi- dence that the accountant was given necessary and accurate information concerning petitioner’s transactions with the foundation to form a professional judgment see neonatology associates p a v commissioner t c pincite for the foregoing reasons we sustain respondent’s deter- mination that petitioners are liable for an accuracy-related_penalty under sec_6662 for negligence or for substantial_understatement_of_income_tax verdate 0ct date jkt po frm fmt sfmt v files viralam sheila united_states tax_court reports conclusion petitioners are not entitled to a charitable_contribution_deduction under sec_170 for their transfers of appreciated stocks to the foundation in petitioners must include in gross_income the capital_gain realized when the foundation sold the appreciated stocks in and must include the investment_income generated in by the property in petitioner’s foundation account petitioners are liable for the accuracy-related_penalty under sec_6662 we have considered all other arguments made by the par- ties and to the extent not discussed we conclude those argu- ments are moot without merit or irrelevant to reflect the foregoing decision will be entered under rule f verdate 0ct date jkt po frm fmt sfmt v files viralam sheila


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi 2-plr-111160-02 date date x date year dear mr this responds to a letter date requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on date the shareholders of x intended for x to be an s_corporation beginning on date however no timely filed form_2553 election by a small_business_corporation was filed on behalf of x for year sec_1362 provides that if -- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x's year taxable_year a copy of this letter should be attached to the form_2553 plr-111160-02 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 of the code this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely yours matthew lay senior technician reviewer branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c summary opinion united_states tax_court kevin and deborah keith petitioners v commissioner of internal revenue respondent docket no 5757-05s filed date stephen g bresset for petitioner kristina l rico for respondent carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 pursuant to sec_7463 the decision to be entered is not reviewable by any unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended in effect for the relevant period rule references are to the tax_court rules_of_practice and procedure other court and this opinion shall not be cited as precedent for any other case respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax and imposed a dollar_figure sec_6662 accuracy-related_penalty the issues for decision are whether petitioners realized cancellation_of_indebtedness_income as a result of a foreclosure proceeding involving their residence and if so whether the underpayment_of_tax required to be shown on petitioners’ federal_income_tax return is a substantial_understatement_of_income_tax background some of the facts have been stipulated and are so found petitioners are married to each other their joint federal_income_tax return was timely filed at the time the petition was filed they resided in pennsylvania in petitioners purchased a parcel of land in tobyhanna pennsylvania for the purpose of constructing a house to be used as the family residence the property petitioners financed the purchase of the land and or the construction of the house through a dollar_figure loan the loan from america’s wholesale lender now know as countrywide home loans inc countrywide the loan was evidenced by a note and secured_by a mortgage on the property each dated date petitioners apparently defaulted on their obligation to repay the loan according to the terms of the note as a result on date foreclosure proceedings were initiated by countrywide and on date the property was seized from petitioners pursuant to a writ of execution on date the property was sold for dollar_figure to third-parties at the time the foreclosure proceeding was initiated the principal balance on the loan was dollar_figure in accordance with pennsylvania procedures in such matters for purposes of the foreclosure proceeding the property was valued pursuant to a broker’s price opinion in a range from dollar_figure to dollar_figure depending upon the marketing time countrywide’s recovery on the note as a result of the foreclosure proceeding is not known to the extent that it received less than petitioners owed the company although entitled to do so under pennsylvania law did not seek a deficiency judgment against petitioners as countrywide viewed the matter following the foreclosure proceeding petitioners owed the company dollar_figure computed by subtracting the lower range of the broker’s price opinion that is dollar_figure from the amount of principal on the loan then outstanding that is dollar_figure because countrywide did not seek a deficiency judgment against the phrase marketing time as used in the valuation report is not familiar to the court and neither party offered an explanation as to what it means petitioners the company was precluded under state law from collecting that amount as evidenced in a form 1099-c cancellation of debt issued to petitioners by countrywide dollar_figure of the debt originating from the loan was forgiven during immediately preceding the foreclosure of the mortgage petitioners had assets totaling dollar_figure and liabilities totaling dollar_figure petitioners did not include any amount of cancellation_of_indebtedness_income on their return in the notice_of_deficiency respondent increased petitioners’ income by the amount reported as cancellation of indebtedness on the form 1099-c other adjustments made in the notice_of_deficiency have been agreed to by the parties discussion in general the term income as used in the internal_revenue_code means income from any source including income from the discharge_of_indebtedness sec_61 348_us_426 in this case during the year in issue countrywide forgave dollar_figure of the debt owed to it by petitioners as a result of the loan according to respondent that amount is includable in petitioners’ the stipulated amount shown for assets includes the value of the residence at dollar_figure income petitioners claim that they were insolvent at the time of the discharge and therefore the amount of debt forgiven is excludable from their income see sec_108 for purposes of sec_108 the term insolvent means the excess of liabilities over the fair_market_value of assets as determined immediately before the discharge sec_108 respondent acknowledges that petitioners were insolvent to the extent of dollar_figure immediately before the discharge nevertheless relying upon an inapplicable regulation and precedent from a case superseded by the enactment of sec_108 respondent argues that in order to qualify for the insolvency_exception the taxpayer must be insolvent both immediately before and immediately after the discharge_of_indebtedness respondent points out that petitioners have failed to establish that they were insolvent immediately following the discharge and argues that the provisions of sec_108 do not apply petitioners’ financial status immediately after the discharge although disputed by the parties is simply put not relevant turning our attention to petitioners’ financial status immediately before the discharge and otherwise ignoring variou sec_4 sec_108 was amended by the bankruptcy_tax_act_of_1980 publaw_96_589 94_stat_3389 of the parties’ positions that we find to have no merit we make the following findings regarding petitioners’ financial status immediately before the discharge the fair_market_value of the property subject_to the foreclosure proceeding was dollar_figure per stipulation of the parties petitioners had other assets totaling dollar_figure per stipulation of the parties petitioners’ liability to countrywide was not less than dollar_figure per stipulation of the parties and petitioners’ other liabilities totaled not more than dollar_figure liabilities substantiated per stipulation of the parties plugging these amounts into the equation contemplated by the statute we find as respondent acknowledges in his brief that immediately before the discharge petitioners’ liabilities exceeded their assets by dollar_figure and therefore within the meaning of sec_108 petitioners were insolvent to that extent for purposes of sec_108 sec_108 limits the exclusion provided in sec_108 to the amount by which the taxpayer is insolvent applying the dollar_figure exclusion against the dollar_figure discharged results in dollar_figure that is includable in petitioners’ income as a result of the discharge of their indebtedness to countrywide respondent imposed a sec_6662 accuracy-related_penalty upon the ground that the underpayment_of_tax required to be shown on petitioners’ return is a substantial_understatement_of_income_tax considering the foregoing the understatement will be far less than the amount required for the imposition of the penalty see sec_6662 respondent’s imposition of the sec_6662 accuracy-related_penalty is rejected to reflect the foregoing decision will be entered under rule