1974 U.S. Tax Ct. LEXIS 146">*146
In 1968 T, a physician, established a charitable foundation to which he, the sole contributor, donated some cash and the building in which he maintained his offices. The foundation thereupon leased the building to T. The foundation was associated with the preparation of two pamphlets on "traits" and "attitudes," the subject of its alleged charitable purpose.
61 T.C. 693">*693 The Commissioner determined a deficiency in petitioner's 1968 income tax in the amount of $ 5,219. 1 Four issues are presented for decision. These are (1) whether the Commissioner conducted an "unnecessary" examination or investigation in respect of petitioner's tax liability for 1968 contrary to the provisions of
FINDINGS OF FACT
The parties have filed a stipulation of facts which, together with its accompanying exhibit, is incorporated herein by this reference.
61 T.C. 693">*694 Petitioner Robert F. Collins, a physician, resided in North Hollywood, Calif., at the time of filing his petition herein. He timely filed a Federal income tax return for the taxable year 1968 with the district director of internal revenue at Los Angeles, Calif.
On or about November 22, 1968, petitioner established the Collins Foundation (foundation), a California corporation, and contributed to it $ 1,000 cash and the building in which he conducted his medical practice. The building had a fair market value of $ 40,000, and it together with the $ 1,000 cash comprised the sole assets of the foundation. 1974 U.S. Tax Ct. LEXIS 146">*151 Subsequently, the foundation executed a lease of the entire building to petitioner for 1 year with five 1-year options to renew.
The foundation's initial board of trustees consisted of petitioner and his two sisters, both of whom were registered nurses holding college degrees. By limiting board membership to his immediate family, Dr. Collins hoped to retain personal control of the foundation's activities. The foundation had no office or telephone, nor did it employ any secretarial help. Instead it shared petitioner's personal office space, using that mailing address. Petitioner's wife handled what correspondence there was.
Petitioner's alleged purpose in creating the foundation was to promote and foster the study of human "traits" with respect to their causal relationship to human "attitudes." The Internal Revenue Service approved the foundation's tax-exempt status under section 501(c) (3). There were difficulties in resolving certain fundamental definitional problems as well as in developing basic projects, and the activities and research conducted by the foundation have been quite limited both in amount and scope. Dr. Robert Morman, a "research teacher" at City College of1974 U.S. Tax Ct. LEXIS 146">*152 Los Angeles, prepared a pamphlet under the aegis of the foundation in 1970 designed to identify "attitudes" on drivers' problems in order ultimately to develop a set of highway safety "predictors." Throughout the preparation of the pamphlet Morman was employed on a full-time basis by City College and he received no compensation from the foundation, although it did pay unspecified costs associated with the pamphlet. In 1972, Dr. Lawrence H. Brown, professor emeritus at Creighton University, initiated a study of "traits," pursuant to a research grant of an undisclosed amount from the foundation; a resulting pamphlet was produced in 1973. At some time in the first part of 1973, the foundation hired Dr. Brown to conduct "basic research" as a full-time employee. The record does not disclose whether the compensation received by him is consequential in amount. In the case of both foregoing pamphlets, the record is unclear both as to the number of copies produced and as to the manner of their dissemination, if they were in fact distributed at all.
61 T.C. 693">*695 At about the time of incorporating the foundation, petitioner had some conversations with a representative of one and perhaps several1974 U.S. Tax Ct. LEXIS 146">*153 pharmaceutical companies with respect to the possibility of obtaining financial support for the foundation's activities. Although he understood the responses to be generally favorable, they were entirely noncommittal, and the foundation in fact received no financial support outside of what petitioner himself had contributed.
The fair market value of all of petitioner's charitable contributions in 1968 equaled $ 41,856, which amount included his donations ($ 41,000) to the foundation. On his individual Federal income tax return for that year, petitioner claimed a charitable deduction in the amount of $ 30,194, and sought to deduct the unclaimed excess in his return for the following year.
Sometime shortly after September 19, 1969, petitioner received a written request from Internal Revenue Agent Albert Zelmon to make his books and records pertaining to his 1967 and 1968 income available in connection with an audit of his returns for those years. As a result of his investigation, Agent Zelmon determined deficiencies in both of those years arising from matters unrelated to the issues herein. Petitioner signed a consent to the adjustments dated November 23, 1970, and paid the amounts due.
On or about May 13, 1971, petitioner was advised by Internal Revenue Agent Norman Smoller that he was at that time commencing an audit of petitioner's 1969 tax return. On or about July 6 of that year, while Agent Smoller's audit was still 1974 U.S. Tax Ct. LEXIS 146">*155 in progress, another revenue agent, Terry Milne, commenced an audit of the foundation's tax return for the taxable year ending November 30, 1969. Milne communicated with the foundation's lawyer, Jack Bratter, who is also petitioner's lawyer, and asked to examine the foundation's records for the year 61 T.C. 693">*696 in question. Bratter provided the requested records at a meeting held on July 27, 1971. On the basis of his examination of the foundation's records, Milne concluded that the foundation was subject to unrelated business income taxation on account of the building which it had leased to petitioner, and he so advised Bratter on September 1, 1971. Milne's conclusion turned upon treating the 1-year lease and the five options to renew as the equivalent of a 6-year lease, thus satisfying the statutory requirement (sec. 514) that the lease in question extend for a period of more than 5 years. Bratter disagreed as to the legal effect of the lease, and there the matter stood for the time being.
Through his examination of the foundation's books and records, however, Milne learned that petitioner was the sole contributor to the foundation and on that basis concluded some time in November1974 U.S. Tax Ct. LEXIS 146">*156 1971, that, although its activities had remained within the scope of its tax-exempt status, the Collins Foundation was a private foundation. Aware that such a determination would render any carryover deduction of petitioner's 1968 contribution to 1969 ineligible (see
In early January of 1972, Milne once again called Bratter, suggesting that before he1974 U.S. Tax Ct. LEXIS 146">*157 wrote his report with respect to his audit of the foundation they meet in an effort to resolve the question of the foundation's unrelated business income. Bratter agreed, and on February 8, 1972, he, Milne, and Milne's group supervisor met. They were, nevertheless, unable to reach any agreement. As a collateral matter, however, they reviewed the possibility that, due to the existence of an encumbrance attached to the donated building, the amount of which was in excess of the basis of the building, there had been a slight gain which should have been reflected in petitioner's 1968 return. Either Milne or his supervisor, though, assured Bratter that, in view of the small 61 T.C. 693">*697 amount involved, they would not seek to reopen petitioner's 1968 return if that were the only adjustment needed.
Shortly thereafter and with the approval of his supervisor, Milne nonetheless requested and on February 16, 1972, obtained permission from the Assistant Regional Commissioner, Audit, to reopen petitioner's 1968 tax return. Milne's decision to reopen the return rested upon his earlier conclusion that the foundation was private, the germinal information for which he had drawn from the foundation's1974 U.S. Tax Ct. LEXIS 146">*158 records. When Milne learned that petitioner had claimed a carryover deduction in 1969 from the same gift, he was alerted to the likelihood that petitioner in 1968 had erroneously employed the higher percentage limitation associated with public foundations in calculating his permissible deduction for charitable contributions.
Milne therefore notified Bratter that he had reopened petitioner's 1968 return and, since the period of limitations within which a deficiency could be assessed against petitioner was about to expire, Milne requested the execution of an appropriate waiver of the statute of limitations. Bratter refused that request but did agree to allow Milne to examine a copy of petitioner's 1968 Federal income tax return which Bratter had, recognizing that the original of that return was obtainable by Milne from the IRS files and that thus making the copy available was merely for Milne's convenience. They met for this purpose on March 2, 1972, and Milne then verified that petitioner had calculated his 1968 charitable contribution deduction in accordance with the higher percentage limitation. Milne prepared a computation of the proposed adjustment at that time which he left1974 U.S. Tax Ct. LEXIS 146">*159 with Bratter. Bratter then asked Milne whether an agreement with respect to the foundation's unrelated business income might induce the Service to forego reopening petitioner's return; Milne responded that such an arrangement was not possible.
As a result of these events, the Commissioner issued a notice of deficiency on April 13, 1972, in which he determined that --
the deduction claimed for contributions in the amount of $ 31,852.00 2 is allowable to the extent of $ 20,621.00 for the taxable year 1968. You contributed property with a net fair market value of $ 40,000.00 to the Collins Foundation and claimed the maximum deduction allowable (30 percent of adjusted gross income). The Collins Foundation does not qualify for the 30 percent limitation as described in
1974 U.S. Tax Ct. LEXIS 146">*160 61 T.C. 693">*698 OPINION
The threshold issue presented concerns whether the Government complied with the procedural dictates of
(b) Restrictions on Examination of Taxpayer. -- No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary or his delegate, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.
Petitioner argues that the reconsideration of his 1968 return by Revenue Agent Milne was "unnecessary" because the Commissioner had previously concluded an examination with respect to the same taxable year. On the materials before us we hold otherwise.
As a preliminary matter we note that in reexamining petitioner's 1968 tax return, Agent Milne did not conduct an unauthorized inspection of petitioner's books of account, nor does petitioner so allege. Cf.
There is no question that at some time after examining the1974 U.S. Tax Ct. LEXIS 146">*162 foundation's records Milne's interest in petitioner's 1968 tax return ripened into an investigation of petitioner's tax liability for that year, separate from the previous investigation conducted by Agent Zelmon. Compare
It is evident from the legislative history of
Petitioner alleges that the investigation was nevertheless "unnecessary" because the Government initiated the investigation in an unlawful effort to procure his agreement to the proposed adjustment to the foundation's tax liability on account of the existence of unrelated business income. In support of his contention he refers us to the fact that it was at the instigation of Agent Milne that the parties met on February 8, 1972, to try to reach agreement on the foundation's tax liability. When petitioner declined to acquiesce, Milne proceeded directly to request permission to reopen petitioner's individual return for 1968.
To be sure, an investigation which is conducted in order to pressure the taxpayer with respect to a collateral issue may be an improper purpose sufficient to render such investigation "unnecessary" and1974 U.S. Tax Ct. LEXIS 146">*165 thus violative of
1974 U.S. Tax Ct. LEXIS 146">*167 Irrespective of
Sec. 4. Policy.
.01 The Internal Revenue Service will not reopen any case closed after examination by a district office * * * to make an adjustment unfavorable to the taxpayer unless: 1. There is evidence of fraud, malfeasance, collusion, concealment or misrepresentation of a material fact; or 2. The prior closing involved a clearly defined substantial error based on an established Service position existing at the time of the previous examination; or 3. Other circumstances exist which indicate failure to reopen would be a serious administrative omission.
.02 All reopenings must be approved by the Assistant Regional Commissioner (Audit), 1974 U.S. Tax Ct. LEXIS 146">*168 * * *
61 T.C. 693">*701 Petitioner does not contend that Agent Milne did not obtain the necessary approval, and the Commissioner does not question that the case was closed.
It is too well settled for discussion that procedural rules, such as
As a result of our conclusion that the Commissioner has conformed to the procedural aspects attendant upon reopening a closed year of a taxpayer, it is necessary to address ourselves to the substance of the deficiency determined by the Commissioner.
(vi) an organization referred to in subsection (c)(2)
1974 U.S. Tax Ct. LEXIS 146">*171 In his 1968 return, petitioner availed himself of the additional 10-percent deduction with respect to his contribution to the Collins Foundation. He does not contend that the foundation was a qualified recipient other than by virtue of
In our view, the plain language of the statute, as reinforced by applicable regulations, leaves no room for any conclusion other than that there had been a failure to satisfy the statutory requirement.
The Treasury regulations, however, recognized the difficulty of a newly formed organization in meeting the statutory qualification even though a particular organization was likely to become publicly supported. Consequently, there was provided a "facts and circumstances test," an alternative means of fulfilling the public-support requirement, which looked to objectively manifested factors other than actual donations.
Moreover, even if the foregoing threshold requirement were complied with, it is plain from a reading of these detailed regulations that the foundation does not come within the terms thereof. In the first place, it was not "constituted so as to attract substantial support from contributions, directly or indirectly, from a representative number of persons in the community or area in which it operates."
1974 U.S. Tax Ct. LEXIS 146">*176 It is evident from the foregoing that from its inception the foundation lacked the objectively ascertainable characteristics which would indicate that it was organized in a manner to elicit broad-based public support. Quite the contrary, all of the evidence underscores its highly circumscribed orientation. Rather, the foundation's intimate relationship to petitioner's wholly private purposes predominated its existence, and petitioner was therefore not entitled to the additional 10-percent deduction allowed by
Due to the computational error in the deficiency notice (see footnote 1
1. Subsequent to the issuance of the deficiency notice, the parties stipulated to a computational error by respondent.↩
2. This figure differs from the $ 30,194 deduction claimed on petitioner's return. See p. 695
3. SEC. 7121. CLOSING AGREEMENTS.
(b) Finality. -- If such agreement is approved by the Secretary or his delegate * * * such agreement shall be final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact -- (1) the case shall not be reopened as to the matters agreed upon or the agreement modified by any officer, employee, or agent of the United States, * * *↩
4. In so deciding this matter, we have no need to face the corollary issue, namely, whether a violation of
5. Sec. 3. Definitions.
.01 Closed Case: 1. A case agreed at the district level is considered closed when the taxpayer is notified in writing, after district conference, if any, of adjustments to tax liability or acceptance of his return without change.↩
6. Sec. 201 of the Tax Reform Act of 1969 (Pub. L. 91-172) made various changes in the statutory scheme relating to charitable deductions. All citations of Code sections and Treasury regulations herein with respect to charitable deductions refer to those in effect in 1968.↩
7.
(c) Charitable Contribution Defined. -- For purposes of this section, the term "charitable contribution" means a contribution or gift to or for the use of --
* * * * (2) A corporation, trust, or community chest, fund, or foundation -- (A) created or organized in the United States or in any possession thereof, or under the law of the United States, any State or Territory, the District of Columbia, or any possession of the United States; (B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals; (C) no part of the net earnings of which inures to the benefit of any private shareholder or individual; and (D) no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation. A contribution or gift by a corporation to a trust, chest, fund, or foundation shall be deductible by reason of this paragraph only if it is to be used within the United States or any of its possessions exclusively for purposes specified in subparagraph (B).↩
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