Contribution deduction denied for gifts to family public charity.

• Author: Beavers, James A.

The Tax Court denied a taxpayer's claim for a deduction for a contribution of stock to a charitable foundation that the foundation used to set up a family public charity account in which the taxpayer's contribution was segregated for investment and future distribution at the taxpayer's discretion.

Background

In 1998, Setty Viralam, a doctor, transferred stocks to xelan Foundation (also known as the Economic Association of Health Professionals, Inc.), which the IRS recognized at the time of the transfer as a public charity. Xelan sent Viralam acknowledgment letters for the stock transfer stating that it had provided no goods or services for the "donation" of the stocks. Xelan sold the stocks in 1998 and maintained a segregated account for Viralam in its records, which reflected the stocks received, the proceeds from the sales of the stocks and their reinvestment, the dividends and interest generated by the assets in the account, and the disbursements from the account in subsequent years.

Promotional materials that xelan provided to Viralam represented that he would be able to direct the distribution of the funds in the account for purported charitable purposes, including as compensation for the performance of charitable services (good works) by Viralam or members of his family. Xelan also offered contributors a student loan program through which account funds could be distributed as loans for college and graduate school tuition and expenses.

On his 1998 federal income tax return, Viralam claimed a charitable contribution deduction equal to the fair market value of the stocks transferred to xelan. In 2001 and 2002, at Viralam's request the foundation transferred a total of $70,299 from his account to the University of Pennsylvania to pay his son's tuition and related expenses. The son executed loan documents that obligated him to repay the amounts transferred, plus interest, in cash or by providing designated amounts of charitable services. Between 1998 and 2005, Viralam paid xelan over $29,000 in management and administration fees.

After examining Viralam's 1998 return, the IRS issued a notice of deficiency for 1998 disallowing the charitable contribution deduction Viralam claimed for his transfer of stock to xelan. Viralam challenged the IRS's determination in Tax Court.

The Tax Court's Decision

The Tax Court held that Viralam was not entitled to a deduction for his contribution of stock to xelan. It found that Viralam had not made a...