Collins v. Comm'r of Internal Revenue , Docket No. 5841-72.

• Decision Date: 07 March 1974
• Docket Number: Docket No. 5841-72.
• Citation: 61 T.C. 693
• Parties: ROBERT F. COLLINS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

61 T.C. 693

ROBERT F. COLLINS, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 5841-72.

United States Tax Court

Filed March 7, 1974.

Jack E. Bratter and Bradley D. Marcus, for the petitioner.

Alan R. Herson, for the respondent.

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. Held, the foundation did not receive ‘a substantial part of its support * * * from direct or indirect contributions from the general public’ as required by sec. 170(b) (1)(A)(vi), I.R.C. 1954, as a condition for T's additional charitable deduction to the extent of 10 percent of adjusted gross income; held, further, that the Commissioner's second investigation of T's tax liability for 1968 was not ‘unnecessary’ within the meaning of sec. 7605(b), I.R.C. 1954; held, further, that Rev. Proc. 68-28, 1968-2 C.B. 912, did not preclude the reopening of the case or affect the validity of the ensuing deficiency notice.

The Commissioner determined a deficiency is 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 section 7605(b), I.R.C. 1954; (2) whether the Commissioner failed to comply with the Service's recognized procedure (set forth in Rev. Proc. 68-28, 1968-2 C.B. 912) in reopening a closed tax year of petitioner; (3) in the event either of the above questions is answered affirmatively, whether the Commissioner's procedural noncompliance deprived the resultant deficiency notice of any validity; and (4) if the deficiency notice is valid, whether the charitable foundation created and endowed by petitioner normally receives a substantial part of its support ‘from direct or indirect contributions from the general public’ as provided in section 170(b)(1)(A)(vi) of the Code. In the event that respondent prevails on the first two issues, the third issue becomes moot; alternatively, if the third issue is reached and decided in favor of petitioner, it will become unnecessary to consider the final issue.

FINDINGS OF FACT

The parties have filed a stipulation of facts which, together with its accompanying exhibit, is incorporated herein by this reference.

Petitioner Robert F. Collins, a physician, resided in North Hollywood, Calif., at the time of filing his petitioner 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. 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 of 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.

At about the time of incorporating the foundation, petitioner had some conversations with a representative of one and perhaps several 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 $42,856, 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. Section 170(b) of the Code, as it applied to 1968, generally permitted a deduction for charitable contributions in an amount up to 20 percent of a taxpayer's adjusted gross income. Irrespective of this limitation, contributions to certain defined charities qualified for an additional separately calculated deduction in an amount up to 10 percent of adjusted gross income, thus in effect resulting in a 30-percent aggregate limit. The amount claimed by petitioner for 1968 was predicated upon the foundation qualifying for the more favorable percentage limitation. Gifts to private foundations generally were restricted to the 20-percent limitation. Accordingly, if the foundation failed to qualify as an organization which received ‘a substantial part of its support * * * from the general public’ (sec. 170(b)(1)(A)(vi)), then the deduction to which petitioner was entitled in 1968 would have been substantially less than that claimed by him.

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 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 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 November 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 sec. 170(b)(5) as it applied to 1968), Milne called Agent Smoller, who was still engaged in the audit of petitioner's 1969 return, to apprise him of his conclusion. Because petitioner had in fact claimed such a carryover deduction in 1969, Agent Smoller called Bratter is order to notify him that he proposed to disallow the carryover deduction on the strength of Agent Milne's determination of the foundation's private status. Bratter thereafter called Milne on or about December 1, 1971, in order to verify the information received from...