van der Lee v. Comm'r

T.C. Memo. 2011-234

UNITED STATES TAX COURT

HENRICUS C. AND PAMELA VAN DER LEE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 19804-08. Filed September 29, 2011.

Leon J. Greenspan, for petitioners.

Frederick C. Mutter, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: Respondent determined a deficiency of

$620,235 in petitioners’ Federal income tax and an accuracy-

related penalty under section 6662(a)1 of $7,624 for 2002. After

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code), as amended and in effect for
the year at issue, and all Rule references are to the Tax Court
(continued...)
 - 2 -

concessions,2 the issues for decision are: (1) Whether

petitioner husband Henricus C. van der Lee (Mr. van der Lee) was

a trader in securities during 2002; (2) whether losses

attributable to Mr. van der Lee’s purchases and sales of

securities are deductible against petitioners’ ordinary income;

(3) whether petitioners are entitled to deduct certain charitable

contributions; and (4) whether petitioners are liable for the

accuracy-related penalty under section 6662(a) for 2002.

FINDINGS OF FACT

Some of the facts have been stipulated. We incorporate the

stipulated facts into our findings by this reference.

Petitioners resided in New York when they filed their petition.

I. Securities Transactions

Mr. van der Lee holds an undergraduate degree from Rollins

College and a master of business administration degree from Duke

University. By 2002 Mr. van der Lee had acquired substantial

1
(...continued)
Rules of Practice and Procedure. All amounts have been rounded
to the nearest dollar.
2
Petitioners concede that the $17,550 of tuition paid to the
Tuxedo Park School, an independent school, is not deductible as a
charitable contribution. The parties stipulated that petitioners
are entitled to deduct investment interest of $29,023 rather than
$12,493. Because respondent allowed the additional interest
deduction in the notice of deficiency, we do not construe this
stipulation as respondent’s further concession.
 - 3 -

trading experience during his career3 as a trader at investment

banks Morgan Stanley, Goldman Sachs, and Merrill Lynch. He

traded mostly mortgage-backed securities, U.S. Treasury bonds,

interest rate swaps, and commodities and also was involved in

credit and foreign exchange trading. Because of industry

regulations, before 2002 Mr. van der Lee was prohibited from

trading securities for his own account.

In the first quarter of 2002 Mr. van der Lee’s career at

Merrill Lynch was coming to an end, and later in 2002 he formally

left his employer. Starting with the second quarter of 2002 he

stopped spending a significant amount of time at Merrill Lynch,

and after the first quarter of 2002, many of the trading

restrictions were lifted. After April 15, 2002, Mr. van der Lee

decided to start trading for his own account.4

Mr. van der Lee conducted most of his trading activities

from home using an account with Merrill Lynch, through which he

traded stocks and options. Between April 15 and December 31,

3
Petitioners state in the petition that Mr. van der Lee had
been employed as a securities trader for over 12 years, but Mr.
van der Lee testified that he had worked as a securities trader
for 15 years by 2002.
4
Before starting the trading, Mr. van der Lee asked
petitioners’ return preparer, Jerome Camiola (Mr. Camiola), to
look into rules regarding trading. Mr. Camiola researched the
rules and in late April 2002 conveyed the results of his research
to Mr. van der Lee.
 - 4 -

2002, his trading activity in the Merrill Lynch account was as

follows:

Month No. of transactions

April 4
May 25
June 29
July 6
August 8
September 7
October 13
November 15
December 41
Total 148

Of the 148 transactions, Mr. van der Lee executed 30 sales and

purchases of stock pursuant to options that he had written or

acquired.5 Mr. van der Lee never sold any stock on the day he

acquired it.

Mr. van der Lee also had an account with Prudential Bache

(Prudential) through which he traded options and futures.

Between April 15 and December 31, 2002, Mr. van der Lee executed

11 trades through the Prudential account. Mr. van der Lee’s

trading activity in the Prudential account was as follows:

5
The table does not include the 30 option transactions
because their dates are unclear. See infra pp. 14-15 note 7.
 - 5 -

Month Trading days No. of transactions

April 0 0
May 0 0
June 0 0
July 0 0
August 0 0
September 1 5
October 4 4
November 1 1
December 1 1
Total 7 11

At the end of 2002 Mr. van der Lee realized that even with

sophisticated communication devices that allowed him to monitor

securities prices, he did not have sufficient information to

trade successfully. Consequently, he decided to concentrate on

purchasing and selling securities as an investor.

II. Charitable Contributions

During 2002, in addition to her employment, petitioner wife

Pamela van der Lee (Mrs. van der Lee) became a consultant pro

bono to nonprofit organizations. She was a board member for the

Rollins College Alumni Association (alumni association), the

National Down Syndrome Society (NDSS), and the Tuxedo Park

School. She provided her expertise in marketing and strategic

planning, for example by making presentations on soliciting

donors. To carry out her charitable work, in 2002 Mrs. van der

Lee established a home office “with a computer, with telephones,

with fax machines, with copiers, all of that”. She also incurred

expenses for taxicabs, copying, office supplies, travel, and

courting donors.
 - 6 -

Mrs. van der Lee traveled extensively for the charities, and

her travel was either expected or required. She traveled to

attend national conferences for NDSS and quarterly meetings,

dinners, and other fundraising events for the alumni association.

Mrs. van der Lee also traveled to Washington, D.C., for meetings

on strategic planning for the alumni association and the NDSS.

She did not seek reimbursement of her expenses from the

charitable organizations.

During 2002 petitioners owned a 3-week timeshare interest in

a residence at the Ritz Carlton in St. Thomas (Caribbean

residence). In 2002 they donated a 1-week use of the Caribbean

residence to NDSS, which raised money by auctioning a vacation at

the Caribbean residence at a fundraising gala.

Around 2002 petitioners renovated the kitchen in their home.

In 2002 they donated their used range to the Tuxedo Park School

and other used kitchen appliances, cabinets, faucets, and similar

items to Hudson Valley Materials Exchange. Hudson Valley

Materials Exchange is an environmental section 501(c)(3)

organization that focuses on waste management and distributes

collected items to school districts.

III. Procedural History

A. Return Positions

Mr. Camiola has prepared petitioners’ returns since the late

1980s, including the 2002 Federal income tax return. Mr. Camiola
 - 7 -

received a degree in history in 1976, and after working as an

accountant, in 1985 he started his own business as a return

preparer. Mr. Camiola gives his clients guidelines but does not

examine receipts. Mr. van der Lee provided Mr. Camiola with

totals by category of all receipts.

Petitioners signed the 2002 return and filed it as married

taxpayers filing jointly. The taxable year 2002 was the first

and only year for which Mr. van der Lee claimed to be a trader.

Petitioners attached a Schedule C, Profit or Loss From Business,

to the 2002 return. On the Schedule C petitioners reported gross

receipts from the securities trading activity of $3,710,378. To

calculate this amount, Mr. Camiola totaled all gross proceeds

using petitioners’ brokerage statements. Petitioners reported

$5,098,705 as the cost of goods sold, which equaled their total

bases in those securities. According to the Schedule C,

petitioners’ loss was $1,388,327. On the Schedule C petitioners

also reported expenses totaling $91,872 as follows:

Expense Amount

Legal and professional services $750
Office expense 34,313
Travel 26,726
Meals and entertainment 16,695
Utilities 13,388
Total 91,872

Petitioners offset the net loss on Schedule C of $1,480,199

against their wages.
 - 8 -

Petitioners did not attach to their 2001 or 2002 return a

statement making the mark-to-market election or a Form 3115,

Application for Change in Accounting Method. Petitioners did not

report on their 2002 return any unrealized profit or loss from

securities held at the close of 2002.

With respect to the reporting of charitable contributions,

Mr. Camiola did not explain to petitioners that cash and noncash

contributions must be reported separately. Petitioners reported

their charitable contributions of $165,026 as gifts by cash or

check.

B. Respondent’s Determinations

In the notice of deficiency respondent determined that Mr.

van der Lee “did not qualify as a trader in securities under

I.R.C. section 475(f) during the 2002 tax year” and that he was

not eligible to elect the use of the mark-to-market accounting

method for the securities activity. Respondent also determined

that petitioners failed to make a timely and effective mark-to-

market election under section 475(f). As a result, respondent

determined that the $1,388,327 loss on the sale of securities

should be reported as a capital loss on Schedule D, Capital Gains

and Losses, that is deductible only to the extent of $3,000 under

sections 165(f) and 1211(b)(1). Respondent also disallowed all

Schedule C expenses.
 - 9 -

Respondent disallowed $98,752 of the charitable contribution

deduction and determined that a 20-percent accuracy-related

penalty under section 6662(a) applied.

OPINION

I. Burden of Proof

Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving them

erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Also, deductions are a matter of legislative grace, and

the taxpayer has the burden of showing entitlement to any

deduction claimed. See Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992).

Petitioners contend that the burden of proof shifts to

respondent pursuant to section 7491(a). Section 7491(a)(1) may

shift the burden to the Commissioner with respect to factual

issues affecting liability for tax where the taxpayer introduces

credible evidence with respect to any factual issue relevant to

ascertaining tax liability. However, the taxpayer must establish

that he or she has complied under section 7491(a)(2) with all

substantiation requirements, has maintained all required records,

and has cooperated with reasonable requests for witnesses,

information, documents, meetings, and interviews. Sec.

7491(a)(2).
 - 10 -

The record does not establish that the requirements for

shifting the burden of proof to respondent are met. In any case,

we base our conclusions on the preponderance of the evidence and

not on the allocation of the burden of proof. See Knudsen v.

Commissioner, 131 T.C. 185, 188-189 (2008).

II. Purchases and Sales of Securities

A. Trader or Investor

Section 165 generally allows a deduction for any loss

sustained during the taxable year and not compensated by

insurance or otherwise. However, section 165(f) provides that

losses from sales or exchanges of capital assets are allowed only

to the extent allowed under sections 1211 and 1212. Section

1211(b) limits the allowance of such losses to the extent of

gains from such sales or exchanges, plus the lower of (1) $3,000

($1,500 in the case of a married individual filing a separate

return), or (2) the excess of such losses over such gains.

Section 1221 defines capital assets as any property held by

the taxpayer, whether or not connected with his trade or

business. Section 1221(a)(1) creates an exception to the

definition of the capital asset:

(1) stock in trade of the taxpayer or other
property of a kind which would properly be included in
the inventory of the taxpayer if on hand at the close
of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course
of his trade or business * * *
 - 11 -

Accordingly, taxpayers who are not dealers generally recognize

capital gain or loss upon the sale or exchange of their stock,

rather than ordinary gains or losses.

However, if a taxpayer who is not a dealer is engaged in

business as a securities trader, section 475(f) allows such

taxpayer to elect the mark-to-market method of accounting for

securities held in his business.6 Under the mark-to-market

method of accounting a trader generally recognizes at the end of

the year ordinary gain or loss on all securities held in the

business as if the securities were sold at the end of the year

for fair market value. Sec. 475(d)(3)(A), (f)(1)(A)(i); Knish v.

6
A securities trader electing under sec. 475(f) to use the
mark-to-market method of accounting for securities held in his
business is required to file with the Commissioner a statement
making the election, identifying the first taxable year for which
the election is effective, and describing the business. See
Knish v. Commissioner, T.C. Memo. 2006-268; Rev. Proc. 99-17,
sec. 5.03(1), 5.04, 1999-1 C.B. 503, 504-505. The taxpayer must
file the statement no later than the due date of the trader’s
original Federal income tax return for the year immediately
preceding the election year, and if the election entails a change
in the accounting method, the trader must also attach a Form
3115, Application for Change in Accounting Method, to the
original return for the election year. Rev. Proc. 99-17, secs.
5.03(1), 5.04, 6.02(2), 1999-1 C.B. at 504, 505.

For a trader’s first year of business, the trader may make
the sec. 475(f) election by placing in the books and records of
the business, no later than 2 months and 15 days after the first
day of the year, a written statement making the mark-to-market
election, identifying the first taxable year for which the
election is effective, and describing the business to which the
election relates. Rev. Proc. 99-17, sec. 5.03(2), 1999-1 C.B. at
505. The trader must attach a copy of the statement to the
trader’s Federal income tax return for the election year. Id.
 - 12 -

Commissioner, T.C. Memo. 2006-268; Lehrer v. Commissioner, T.C.

Memo. 2005-167, affd. 279 Fed. Appx. 549 (9th Cir. 2008). Where

the trader has not made a proper election, the losses are treated

as capital losses and are deductible only to the extent of

capital gains plus $3,000. Secs. 165(a), (c), (f), 1211(b)(1);

Knish v. Commissioner, supra.

As follows from the foregoing, the proper taxation of gains

and losses from the taxpayer’s securities activity depends on

whether he is a dealer, a trader, or an investor. See Estate of

Yaeger v. Commissioner, 889 F.2d 29 (2d Cir. 1989), affg. in

part, revg. in part on another issue and remanding T.C. Memo.

1988-264; King v. Commissioner, 89 T.C. 445, 458-459 (1987).

Petitioners contend that Mr. van der Lee was a trader in 2002,

and respondent contends he was an investor.

Generally, traders are engaged in the trade or business of

selling securities for their own account. See King v.

Commissioner, supra at 457-458. Although investors also buy and

sell securities for their own account, they are not considered to

be in the trade or business of selling securities. See Kay v.

Commissioner, T.C. Memo. 2011-159; Arberg v. Commissioner, T.C.

Memo. 2007-244. Unlike an investor’s expenses, a trader’s

expenses are deducted in determining adjusted gross income rather

than as itemized expenses. See, e.g., Kay v. Commissioner,

supra. Whether a taxpayer’s activities constitute a trade or
 - 13 -

business is a question of fact. See Higgins v. Commissioner, 312

U.S. 212, 217 (1941).

In distinguishing a trader from an investor, courts consider

the following nonexclusive factors: (1) The taxpayer’s intent,

(2) the nature of the income to be derived from the activity, and

(3) the frequency, extent, and regularity of the taxpayer’s

securities transactions. See Estate of Yaeger v. Commissioner,

supra at 32 (quoting Moller v. United States, 721 F.2d 810, 813

(Fed. Cir. 1983)); see also Purvis v. Commissioner, 530 F.2d

1332, 1334 (9th Cir. 1976), affg. T.C. Memo. 1974-164. The Court

of Appeals for the Second Circuit, where the appeal in this case

would lie absent a stipulation to the contrary, see sec.

7482(b)(1)(A), (2), has held that the length of the holding

period and the source of profit are the two fundamental

distinguishing criteria, see Estate of Yaeger v. Commissioner,

supra at 33. Investors derive profit from interest payments,

dividends, and capital appreciation of securities. Id. Traders

buy and sell securities with reasonable frequency with the

purpose of catching the swings in the daily market movements and

profiting on a short-term basis. Id.

The length of time Mr. van der Lee held stocks before

selling suggests that in 2002 he was an investor rather than a

trader. He never sold stocks on the day of their acquisition.

Of the 76 sales of stocks between April 15 and December 31, 2002,
 - 14 -

35 involved shares that Mr. van der Lee had acquired before 2002.

His potential source of profit, if any, was asset appreciation

rather than short-term price variation. Mr. van der Lee did not

seek to profit from the swings in the daily market movements and

instead intended to profit from the longer term holding of

investments.

Mr. van der Lee also did not trade with sufficient frequency

to qualify as a trader. The brokerage statements show that

between April 15 and December 31, 2002, Mr. van der Lee executed

148 trades through the Merrill Lynch account and 11 trades

through the Prudential account. Of the 148 trades, 30 were

executed pursuant to options that Mr. van der Lee had written or

acquired.7 Mr. van der Lee’s total number of trades was

7
The parties stipulated that in 2002 there were a total of
94 purchases and 94 sales in the Merrill Lynch account. However,
Mr. van der Lee testified that from April through December 2002
he executed 171 trades. Mr. van der Lee commenced his securities
activity after Apr. 15, 2002, but the parties’ stipulations are
unclear as to whether they cover the full calendar year. In
addition, the parties’s stipulations are unclear regarding the
extent, if any, to which they include options pursuant to which
the parties sold or acquired stocks.

The record contains the yearend statement and the December
2002 statement issued by Merrill Lynch. For our findings of fact
we employed the following methodology. First, we ignored certain
transactions involving shares of Viacom. Until Dec. 31, 2002,
Mrs. van der Lee had worked for Viacom for 14 years. She
received Viacom stock options and exercised them, acquiring 8,000
Viacom shares. On Apr. 23, 2002, petitioners sold the Viacom
stock in three transactions. These transactions, namely the
purchase of the shares pursuant to the options and the sales of
the shares, did not relate to Mr. van der Lee’s trading activity.
(continued...)
 - 15 -

therefore 189. In April, July, August, and September, almost

one-half of the time he engaged in the securities activity Mr.

van der Lee placed between four and eight trades. In June 2002

he executed 29 trades, but on only 5 days. In addition, Mr. van

der Lee traded on only 11 days in the Prudential account,

averaging 3 or 4 trading days per month. Mr. van der Lee had a

spurt of trading activity in the Merrill Lynch account in

December, but overall his activity was sporadic.

Mr. van der Lee’s number of trades also does not support a

conclusion that in 2002 he was a trader. See Kay v.

Commissioner, supra (313 trades held insubstantial); Holsinger v.

Commissioner, T.C. Memo. 2008-191 (289 trades with aggregate

7
(...continued)

Second, we identified all transactions pursuant to which Mr.
van der Lee purchased or sold shares, including the purchases of
shares that he held at yearend. On the basis of the December
2002 statement, we also identified all options that Mr. van der
Lee purchased or wrote that were held open as of Dec. 31, 2002.
We then identified all options that Mr. van der Lee wrote or
acquired that expired and included the original option
transaction as a trade. We did so using the December 2002 and
the yearend statements, which together show that on the yearend
statement under “short-term capital gains” Merrill Lynch reported
gains and losses with respect to expired options. With respect
to options that Mr. van der Lee wrote or acquired between Apr. 15
and Dec. 31, 2002, that were exercised, we relied on the yearend
statement. If the yearend statement shows the basis and/or the
sale price of the underlying stock includes an option premium, we
counted the option itself as a trade in addition to the trade of
the underlying stock. The yearend statement does not identify
the date on which Mr. van der Lee acquired or wrote the options
that were exercised, and we therefore are unable to find his
monthly number of trades with precision.
 - 16 -

sales of $754,277 in 1 year held insubstantial).8 We conclude

that Mr. van der Lee was not a trader in 2002, and petitioners

are limited to a $3,000 deduction of losses arising from the

purchase and sale of securities under section 1211(b).

B. Respondent’s Motion for Summary Judgment

Respondent filed a motion for partial summary judgment on

the issue of whether petitioners were permitted to use the mark-

to-market method of accounting for 2002. Respondent contends

that regardless of whether Mr. van der Lee was a trader in 2002,

petitioners failed to make the mark-to-market election and

therefore are not entitled to claim ordinary losses. Respondent

also contends that petitioners are not entitled to administrative

relief for failing to make a valid election under section

301.9100-3, Proced. & Admin. Regs.9 Petitioners argue that

8
We note, however, that in any case the Court of Appeals for
the Second Circuit does not consider a large number of trades
determinative of whether the taxpayer was a trader or an
investor. See Estate of Yaeger v. Commissioner, 889 F.2d 29, 33-
34 (2d Cir. 1989) (holding the taxpayer was an investor when he
executed over 2,000 trades in 1979 and 1980 but held most stocks
for over 1 year), affg. in part, revg. in part on another issue
and remanding T.C. Memo. 1988-264.
9
Under sec. 301.9100-3, Proced. & Admin. Regs., the
Commissioner may grant administrative relief to a securities
trader with regard to an improper mark-to-market election if the
trader, among other things, requests sec. 9100 relief and
demonstrates that he acted reasonably and in good faith in
failing to make a timely election under sec. 475(f). A trader
has not acted reasonably and in good faith if the trader uses
hindsight in requesting relief by attempting to make a sec.
475(f) mark-to-market election after the election was due.
(continued...)
 - 17 -

because in 2002 Mr. van der Lee was a new trader rather than a

continuing trader, the rules on filing the mark-to-market

election do not apply. Petitioners also contend that the failure

to elect the mark-to-market method of accounting does not

preclude Mr. Van Der Lee from using “the ordinary accounting

method of deducting losses”. According to petitioners, section

475(f), if elected, creates a rebuttable presumption that the

taxpayer is a trader, but if the taxpayer made no such election,

he bears the burden of proving his trader status.

We held a hearing on the motion and announced an intention

to grant respondent’s motion partially in that the election under

section 301.9100-3, Proced. & Admin. Regs., does not apply.

Thereafter a trial was held in New York. In the light of our

conclusion that Mr. van der Lee was not a trader, we will deny

respondent’s motion as moot. For the same reason, we do not

address petitioners’ arguments.

C. Expenses Related to the Activity

1. In General

Section 162 generally allows as a deduction all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business. As discussed above, in 2002

9
(...continued)
Kantor v. Commissioner, T.C. Memo. 2008-297.
 - 18 -

Mr. van der Lee was not a trader, and therefore he is not

entitled to the deductions under section 162.

Nevertheless, under section 212 individuals are allowed to

deduct ordinary and necessary expenses paid or incurred during

the taxable year for the production or collection of income or

for the management, conservation, or maintenance of property held

for the production income. To be deductible under section 212,

expenses must be ordinary and necessary. See sec. 1.212-1(d),

Income Tax Regs. Section 1.212-1(d), Income Tax Regs., provides

that expenses are deductible under section 212 only if they are

reasonable in amount and bear a reasonable and proximate relation

to the production or collection of income or to the management,

conservation, or maintenance of property held for the production

of income. No deduction is allowed for personal expenditures.

Sec. 262(a). Expenses under section 212 are allowed as

miscellaneous itemized deductions only to the extent that in the

aggregate itemized deductions exceed 2 percent of adjusted gross

income. Sec. 67(a). We now consider petitioners’ specific

expenses.

2. Legal and Professional Services Expenses

Respondent disallowed a deduction for legal and professional

services expenses of $750. The record contains two bills
 - 19 -

totaling $782 issued by the law firm of Norton & Christensen.10

However, the record contains no credible evidence establishing

that the legal advice pertained to Mr. van der Lee’s activity of

purchasing and selling stocks, as opposed to personal matters.

We sustain respondent’s determination disallowing legal and

professional services expenses.

3. Travel and Meals and Entertainment Expenses

Generally, a deduction is not allowed for travel expenses,

meals and entertainment expenses, and any expenses for gifts or

listed property unless the taxpayer properly substantiates: (1)

The amount of such expense; (2) the time and place of the

expense; (3) the business purpose; and (4) in the case of meals

and entertainment, the business relationship between the taxpayer

and the persons being entertained. Sec. 274(d). Deductions for

expenses that are subject to the strict substantiation

requirements of section 274(d) must be disallowed in full unless

the taxpayer satisfies every element. Sanford v. Commissioner,

50 T.C. 823, 827-828 (1968), affd. per curiam 412 F.2d 201 (2d

Cir. 1969).

A taxpayer may substantiate his deductions by either

adequate records or sufficient evidence corroborating the

taxpayer’s statement. Sec. 274(d). To satisfy this requirement,

10
Petitioners explain that they deducted these expenses
under the category of office expenses.
 - 20 -

a taxpayer must maintain records and documentary evidence that in

combination are sufficient to establish each element of an

expenditure or use. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax

Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). In the absence of

adequate records, a taxpayer may establish an element of an

expenditure by his or her statement, written or oral, containing

specific information as to such element. Larson v. Commissioner,

T.C. Memo. 2008-187; sec. 1.274-5T(c)(3), Temporary Income Tax

Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).

To substantiate this category of deductions, petitioners

submitted credit card statements and summaries on which they

circled purportedly deductible items. However, these documents

substantiate only the amounts of the expenses but not the other

elements of section 274(d), such as the business purpose or the

business relationship between Mr. van der Lee and persons being

entertained. The record is devoid of any details of Mr. van der

Lee’s travel or the business purpose of each trip.11 We sustain

respondent’s determination disregarding this category of

expenses.

4. Office and Utilities Expenses

To substantiate the deductions for office and utilities

expenses, petitioners submitted bank and credit card statements,

11
Mr. van der Lee stated at trial that he provided to the
IRS the list of contacts showing with whom he met. The list was
not organized by date and is not part of the record.
 - 21 -

invoices, payment confirmations, and receipts.12 With respect to

the charges for utilities and security, house cleaning, and

exterminator services, generally, under section 280A13 no

deduction is allowable for use of a home in connection with an

activity which is merely for the production of income within the

meaning of section 212 but is not a trade or business under

section 162. Curphey v. Commissioner, 73 T.C. 766, 770 (1980).

With respect to the charges for PC Warehouse, Radio Shack,

PalmNet, Gateway, CompUSA, and Best Buy, petitioners failed to

present credible evidence establishing what Mr. van der Lee

purchased and that the items he purchased were not for personal

use. Although Mr. van der Lee testified that when he decided to

start trading, he researched the technology side of the

12
The expenses were: Direct TV ($444), Cottage Care
cleaning services ($2,385), S&B Total Home ($3,850), land
surveyor services ($2,400), payments to Bruce McKinnon and Mr.
Tammaro ($1,050), New York Post subscription ($372), Radio Shack
and PalmNet ($364), Gateway ($2,418), cable ($1,200), Cablevision
($1,368), PC Warehouse ($154), Staples, CompUSA, and Best Buy
($691), Chubb Insurance ($1,421), security services ($2,799),
shipping ($1,243), Bug Runner Exterminator ($729), water ($196),
Brazilian American ($125), House and Garden and Renovation Style
magazines ($55), Suburban Propane ($2,226), Rockland Electric
($1,200), and communications charges, such as AT&T Services,
Palmnet service, GTE Airfone, and others ($8,875).
13
Sec. 280A(a) generally disallows deductions for expenses
with respect to a “dwelling unit” used by a taxpayer as a
residence unless an exception applies. Sec. 280A(c) exempts from
the general disallowance rule expenses attributable to a dwelling
unit which is exclusively used on a regular basis as a principal
place of business for any trade or business of the taxpayer.
 - 22 -

operations and set up a trading floor, such general testimony is

insufficient to substantiate the claimed deductions.

With respect to the payments to Mr. McKinnon and Mr. Tammaro

and the payments for the land surveyor services, New York Post,

House and Garden and Renovation Style magazines, shipping, and

various communications services, the record contains no credible

evidence regarding the ordinary and necessary and nonpersonal

nature of the expenses. We sustain respondent’s determinations

disallowing the deductions for these expenses. See sec. 262.

III. Charitable Contribution Deduction

The following charitable contributions remain at issue:

Description Amount

Underage $1,613
Percentage of home used for charity 6,000
Partial interest in the Caribbean residence 1,356
Charitable use of the Caribbean residence 11,500
NDSS expenses 32,635
Bug Runners 500
Rockland Occupational Therapy for Kids 1,475
Hudson Valley Materials Exchange and Tuxedo Park
School
Fridge and freezer 2,800
Cabinets and granite countertops 27,729
Sink, faucet, dishwasher 680
Toilet, sink, and vanity 550
Range 1,250
Total 88,088

Generally, section 170(a) allows a deduction for any “charitable

contribution” made by the taxpayer. A “charitable contribution”

is defined as “a contribution or gift to or for the use of” a

charitable organization. Sec. 170(c). Because the recordkeeping
 - 23 -

requirements under the Code and the regulations vary depending on

the amount and nature of the contribution, we address each

category separately.

A. NDSS Expenses

Mrs. van der Lee testified about her pro bono work for the

charitable organizations. We find her testimony credible on this

point, and we find that she rendered services to NDSS. No

deduction is allowable under section 170 for a contribution of

services, but “unreimbursed expenditures made incident to the

rendition of services to an organization contributions to which

are deductible may constitute a deductible contribution.” Sec.

1.170A-1(g), Income Tax Regs.

Recently in Van Dusen v. Commissioner, 136 T.C. ___ (2011),

we have addressed the deductibility of expenses incident to the

rendition of services to a charitable organization and the

recordkeeping requirements. To be deductible, unreimbursed

expenses must be directly connected with and solely attributable

to the rendition of services to a charitable organization. See

id. at ___ (slip op. at 22-23); Saltzman v. Commissioner, 54 T.C.

722, 724 (1970). Charitable contributions are subject to the

recordkeeping requirements of section 1.170A-13(a), Income Tax

Regs., for monetary contributions, or section 1.170A-13(b),

Income Tax Regs., for contributions of property other than money.

In Van Dusen v. Commissioner, supra at ___ (slip op. at 37-38),
 - 24 -

we held that contributions through the payment of unreimbursed

volunteer expenses of less than $250 are subject to the

requirements for contribution of money set forth in section

1.170A-13(a), Income Tax Regs. Section 1.170A-13(a)(1), Income

Tax Regs., requires the taxpayer to maintain a canceled check or

a receipt from the donee organization. In the absence of a

canceled check or a receipt from the donee organization, the

taxpayer must maintain other reliable written records showing the

name of the donee and the date and the amount of the

contribution. Id.

To claim a charitable contribution deduction of $250 or

more, the taxpayer must substantiate the contribution with a

contemporaneous written acknowledgment from the donee

organization. Sec. 170(f)(8)(A); sec. 1.170A-13(f)(1) and (2),

Income Tax Regs. A taxpayer who incurs unreimbursed expenses

“incident to the rendition of services” is deemed to have

obtained such acknowledgment if the taxpayer (1) has adequate

records to substantiate the amount of the expenditures and (2)

obtains by a prescribed date a statement prepared by the donee

organization containing specified information. See sec. 1.170A-

13(f)(10), Income Tax Regs.; see also Van Dusen v. Commissioner,

supra at ___ (slip op. at 37-38). Contributions of less than

$250 to the same donee are not subject to these additional

requirements even if the aggregate donations to the donee exceed
 - 25 -

$250 within the same taxable year. See Van Dusen v.

Commissioner, supra at ___ n.26 (slip op. at 26 n.26); sec.

1.170A-13(f)(1), Income Tax Regs.

Even if we assume that Mrs. van der Lee’s expenditures were

directly connected with and solely attributable to her services

to NDSS, petitioners failed to satisfy the substantiation

requirements. The record contains no list of expenses or

receipts. There is no trip log or written acknowledgment from

NDSS describing Mrs. van der Lee’s services and other information

as required by section 1.170A-13(f)(10)(ii), Income Tax Regs.

Mrs. van der Lee testified that the credit card statements in the

record show some of these expenses. However, petitioners

submitted those credit card statements with circled items to

substantiate Mr. van der Lee’s deductions for expenses related to

his securities activity.

Because the record contains only the total amount of

expenses incurred for NDSS, it is not clear whether any of the

expenses were more than $250. Even if we erred on petitioners’

side and concluded that the less stringent substantiation

requirements of section 1.170A-13(a), Income Tax Regs., applied,

we would nevertheless conclude that petitioners fail even those

requirements. In the absence of receipts, the taxpayer must

provide reliable written records showing the names of the donees

and the dates and amounts of the contributions or, in this case,
 - 26 -

expenses. Sec. 1.170A-13(a)(1)(iii), Income Tax Regs. The

record contains no such reliable written records. We sustain

respondent’s determination regarding a deduction for

contributions to NDSS.

B. Charitable Use of the Caribbean Residence

With respect to the charitable use of the Caribbean

residence, petitioners deducted the rental value of the residence

for the length of the charitable use. They also deducted a

portion of the maintenance expenses they paid. Mr. van der Lee

explained at trial that because petitioners own a 3-week share of

the Caribbean residence and they donated 1 week to NDSS, they

claimed 30 percent of applicable maintenance fees as a charitable

contribution.14 Mr. van der Lee testified that they received a

document from NDSS acknowledging the donation of the use of the

Caribbean residence, but petitioners introduced no credible

documentary evidence regarding this deduction at trial.

Generally, subject to certain exceptions, section

170(f)(3)(A) disallows a charitable contribution deduction for a

gift of a partial interest in property not in trust. Petitioners

do not argue that any of the exceptions under section

14
Mrs. van der Lee testified that they donated the use of
the Caribbean residence to two different organizations in 2002.
The record contains no other reference to a second donee
organization. Because Mrs. van der Lee’s testimony on the point
was vague, on the basis of Mr. van der Lee’s testimony we find
that the donated use was 1 week.
 - 27 -

170(f)(3)(B)15 apply, and we conclude none are applicable.

Accordingly, we sustain respondent’s determination regarding the

deduction for the charitable use of the Caribbean residence.

C. Hudson Valley Materials Exchange

As described above, for a charitable contribution deduction

of $250 or more, the taxpayer must substantiate the contribution

with a contemporaneous written acknowledgment from the donee

organization. Sec. 170(f)(8)(A); sec. 1.170A-13(f), Income Tax

Regs. For contributions of property other than money, the

written acknowledgment must provide, among other information, a

description of the property and a statement of whether the donee

organization provided any goods or services in consideration for

the property. See sec. 1.170A-13(f)(2), Income Tax Regs.

Besides the written acknowledgment requirement, the

regulations establish an additional three-tier recordkeeping

system for contributions of property other than money. In the

case of a deduction of less than $500 for a contribution of

property other than money, the taxpayer must maintain a receipt

from the donee showing the name of the donee, the date and

15
The exceptions are: (1) A contribution of a remainder
interest in a personal residence or farm, (2) a contribution of
an undivided portion of the taxpayer’s entire interest in
property, and (3) a qualified conservation contribution. Sec.
170(f)(3)(B). The second exception does not apply because an
undivided portion must consist of a fraction or percentage or
each substantial right and “must extend over the entire term of
the donor’s interest in such property”. Sec. 1.170A-7(b)(1),
Income Tax Regs.
 - 28 -

location of the contribution, and a detailed description of the

property. See sec 1.170A-13(b)(1), Income Tax Regs. A letter or

other written communication from the donee acknowledging receipt

of the contribution constitutes such receipt. Id. A receipt is

not required if it is impractical to obtain, for example, when

the taxpayer deposits property at a charity’s unattended drop

site. Id. In such a case the taxpayer must maintain reliable

written records with respect to each item of donated property.

Id.

If a taxpayer makes a charitable contribution of property

other than money and claims a deduction in excess of $500, the

taxpayer must maintain written records showing the manner of

acquisition of the item and the approximate date of the

acquisition. See sec. 1.170A-13(b)(3), Income Tax Regs. Lastly,

if the deduction exceeds $5,000, the taxpayer must (1) obtain a

qualified appraisal for the contributed property, (2) attach a

fully completed appraisal summary (i.e., Form 8283, Noncash

Charitable Contributions) to the tax return on which the

deduction is claimed, and (3) maintain records pertaining to the

claimed deduction in accordance with section 1.170A-13(b)(2)(ii),

Income Tax Regs. See sec. 1.170A-13(c)(2), Income Tax Regs. A

qualified appraisal must include, among other things, a detailed

description of the property, its physical condition, the

valuation method used to determine the fair market value, and the
 - 29 -

specific basis for the valuation. See sec. 1.170A-13(c)(3)(ii),

Income Tax Regs. A qualified appraisal must be performed by a

qualified appraiser no earlier than 60 days before the date of

the contribution and no later than the due date of the return.

Sec. 1.170A-13(c)(3)(i)(A) and (B), Income Tax Regs.

Generally, the amount reported as a deduction for

contributions of property is an aggregate amount for all similar

items of property. See sec. 1.170A-13(c)(1)(i), Income Tax Regs.

We find the donated kitchen items were similar items of property.

Accordingly, we aggregate all items in this category and consider

the deduction to exceed $5,000. Petitioners therefore need to

establish that they met the substantiation requirements

applicable to deductions over $5,000.

Petitioners failed to attach a Form 8283 to their return.

They obtained an appraisal by Masterwork Kitchens dated July 27,

2001.16 The appraisal was not a qualified appraisal because it

was untimely. See Friedman v. Commissioner, T.C. Memo. 2010-45.

Petitioners did not present written acknowledgments of the

contributions by the donees and receipts from the donees. They

therefore failed to establish that they met the requirements of

the three-tier recordkeeping system described supra pp. 27-28.

16
The appraisal did not include the refrigerator, the
freezer, the toilet, and the vanity, the values of which
petitioners also deducted as charitable contributions.
 - 30 -

However, petitioners met the general recordkeeping

requirements for a charitable contribution deduction of less than

$250 because no written acknowledgment from the donee

organization is required for contributions of property valued at

$250 or less. See sec. 1.170A-13(f)(1), Income Tax Regs.

Petitioners’ records for the contribution of the kitchen items

meet the requirements for substantiating contributions of $250 or

less. We allow petitioners a $250 deduction for their

contribution of the kitchen items and sustain respondent’s

determination disallowing the deduction of the remaining amount.

D. Percentage of Home Used for Charity

Mrs. van der Lee testified that she calculated this

deduction on the basis of various expenses to establish a home

office, such as the cost of a computer, telephones, fax machines,

and copiers for her charitable work. Petitioners did not

introduce any credible documentary evidence substantiating these

expenses and are not entitled to the claimed deduction.

E. Underage, Rockland Occupational Therapy for Kids, and
Bug Runners

Mrs. van der Lee testified that she did not know what the

contribution identified as “Underage” was. She testified that

Bug Runners is an exterminator and that she did not know why that

expense was reported as a charitable contribution, other than the
 - 31 -

fact that she performed her charitable work from home.17 With

respect to the contribution to Rockland Occupational Therapy for

Kids, Mrs. van der Lee did not recall the details.

Petitioners presented no credible evidence to substantiate

these contributions. Because each of these contributions is over

$250 and the record contains neither written acknowledgment of

the contributions by the donees nor petitioners’ reliable written

records, we sustain respondent’s disallowance of these

deductions.

IV. The Accuracy-Related Penalty Under Section 6662(a)

Respondent determined that the portion of the underpayment

resulting from improper reporting of charitable contributions is

attributable to negligence and imposed the accuracy-related

penalty under section 6662(a) and (b)(1).

Generally, section 6662(a) and (b)(1) authorizes the

Commissioner to impose a 20-percent penalty on the portion of an

underpayment of income tax attributable to negligence or

disregard of rules or regulations. The term “negligence”

includes any failure to make a reasonable attempt to comply with

the provisions of the internal revenue laws, and the term

“disregard” includes any careless, reckless, or intentional

17
The record contains a credit card statement showing a
charge for Bug Runner Exterminator. However, petitioners
attempted to use this receipt to substantiate Mr. van der Lee’s
office expense deduction.
 - 32 -

disregard. Sec. 6662(c); sec. 1.6662-3(b)(1) and (2), Income Tax

Regs. Disregard of rules or regulations is careless if “the

taxpayer does not exercise reasonable diligence to determine the

correctness of a return position” and is reckless if “the

taxpayer makes little or no effort to determine whether a rule or

regulation exists, under circumstances which demonstrate a

substantial deviation from the standard of conduct that a

reasonable person would observe”. Sec. 1.6662-3(b)(2), Income

Tax Regs.; see also Neely v. Commissioner, 85 T.C. 934, 947

(1985).

The Commissioner bears the burden of production with respect

to the taxpayer’s liability for the section 6662(a) penalty and

must produce sufficient evidence indicating that it is

appropriate to impose the penalty. See sec. 7491(c). Once the

Commissioner meets his burden of production, the taxpayer must

come forward with persuasive evidence that the Commissioner’s

determination is incorrect or that the taxpayer had reasonable

cause or substantial authority for the position. See Higbee v.

Commissioner, 116 T.C. 438, 447 (2001).

Respondent met his burden of production. He introduced

evidence that petitioners failed the substantiation requirements

of section 170 and regulations thereunder. Accordingly,

petitioners had the burden of producing sufficient evidence to

prove that respondent’s penalty determination is incorrect. See
 - 33 -

Higbee v. Commissioner, supra at 446-447. Petitioners did not

carry that burden. The failure to properly substantiate their

claimed deductions evidences negligence and careless disregard of

the rules and regulations.

Petitioners contend that they should not be liable for the

section 6662(a) penalty because they relied on Mr. Camiola to

properly report the deductions. Generally, section 6664(c)(1)

provides an exception to the section 6662(a) accuracy-related

penalty with respect to any portion of an underpayment if the

taxpayer shows that there was reasonable cause for such portion

and that the taxpayer acted in good faith with respect to such

portion. Reliance on the advice of a tax professional may

establish reasonable cause and good faith. See United States v.

Boyle, 469 U.S. 241, 250 (1985). A taxpayer claiming reliance on

professional advice must show that: (1) The adviser was a

competent professional who had sufficient expertise to justify

reliance, (2) the taxpayer provided necessary and accurate

information to the adviser, and (3) the taxpayer actually relied

in good faith on the adviser’s judgment. Neonatology Associates,

P.A. v. Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221

(3d Cir. 2002).

Petitioners failed to provide Mr. Camiola with all relevant

information. They gave him only the total of the charitable

contributions and did not tell him that a large portion of the
 - 34 -

contributions was not gifts by cash or check. Petitioners have

failed to carry their burden of proving that there was reasonable

cause for, and that they acted in good faith with respect to, any

portion of the underpayment in tax. In addition, we disallow the

charitable contribution deduction on the ground of the lack of

credible evidence in the record. We sustain respondent’s

determination of the accuracy-related penalty.

We have considered the remaining arguments the parties made

and to the extent not discussed above, conclude those arguments

are irrelevant, moot, or without merit.

To reflect the foregoing,

An appropriate order and

decision under Rule 155 will be

entered.