UNITED STATES TAX COURT
WASHINGTON, DC 20217

Docket No. 13015-07.

Stephen E. McGrady & Patsy J.
Powers, Stephen E . McGrady, Next
Friend,

Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE ,

Respondent

O R D E R

This case was on the Court’s June 2, 2008 trial calendar
for San Francisco, California. The Court took it off the trial
track because the parties were working toward a settlement, but
pretrial discovery led the Commissioner to move for summary
judgment on all issues. McGrady, acting for himself and as his
wife’s next friend, answered the motion and it is now ready for
decision.

The case is about the couple’s 2002-04 taxes. The key
issue is McGrady’s deduction of an approximately $1 .1 million
loss in 2002 and 2003 (part of which carried over to 2004) .
McGrady asserts that he suffered this loss because a valuable
proprietary database that he had developed became worthless in
2002 and 2003. He also contended in his petition that the
Commissioner missed the statute of limitations for the 2003 tax
year, and that the Commissioner was mistaken in determining that
he owed the late-filing addition and accuracy-related penalty.
We address each issue separately, keeping in mind the usual
admonition to draw all inferences in petitioners’ favor and to
always look out for genuine factual disputes.

The $1 .1 million loss

The loss that is the only substantive issue in the case
grew out of an idea McGrady had in the 1990s — assembling an
electronic database of the education, training, and experience
of health-care professionals. McGrady and his wife thought that
with this database they could make money from publications,
software that would use the information to generate resumes,
fees for job placement, and advertisements directed at those
using the database . They created a business model that looked a
lot like what became Monster .com and similar sites, but one that
McGrady thought up at the dawn of the internet age, before
anyone knew which such businesses would thrive .
McGrady and his wife incorporated MediMatch, Inc. as part
of their plan. Doctors, nurses, and others in the field would
submit their information for inclusion into the database on
their own. Most of what they submitted was then posted on
MediMatch’s website. At its peak, in late 1999, the database
held over a million records.

But, again according to McGrady’s declaration, the website
crashed as a result of a Y2K bug. MediMatch became a named
party in the resulting class-action suit, but the database
became increasingly stale, the lawsuit led to no substantial
recovery, and McGrady eventually decided to take the position
that the database had become worthless. He abandoned it, and
took the loss on his tax return.

Supporting this loss proved problematic. The parties do
not contend about whether the loss was an out-of-pocket cost to
McGrady and his wife — there is no genuine dispute that it was
not. Instead, McGrady argues that he or MediMatch was the recipient
of more than a million gifts — i.e., the resumes — from
more than a million donors. By characterizing the submission of
a resume to MediMatch as a donation, McGrady hopes to rely on
IRC section 1015. That section establishes as a general rule
that, in the case of donated property, the basis to the donee
equals the lower of the basis to the donor or the fair-market
value at the time of the donation.

McGrady submitted evidence on both types of valuation, and
we assume in ruling on this motion that his valuations are true.
Under the first method — what he called the “cost-basis” approach
— his appraiser calculated a hypothetical, fully-allocated
cost of creating a single resume (i.e., amortizing the cost
of a home computer and software, and then adding an hourly
charge for internet access and electricity); followed by
multiplying the per-resume cost by the million or so resumes in
the database at its height. (This is a bit of a simplification,
but not much.)

Under the second method, his appraiser calculated the fairmarket
value of the individual resumes by examining sales of
successful internet job databases, then dividing the sales price
by the number of resumes in the databases. Multiplying the
price per resume in these transactions by the number of resumes
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in MediMatch’s database yields what McGrady dubs the fair-market
value of his database .

He now claims that the value of the database using a costbasis
approach was $3,014,635; and that its fair-market value
was $3,855,000. Because section 1015 tells a taxpayer to take
the lower number, he reported a basis of slightly more than $3
million. Since the database became worthless, he used the basis
as the measure of his loss.

A threshold difficulty in analyzing the motion is that Mc-
Grady has taken different positions at different times in this
litigation about whose loss this was. In a March 4, 2008 letter
to the IRS, McGrady’s lawyer referred to MediMatch as the owner
of the database and owner of “the rights to in excess of one
million resumes.” In his papers answering the Commissioner’s
motion, however, McGrady takes the position that the donations
were to himself, because the database belonged to him.
We look at both possibilities.

  1. Donation to MediMatch.

Though MediMatch is an S corporation
whose losses and income flow through to its owners,
it is still a corporation. And that creates a problem for
taking the loss because of restriction on basis calculations for
property given to corporations. IRC section 362(c) trumps
section 1015 and states that in the case of noncash property
donated to a corporation from someone not a shareholder, the
basis to the corporation in that property is zero. See, e .g.,
Veterans Foundation v. Comm’r, 317 F .2d 456, 458 (10th Cir .
1963). Since property with a zero basis cannot generate a loss
deduction, see Treas. Reg. § 1 .165-1(c); Tonn v. Comm’r, T .C.
Memo. 2001-123, the Commissioner is entitled to summary judgment
if the donations of the resumes were to MediMatch, rather than
to McGrady directly. And that is true whether one uses the cost
or market method — section 362 tells us that the basis is zero
either way.

So the key question for this part of the analysis is
whether there is a genuine dispute as to whether the resumes
were donated to MediMatch or to McGrady. We hold that there is
no dispute because McGrady admitted in discovery that “for a
person to make his resume information available to employers
through MediMatch, a person must have submitted [a] resume or
resume information to MediMatch .” Ptrs. Resp. to Req. for
Admis. No. 8. He has presented no evidence or explanation in
his answering papers for why this isn’t sufficient reason to
disallow the loss — there’s no evidence from even a single
submitter of even a single resume that he intended to donate i t
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at all, much less donate to either McGrady or MediMatch
specifically .

  1. Donation to McGrady.

Nevertheless, caution compels us
to examine the possibility of whether the result would change,
were we to assume that the resumes were directly donated to
McGrady .

  1. The Cost Approach to Basis.

We are dubious of the
McGrady’s purported “cost approach” analysis, which relies on
the various expenses necessary for a job seeker to enter his
resume information on Medimatch. IRC section 1012 says the
basis in property shall be the cost of such property. A job
seeker acquires his knowledge of his career history for no cost,
making initial basis zero. However, he might incur some
expenses to translate that knowledge into a Medimatch entry.
IRC section 1016(a)(1) says the job seeker can then adjust his
zero basis for “expenditures, receipts, losses, or other items,
properly chargeable to capital account .” But a Medimatch entry
is, essentially, a resume, which is non-capital intellectual
property like letters and memos. IRC § 1221(a)(3). Without a
capital account, the taxpayer cannot adjust his basis, which
remains zero.

McGrady’s cost approach to calculating basis in property
might indeed an acceptable one in some circumstances. But the
Code limits the acceptability of this direct-cost-plus-allocation-
of-indirect-cost approach to “real or tangible personal
property produced by the taxpayer.” IRC § 263A(b)(1). This
section also says it “shall not apply to any property produced
by the taxpayer for use by the taxpayer other than in a trade or
business or an activity conducted for profit.” IRC §
263A(c)(1). A job seeker who produces a resume is producing it
for personal use not connected to a trade, business, or profitseeking
activity. It would not be appropriate for a job seeker
to value his basis in his own resume using this type of
valuation, making it similarly inappropriate for McGrady to
claim this basis in each “gifted” resume .

  1. The Fair-Market-Value Approach to Basis.

That would leave McGrady with only the fair-market-value approach to
rely on. But his answering papers calculate the value of the
entire database in the market for databases. This is a
misdirection play, because McGrady’s argument — that those
submitting resumes to him or Medimatch were donating them —
means that we have to calculate the fair-market value of those
resumes in the hands of those submitting them, not those
receiving them for compilation in a database, because McGrady’s
theory is that basis flowed with the donation .
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But can there be any genuine dispute as to what the fairmarket
value of these resumes were in the hands of those submitting
them? More precisely, the question is what price would a
jobseeking health professional pay for the nonexclusive right to
use his own resume information. The answer has to be zero,
because the professional retains broader rights — the right to
use that resume over and over again without restriction .
Our conclusion then, from all these perspectives, is that
there is no genuine issue of disputed fact here ; and that the
Code requires us to rule in the Commissioner’s favor on whether
McGrady and his wife can claim the loss deduction .

That leaves several smaller questions, to which we now turn
The Statute-of-Limitations Argument for 2003 .
McGrady’s petition alleged that the IRS issued a notice of
deficiency for the 2003 too late to allow assessment. The Commissioner
introduced a copy of the notice showing that it wa s
dated March 7, 2007. McGrady’s 2003 return was due on April 15,
2004. That leaves no genuine dispute that the Commissioner met
the three-year deadline imposed by IRC section 6501 .

The Accuracy-Related Penalty .

Because we agree with the Commissioner’s disallowance of
the McGradys’ loss, arithmetic dictates that the McGradys
substantially understated their tax liability. See IRC
§ 6662(d)(1)(A). McGrady’s answering papers don’t contest the
penalty by raising the issue of whether he was acting reasonably
and in good faith in taking this position. Positions not
contested in opposing a summary-judgment motion are conceded .
Hughes v. Stottlemyre, 454 F .3d 791, 800 (8th Cir. 2006);
Lanphere Enterprises, Inc. v. Jiffy Lube Int’l Inc ., 138 Fed .
Appx. 20, 23 (9th Cir. 2005).

And we also agree with the Commissioner that there is no
genuine issue that McGrady — who prepared his own returns for
2002 and 2003 — was behaving unreasonably in trying to claim
such a large loss on the abandonment of the database when he
didn’t pay for the resumes in the first place. Trying to avoid
taxes by using fictitious losses to offset real income has to be
supported by some reasonable argument or evidence to avoid summary
judgment even on the accuracy-related penalty issue .
The Late-Filing Addition .
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The Code imposes an addition to tax for failing to file a
return on or before its due date. IRC § 6651(a)(1). The
returns in the record are all dated after their due dates and
were unquestionably received after their due dates. McGrady
argues that these late-filed returns were only duplicates that
he and his wife sent in after learning that the IRS had never
received the originals. In his answering papers, he produced no
copies of those earlier returns, and no certified-mail or
overnight-delivery receipts, or any of the evidence that the
Code requires to invoke the statutory-mailbox rule. (The
general rule is that a return is filed when the IRS receives it,
United States v. Lombardo, 241 U .S. 73, 76 (1916) ; there’s an
exception in the Code that treats a postmark as the equivalent
of a receipt if the postmark is on or before the due date of the
return. IRC § 7502. Elaborations of these rules are stated at
great length in the Code and regulations — together this body
of law is the “statutory-mailbox rule .” )

The problem for the Commissioner is that this case would be
appealable to the Ninth Circuit. And the Ninth Circuit has long
held that the statutory-mailbox rule did not eliminate the “common-
law mailbox rule .” Anderson v. United States, 966 F .2d 487
(9th Cir. 1992). The common-law mailbox rule treats timely
mailing of a document as raising a rebuttable presumption that
it was timely received by its addressee. Id. at 491.
Testimony alone is at least sometimes sufficient to meet
the terms of this rule. Id. at 492. And in his answering
papers, McGrady specifically swore that he timely mailed two of
the three returns at issue — those for 2002 and 2003. The
Commissioner urges us to conclude that “petitioners’ bare
testimony will not be able to credibly contradict the
information on the returns. “

But whatever he thinks is the probability of his success at
trial, the Commissioner must realize that summary-judgment motions
are not the place for determinations of credibility. So
we will not grant his motion as to the late-filing additions to
the deficiencies for the 2002 and 2003 years. We will grant it
as to the addition to the 2004 deficiency because McGrady failed
to raise any issue of disputed fact on the addition for that
year .

It is therefore
ORDERED that respondent’s motion for summary judgment,
filed September 10, 2008, is denied insofar as it seeks to
determine an addition to tax under IRC section 6651(a)(1) for
tax years 2002 and 2003. It is als o
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ORDERED that respondent’s motion for summary judgment,
filed September 10, 2008, is granted in all other respects. It
is also

ORDERED that on or before August 19, 2009, the parties
submit settlement documents or file status reports describing

(Signed) Mark V. Holmes
Judge
Dated : Washington, D .C .
June 19, 2009
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