Sherrel Jones isn't afraid to take a tough case. He was the defense lawyer for Oklahoma City truck-bomber Timothy McVeigh. That case didn't go so well, and as a result McVeigh is no longer among the living.
Mr. Jones achieved a better result in Tax Court yesterday, but only because there is no death penalty for disallowed deductions.
Mr. Jones donated his case files for the McVeigh case files to the University of Texas at Austin and took a charitable deduction of $294,877 for them. The files mostly consisted of copies of documents, FBI notes, tapes, computer disks and correspondence. The majority of information was copies of material provided by the government, with almost no original documents in the mix.
Mr. Jones did comply with the tax law's requirement that he get an appraisal for a noncash contribution over $5,000 (unlike the taxpayer we discussed yesterday), but that's only a first step. The IRS still gets to challenge the appraiser's conclusion, and they did so here:
Respondent disallowed the charitable deduction claimed by petitioners for the donation of the materials related to the criminal prosecution of McVeigh for the Oklahoma City bombing because respondent determined that petitioner did not personally own the materials that were provided to him for the purpose of preparing McVeigh's legal defense.
The Tax Court agreed with the IRS, saying that the documents were McVeigh's property under Oklahoma rules, so they weren't Mr. Jones' to give away.
What's more, the court said:
Because the materials would fall under the exclusion of letters, memoranda, or similar property created by the taxpayer's own efforts, if they had been created by the taxpayer's own efforts and were work product, we would be required to treat them as ordinary assets. Thus, even if petitioners could fall within the minority work product exception to the general rule that a client's case file legally belongs to the client, their allowable deduction would be limited to their basis in the materials. Petitioners have presented no evidence that the basis in the materials was greater than zero. Thus, even if we held that petitioner legally owned the materials under a work product exception, section 170(e)(1)(A) would limit petitioners' deduction to zero, the amount of petitioners' basis.
Unless you are donating long-term capital gain property, your deduction for non-cash donations can't exceed your basis (usually this means your cost) for the donated property. The court said the workpapers were ordinary income property with no basis. No basis, no write-off.
Cite: Jones, 129 T.C. No. 16
UPDATE, 11/4: The TaxProf has more.
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