Hewitt v. Comm'r of Internal Revenue
| Decision Date | 29 October 1997 |
| Docket Number | No. 17146–95.,17146–95. |
| Citation | 109 T.C. 258,109 T.C. No. 12 |
| Parties | John T. and Linda L. HEWITT, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
During 1990 and 1991, Ps donated nonpublicly traded stock for which they claimed charitable contribution deductions in amounts which the parties agree represent the fair market values of such stock. Ps did not obtain qualified appraisals of the stock prior to filing their returns, and Ps did not attach a summary thereof to the returns. Held, Ps have not substantially complied with sec. 1.170A–13, Income Tax Regs., and are not entitled to charitable contribution deductions in excess of that allowed by R.
Neil L. Rose, Donna S. Rucker, and Robert E. Lee, for petitioners.
Deborah C. Stanley, for respondent.
Respondent determined deficiencies in petitioners' Federal income taxes and penalties under section 6662(a) 1 as follows:
+-------------------------+
¦¦Year¦Deficiency ¦Penalty¦
++----+-----------+-------¦
¦¦1990¦$17,332 ¦$3,466 ¦
++----+-----------+-------¦
¦¦1991¦22,945 ¦4,589 ¦
+-------------------------+
Year Deficiency Penalty 1990 $17,332 $3,466 1991 22,945 4,589
After concessions, the sole issue for decision is whether petitioners should be allowed charitable deductions in amounts greater than those allowed by respondent for gifts of nonpublicly traded stock.Background
This case was submitted fully stipulated under Rule 122. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Petitioners resided in Virginia Beach, Virginia, at the time they filed their petition. They filed their joint Federal income tax returns for the years in issue with the Internal Revenue Service Center, Philadelphia, Pennsylvania.
Petitioner John T. Hewitt, along with about a dozen other investors, bought Mel Jackson's Tax Service in Tidewater, Virginia (the company), in 1982. In fiscal year 1987, the company generated over $1 million in revenues and by 1988, was operating out of 50 office locations in three States. In 1988, the company name was changed to Jackson Hewitt Tax Service, Inc. (Jackson Hewitt).
During the taxable year 1990, petitioners made gifts of Jackson Hewitt stock to the Hewitt Foundation (the foundation) and the Foundry United Methodist Church (the church). During 1991, petitioners made gifts of Jackson Hewitt stock to the foundation and the church.
At the time of the gifts, the market for Jackson Hewitt stock operated primarily through individuals or organizations contacting the company and offering to buy or sell at a given price. In arriving at the price, the potential purchaser had access to information with respect to the most recent trades and offers to sell by other shareholders. At the time of the gifts, approximately 700,000 shares of Jackson Hewitt stock were outstanding in the hands of approximately 400 individuals and organizations (among whom were employees, franchisees, and others unrelated to the company). Between May 1, 1990, and December 31, 1991, 317 stock transfers were recorded in the company's stock book, involving approximately 100,000 shares.
In addition to the company market, another market operated through Wheat, First Securities, Inc., in which hundreds to thousands of shares of Jackson Hewitt stock were traded between 1990 and 1992 for about 80 individual accounts.
On January 29, 1994, the company began trading on NASDAQ. Prior to January of 1994, Jackson Hewitt stock did not qualify as “publicly traded securities” under section 1.170A–13(c)(7)(xi), Income Tax Regs.
Petitioners filed timely joint Federal income tax returns for the taxable years 1990 and 1991. Attached to petitioners' 1990 return were Schedule A (Itemized Deductions), noting Gifts to Charity other than cash or check in the amount of $35,745,2 and Form 8283 (Noncash Contributions). In section B of Form 8283 (Appraisal Summary of $5000 or More Items), petitioners reported the donation of two blocks of stock valued at $26,000 and $7,000, respectively, which they reported as acquired by purchase on August 14, 1982, for $522 and $131, respectively, and for which they claimed deductions of $26,000 and $7,000, respectively.
Attached to petitioners' 1991 Form 1040 were Schedule A, noting Gifts to Charity other than cash or check in the amount of $89,479,3 and Form 8283. In section A of Form 8283 (items of $5000 or less and certain publicly traded securities), petitioners reported a contribution to the foundation of stock acquired by purchase on August 1, 1982, with a basis of $2,832 and a value of $48,000. They also reported a contribution to the church of stock acquired by purchase on August 1, 1982, with a basis of $3,057 and a value of $40,000.4 No section B (Appraisal Summary of $5,000 or More Items) was attached.
Petitioners did not obtain a qualified appraisal, as defined in section 1.170A–13(c)(3), Income Tax Regs., of the Jackson Hewitt stock they donated in 1990 and 1991. The fair market values claimed by petitioners with respect to their gifts of Jackson Hewitt stock in 1990 and 1991 were based on the average per-share price of Jackson Hewitt stock traded in bona fide, arm's-length transactions at approximately the same time as petitioners made the gifts.
In the notice of deficiency, respondent allowed petitioners deductions for the gifts of Jackson Hewitt stock in 1990 and 1991 in the amounts of their basis in that stock only.5
Section 170(a) (1) provides: Where the charitable contribution consists of property other than cash, the value of the contribution, with exceptions not relevant here, is the fair market value of the donated property at the time of contribution. Sec. 1.170A–1(c)(1), Income Tax Regs.
A further applicable statutory provision is section 155 of the Tax Reform Act of 1984 (Division A of the Deficit Reduction Act of 1984), Pub.L. 98–369, 98 Stat. 494, 691 (), which had its origins in proposed amendments to section 170 set forth in section 154 of the legislation as passed by the Senate. S. Comm. on Finance, Deficit Reduction Act of 1984, Statutory Language of Provisions Approved by the Committee on March 21, 1984, S. Prt. 98–169, vol. II, at 449–459 (S. Comm. Print 1984); H. Conf. Rept. 98–861, at 993–999 (1984), 1984–3 C.B. (Vol.2) 1, 247–253. The Senate provision contained detailed rules regarding substantiation of contributions of property to charitable organizations.6 Section 155, in its final form, adopted an approach which did not amend section 170 but provided separate rules for such substantiation. It incorporated many of the provisions of the Senate version but left the details of implementation to regulations to be issued by the Secretary of the Treasury. The provisions relevant to this case state:
Sec. 155. Substantiation of Charitable Contributions; Modifications of Incorrect Valuation Penalty.
(B) to attach an appraisal summary to the return on which such deduction is first claimed for such contribution, and
(C) to include on such return such additional information (including the cost basis and acquisition date of the contributed property) as the Secretary may prescribe in such regulations.
Such regulations shall require the taxpayer to retain any qualified appraisal.
(2) Contributions to which paragraph (1) applies.—For purposes of paragraph (1), a contribution is described in this paragraph—
(a) if such contribution is of property (other than publicly traded securities), and
(B) if the claimed value of such property (plus the claimed value of all similar items of property donated to 1 or more donees) exceeds $5,000.
In the case of any property which is nonpublicly traded stock, subparagraph (B) shall be applied by substituting “$10,000” for $5,000”.
The Secretary of the Treasury has implemented the foregoing provisions by issuing section 1.170A–13, Income Tax Regs., which, among other matters, provides that a “qualified appraisal” be obtained prior to the filing of the return in which the deduction is claimed and that an appraisal summary be submitted with that return.
Respondent disallowed the amounts of petitioners' charitable deductions for the Jackson Hewitt stock in excess of basis due to the lack of qualified appraisals.7 Respondent does not dispute that petitioners made charitable contributions to the church and foundation within the respective taxable years or that the claimed values did not represent the fair market values of such contributions.8 Petitioners maintain that they should be allowed the claimed deductions because their use of the average per-share price of Jackson Hewitt stock traded in bona fide, arm's-length transactions constituted substantial compliance with the requirements of section 1.170A–13, Income Tax Regs., and relieved them of any obligation to obtain a qualified appraisal.
It is clear that petitioners did not obtain any qualified appraisal, and no summary of any such appraisal was submitted with the returns. The returns only reflected gifts of stock without identifying the gifts as Jackson Hewitt stock, without any indication of the number of shares, and setting forth only the cost and claimed values. The question is whether petitioners satisfied the...
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