Sherrel v. Comm'r of Internal Revenue, 20253–04.

• Decision Date: 01 November 2007
• Docket Number: No. 20253–04.,20253–04.
• Citation: 129 T.C. No. 16,129 T.C. 146
• Parties: Sherrel and Leslie Stephen JONES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

129 T.C. 146

129 T.C. No. 16

Sherrel and Leslie Stephen JONES, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 20253–04.

United States Tax Court.

Nov. 1, 2007.

In 1997, P, an attorney practicing in Oklahoma, donated to a university library photocopied materials received from the Government in connection with P's representation of a criminal defendant.

Held: Under Oklahoma law, an attorney does not own his client's case file, but rather maintains custodial possession of the file. Because P did not possess an ownership interest in the materials and was thus incapable of effecting a valid gift of the materials under Oklahoma State law, sec. 170(c), I.R.C., precludes the charitable contribution deduction.

Clarke Lewis Randall, for petitioners.

Elizabeth Downs, for respondent.

COHEN, Judge.

Respondent determined deficiencies of $3,675 and $11,109.99 in petitioners' Federal income tax for 2000 and 2001, respectively. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue. The sole issue for decision is whether petitioners are entitled to charitable contribution deduction carryovers for 2000 and 2001 with respect to the 1997 donation of a collection of copies related to one of petitioner's client's case files.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts are incorporated into our findings by this reference. Petitioners resided in Oklahoma during the years in issue and at the time they filed their petition.

From the date of his appointment by the United States District Court in May 1995 until his withdrawal in August 1997, petitioner Leslie Stephen Jones (petitioner) was lead counsel for the defense of Timothy McVeigh (McVeigh), who was prosecuted for and convicted of the April 19, 1995, bombing of the Alfred P. Murrah Federal Building in Oklahoma City, Oklahoma (the Oklahoma City bombing). During the course of his representation of McVeigh and for use in the preparation of his legal defense, petitioner was periodically provided with photocopies of documents and copies of certain tangible objects that were prepared, created, or compiled by agencies of the U.S. Government for the purposes of investigating the Oklahoma City bombing and prosecuting that crime (materials). Petitioner always notified McVeigh of the materials received from the Government and delivered them to McVeigh whenever he requested them and for however long McVeigh desired to keep them.

The materials that petitioner received from the Government in connection with his representation of McVeigh included: Copies of 17,802 Federal Bureau of Investigation (FBI) “320s” (statements of interviews with relevant witnesses); copies of 9,743 FBI “Inserts” (statements of interviews with nonrelevant witnesses); copies of 25,141 pieces of documentary evidence assembled by the FBI; copies of 25,000 pages of FBI notes; copies of 168 files of medical examiner's reports; 100,000 color or black and white photographs taken by Government agencies during the investigation; copies of 1,417 audio and video cassettes made by Government agencies during the investigation; copies of 1,320 computer disks compiled by Government agencies during the investigation; copies of correspondence written by McVeigh to family and friends and acquired by the Government during its investigation (98 letters, 17 postcards, and 11 envelopes); a copy of a text of the Declaration of Independence containing notes made by McVeigh; copies of investigative materials that were compiled by the Government in its prior investigation of David Koresh (5 boxes of FBI 320s and 5 boxes of transcripts); and copies of Government expert summary reports. None of the materials described above bears an original signature of or original notation by McVeigh or any other person. None of the original items, of which copies are included in the materials described above, were prepared personally by petitioner or for him by anyone under his direction.

Several interested entities, including the U.S. Department of Justice, the U.S. Department of the Treasury, the Oklahoma State Bureau of Investigation, the Oklahoma County District Attorney's Office, and the defense team of Terry Nichols, a convicted conspirator in the Oklahoma City bombing, were provided the same materials or a substantial part of the same materials that petitioner received from the Government in connection with his representation of McVeigh. McVeigh's attorneys on appeal were also provided with copies of the same materials received by petitioner and the other members of McVeigh's defense team during McVeigh's initial trial.

Petitioner contacted the University of Texas at Austin to propose donation of the materials on August 27, 1997, the same day that he was allowed to withdraw from representation of McVeigh. Petitioner required, as a primary condition for making the gift, that the deed of transfer be executed before the end of 1997, without regard to physical delivery of the materials. From the beginning of formal discussions regarding the potential donation, petitioner placed restrictions on his donation of the materials. Petitioner required that investigative reports given to petitioner by Terry Nichols's attorney remain sealed and that photographs of the deceased victims of the Oklahoma City bombing remain sealed forever. He also required that the University of Texas provide private work space and staff assistance for petitioner or his designated agents to review the materials. Petitioner required that the University of Texas pay both the storage costs with respect to the materials from the date of acknowledgment of the deed of gift in December 1997 until the date of actual delivery of the materials in January 1999 and the shipping costs for delivery of the materials. Petitioner also required that the University of Texas pay for his designated agent to review and organize the materials between the time that the deed of gift was executed and the date of delivery. The review for which the University of Texas paid included determinations by petitioner or his agent about whether certain documents should be removed from the donated materials due to privilege and confidentiality concerns.

On December 24, 1997, petitioner executed a document entitled “Deed of Gift and Agreement”, which memorialized the transfer by petitioner to the Center for American History at the University of Texas at Austin (University of Texas), a qualifying charitable organization under section 170(c), of the above-described materials that petitioner received from the Government during the preparation of McVeigh's legal defense.

On May 1, 1998, John R. Payne (Payne), employed by petitioners to value the materials for the purpose of their claiming a charitable contribution deduction, appraised the materials at $294,877. Payne spent only one day reviewing the materials, which included hundreds of thousands of items contained in 171 boxes. He reviewed only a small percentage of the materials before assessing their value. Although he discounted his preliminary value assessment by 50 percent because none of the materials were originals, Payne did not take into consideration that multiple copies of the materials had been distributed to various attorneys during the course of the underlying trial. Payne's appraisal method in part involved assessing the value of certain documents at the price that a legal research service would charge for access to them. His appraisal method also relied heavily on purchase prices or assessed values of document archives that Payne considered to be comparable collections. All of the collections to which Payne compared the materials possessed by petitioner as part of McVeigh's case file, however, consisted primarily of original documents, handwritten letters, and original signatures of players in other infamous crimes or scandals. None of the materials in issue are original documents, and none contain an original signature or notation of McVeigh or any other person.

Petitioners claimed a deduction of $294,877 on their joint Federal income tax return for 1997 for the donation of the materials. The deductions at issue in this case were carried over from petitioners' 1997, 1998, and 1999 Federal income tax returns.

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.

OPINION

In order to be eligible for a charitable contribution deduction under section 170(a), a taxpayer must make a gift of property to a qualifying charitable organization. Sec. 170(c). The parties agree that the University of Texas is a qualifying charitable organization for purposes of section 170, but they disagree about whether petitioner legally owned the materials and thus whether his donation and transfer of possession of the materials effected a valid gift. In applying a provision of Federal tax law, State law controls in determining the nature of a taxpayer's legal interest in property. United States v. Natl. Bank of Commmerce, 472 U.S. 713, 722, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985); United States v. Mitchell, 403 U.S. 190, 197, 91 S.Ct. 1763, 29 L.Ed.2d 406 (1971). State law creates legal interests, while Federal law determines when and how those interests shall be taxed. United States v. Mitchell, supra at 197. In order to make a valid gift for Federal tax purposes, a transfer must at least effect a valid gift under the applicable State law. See Woodbury v. Commissioner, 49 T.C. 180, 193–194, 1967 WL 1288 (1967).

In the case of a valid gift, the amount of an otherwise allowable deduction for the charitable contribution of property that would produce ordinary income if...