December 20, 2018

Attorneys are frequently given documents and copies of materials that may have value for historic purposes. Can they donate them to charitable organizations, such as libraries, and claim a tax deduction? The U.S. Tax Court answered that question in a case involving Timothy McVeigh, who was convicted and executed for his role in the April 1995 bombing of an Oklahoma City federal building that killed 168 people.

Facts of the case: Leslie Stephen Jones was the lead counsel for Timothy McVeigh from the date of his appointment by the United States District Court in May 1995 until his withdrawal in August 1997.

During the course of representing McVeigh and for use in his legal defense, Jones “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,” according to the U.S. Tax Court.

These materials included copies of: statements from interviews with witnesses, FBI notes, medical examiner reports, correspondence written by McVeigh to friends and relatives, photographs taken by government agencies and a copy of a text of the Declaration of Independence containing notes made by McVeigh.

The Tax Court emphasized the documents and other items were copies. “None of the materials described above bears an original signature of, or original notation by McVeigh, or any other person,” the court added. In addition, several other interested parties and entities were provided with some or all of the materials that Jones was given.

The attorney donated the materials, with some stipulations, to the University of Texas at Austin for inclusion in its Center for American History. The school is a qualifying charitable organization under Internal Revenue Code section 170(c).

Jones hired an appraiser to value the materials in order to take a charitable contribution deduction. The appraiser reviewed a small percentage of thousands of items contained in 171 boxes.

How the Materials Were Valued

Although the appraiser discounted his preliminary value assessment by 50 percent because the materials were not originals, the Court explained, he did not take into consideration that multiple copies had been distributed to other parties during the course of the trial.

The appraisal method used included assessing the value of certain documents at the price that a legal research service would charge for accessing them. The method also relied heavily on purchase prices or assessed values of document archives that the appraiser considered to be comparable collections. However, the collections the appraiser compared the McVeigh materials to “consisted primarily of original documents, handwritten letters, and original signatures of players in other infamous crimes or scandals,” the Tax Court stated.

Based on the appraisal, Jones and his spouse claimed a charitable write-off on their tax return of nearly $295,000. The IRS disallowed the deduction.

The Court’s Ruling

In order to make a valid gift for federal tax purposes, the donor must be the legal owner of property that is given to a qualified organization. Otherwise, there is no deduction for the donation.

In the case of a valid gift, the amount of an allowable deduction for the charitable contribution of property, which would produce ordinary income if sold at its fair market value, is limited to the donor’s cost or basis in the contributed property.

The Tax Court concluded that Jones could not take a charitable deduction because he did not personally own the materials that were provided to him for the purpose of preparing McVeigh’s legal defense.

Under the state law of Oklahoma, as in most jurisdictions, a client is considered the owner of an attorney’s case files. This is especially true if the files do not include any “work product,” which the Court “generally defined as (an) attorney’s or accountant’s notes, drafts, and internal memoranda recording the professional’s ideas, opinions, and impressions.”

Although some courts have ruled that ownership of a case file is divided between an attorney or a client, these rulings generally hold that the attorney owns the portion involving his or her work product. In the McVeigh case, the Tax Court stated the materials involved were not Jones’ work product and did not contain his ideas, opinions or impressions.

So Jones’ possession of the files did not legally establish ownership because he held them as his client’s agent, fiduciary and custodian. Furthermore, the attorney did not establish that McVeigh waived the attorney-client privilege with respect to the files. So the U.S. Tax Court concluded Jones was incapable of making a valid gift under state law.

Finally, the Tax Court noted that it had “serious doubts about the value asserted by the petitioners’ appraiser.” The reason: The materials contain merely copies of documents and other items that have been duplicated many times and are possessed by many people and entities.

Even if the attorney was treated as the owner of any work product in the files, the Tax Court stated, his deduction for the donation would be limited to his basis in the materials — zero.

But because he was not the legal owner, the court added that it did not need to reach a conclusion on the valuation of the materials. (Sherrel and Leslie Stephen Jones, 129 TC No. 16)

© 2018