10th Circuit Denies $300k Charitable Deduction Claimed by Timothy McVeigh's Lawyer for Donation of Work Papers to University of Texas

I previously blogged the Tax Court's denial of a $300,000 charitable deduction claimed by Leslie Stephen Jones, lead counsel for the defense of Timothy McVeigh in the 1995 bombing of the Alfred P. Murrah Federal Building in Oklahoma City, for the donation of his papers in the case to the University of Texas. Jones v. Commissioner, 129 T.C. 146 (2007).  The Tenth Circuit yesterday affirmed the Tax Court's decision.  Jones v. Commissioner, No.08-9001 (10th Cir. Mar. 27, 2009):

[T]he tax court held that Taxpayer was not entitled to claim a deduction on the donation of the discovery material for two reasons: (1) Taxpayer did not own the discovery material, and (2) the discovery material was not a capital asset [and thus Taxpayer's charitable deduction was limited to  his basis in the donated material -- zero]. Because we hold that the discovery material is not a capital asset, we need not decide whether Taxpayer owned the discovery material under Oklahoma law. As the following discussion demonstrates, however, our rationale for determining that the discovery material is not a capital asset differs from that of the tax court. ...

[T]he tax court ruled that if Taxpayer owned the discovery material, it was excluded under the IRC’s definition of capital asset pursuant to § 1221(a)(3)(A). Specifically, the tax court held that the discovery material qualified as “letters, memoranda, or similar property created by the taxpayer’s own efforts.”  The record, however, clearly demonstrates—and the Commissioner appears to concede—that the property which Taxpayer claimed as a charitable contribution was not created by his own personal efforts. Thus, we believe the tax court incorrectly applied § 1221(a)(3)(A) to the discovery material. Nevertheless, for the reasons articulated below, we hold that § 1221(a)(3)(B) encompasses the discovery material donated by Taxpayer, thereby excluding it from the IRC’s definition of capital asset. Accordingly, we affirm the tax court’s ruling, albeit on alternative grounds.

The items Taxpayer donated consisted of copies of FBI memoranda, lab reports, computer discs, and photographs—all containing information related to the investigation and prosecution of Timothy McVeigh. In addition, the discovery material included letters to Taxpayer from the FBI and the Department of Justice explaining the contents of the material. We have no trouble concluding, therefore, nor does Taxpayer seriously contest, that the discovery material is properly characterized as “letter[s], memorand[a], or similar property.”  § 1221(a)(3)(B) .

We next consider whether the material was “prepared or produced” for Taxpayer. ...  Taxpayer argues that the discovery material does not fall under § 1221(a)(3)(B) because it was not produced specifically for him. Admittedly, the discovery material was not originally created for Taxpayer’s benefit. Rather, the Government first compiled the material to assist in its investigation and prosecution of McVeigh. Nevertheless, we believe the discovery material falls under § 1221(a)(3)(B)’s plain language. The Government made numerous copies of memoranda, investigative reports, photographs, etc., specifically for Taxpayer. Subsequently, they organized and categorized all the material for the benefit of Taxpayer and his client. The Government then placed the discovery material in banker’s boxes and prepared letters for Taxpayer explaining the contents of each box. Clearly, the discovery material was “br[ought] into a suitable condition,” and “made ready” for Taxpayer’s future use. The Government then produced the discovery material for Taxpayer, i.e., the Government “offered,” or “present[ed]” the material to Taxpayer for his “view,” “consideration,” and “use” in representing McVeigh. ...

[W]e hold that the discovery material donated by Taxpayer falls within the plain language of § 1221(a)(3)(B)—thereby limiting the charitable deduction amount to Taxpayer’s basis in the property. See Morrison [v. Commissioner, 71 T.C. 683, 689 (1979)] (holding that a Congressman’s charitable contribution deduction for letters, memoranda, and similar property provided to him by third parties during the course of his legislative duties was limited to his basis in the property). Because Taxpayer had no basis in the discovery material, he is precluded from claiming any income tax deduction for his charitable donation.

(Hat Tip: How Appealing.)