Appeals Court Gives Taxpayer Good News, Bad News

The Tenth Circuit Court of Appeals started out with good news for Leslie Stephen Jones–they agreed that the Tax Court had come to an erroneous conclusion about the application of §1221(a)(3)(A) preventing the asset he had donated from being treated as a capital asset.

However, the Tenth Circuit then went on to rule instead that §1221(a)(3)(B) gave the same result, meaning that, in the end, the taxpayer was not able to claim a charitable contribution deduction.

Mr. Jones was counsel for Timothy McVeigh in the Oklahoma City bombing case. Following the case, Mr. Jones donated the case files to the University of Texas, had the papers appraised and claimed a charitable contribution deduction for the fair value of the papers.

The IRS disallowed the deduction on two grounds–one that he did not own the papers (they were the property of his client’s estate) and, if he did own them, they were not a capital asset. The Tax Court had agreed with the IRS on both matters.

The Tenth Circuit did not rule on the ownership issue, finding that the asset was not capital. While it found the papers were not created by Mr. Jones (which was the exception the Tax Court had relied upon), it found they were “prepared or produced” for Mr. Jones, thus invoking §1221(a)(3)(B.

Though many of the documents were copies of documents the government had produced in its investigation, the Court found that by the act of compiling and producing those copies for Mr. Jones, the specific documents he donated were produced for him, and thus were excluded from the definition of a capital asset.

Under §170(e)(1)(A) Mr. Jones therefore had to reduce the value of the donated asset by the amount of gain that would not have been long term capital gain if the property had been sold. Since he had no basis in the asset, that meant there was no allowable deduction.

Jones v. Commissioner, CA10, 3/27/09.

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