The Tax Court ruled that a criminal defense attorney who donated case materials in a prominent case to the University of Texas did not have sufficient ownership rights to the materials to claim a charitable deduction under IRC § 170. Even if the taxpayer did exhibit proper ownership, section 170(e)(1)(A) would limit his deduction to zero—his cost basis in the materials. Based on the disallowed deductions, the taxpayer was found liable for deficiencies in 2000 and 2001.
Leslie Stephen Jones represented accused Oklahoma City bomber Timothy McVeigh from May 1995 until Jones withdrew from the case in August 1997. McVeigh was convicted in June 1997 and subsequently executed for the bombing of the Alfred P. Murrah Federal Building, which killed 168 people. Jones donated to the university materials in his possession, which included FBI case notes, witness interviews, medical examiner reports, photographs and computer disks, among many other materials tied to the case.
Based upon an appraiser’s valuation, Jones and his wife claimed a charitable deduction of $294,877 in 1997, which was carried over from their 1997, 1998 and 1999 joint federal income tax returns. The IRS denied the deduction and assessed deficiencies of $3,675 for 2000 and $11,110 for 2001.
Since state law controls the nature of a taxpayer’s legal interest in property, the court first examined whether Jones had a property interest in the donated materials under Oklahoma state law. In denying Jones’ assertion that he owned the materials, the court noted the unique fiduciary relationship between an attorney and a client. The rules of ethics charge an attorney in that role with the safekeeping of a client’s property.
The court said the attorney-client relationship is fundamentally one of agency, and the delivery of materials to Jones by various investigating government agencies occurred within the scope of that agency relationship. Though Oklahoma courts have not ruled on this specific fact pattern, the court cited cases showing the weight of authority supports the notion that clients are the legal owners of their case files, including the attorney’s work product. Furthermore, the rules of ethics would prevent Jones from disclosing or capitalizing on any information related to his representation of McVeigh absent an explicit waiver of the attorney-client privilege. No proof of waiver was presented.
The court further noted that even if Jones could prove ownership, section 170(e)(1)(A) requires the deduction be reduced by the amount of gain that would not have been long-term gain if the property contributed had been sold at its fair market value. Since the property would be work product that fell under the letter, memorandum or similar property exclusion from long-term gain treatment under section 1221(a)(3), Jones would have been left to deduct only his basis in the property, which was zero.
This case should highlight for tax practitioners the close intersection of state law and federal tax law when property rights are at issue. It should also give attorneys pause to consider the ethical implications of divulging to third parties any information obtained in the course of the attorney-client relationship—for tax benefit or otherwise.
n Sherrel and Leslie Stephen Jones v. Commissioner, 129 TC no. 16
Prepared by JofA staff member Jeffrey Gilman, Esq.