Jones v. Comm'rJones v. Comm'r
Lead Opinion
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 U.S. 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
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
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 1 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
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 contribution 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,
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 sold at its fair
We thus first consider whether petitioner owned the materials donated such that he was capable of making a valid gift under the law of the State of Oklahoma. In determining what the relevant State law is, that State’s highest court is the best authority on its own law. Commissioner v. Estate of Bosch,
Respondent contends that petitioner did not own the materials relating to his defense of McVeigh in his trial for the Oklahoma City bombing and thus could not have divested himself of ownership in order to effect a valid inter vivos gift of those materials. Petitioners assert that, under Oklahoma law, petitioner legally owned the materials in issue and that the materials constituted petitioner’s personal property.
The parties have not cited, and we have not found, any case in Oklahoma or any other jurisdiction that addresses directly the ownership of materials in the possession of an attorney that are related to the representation of his client. The ownership of client files is apparently an issue of first impression under Oklahoma law. However, Oklahoma State law in related areas provides us with general guidance, and we are assisted in our analysis by a repository of relevant cases decided by courts in other jurisdictions that have
Petitioners maintain that, because petitioner at all relevant times exercised possession and control of the materials, petitioner was the legal owner of those materials until he donated them to the University of Texas. Petitioners argue further that, because McVeigh did not typically hold any of the materials in excess of 72 hours, McVeigh did not exhibit control or dominion over the materials and therefore could not be the legal owner of them.
As a general rule under Oklahoma law, possession of personal property is, if unexplained, prima facie evidence of ownership. Ragan v. Citizens’ State Bank,
Respondent argues that general principles of agency law and ethical rules governing the conduct of attorneys establish that petitioner did not own the materials and was not entitled to dispose of them. Respondent contends that petitioner received the materials as an agent of McVeigh during the course of defending McVeigh in his trial for the Oklahoma City bombing and that the materials thus belong to McVeigh, not petitioner. Petitioners maintain that general agency law is inapplicable to this case and that, although his clients may possess a right of access to information in their case files,
Central to our analysis of ownership is the principle that the attorney-client relationship is fundamentally one of agency. See Commissioner v. Banks,
Petitioners assert that general principles of agency law do not resolve the issue of ownership, and they rely instead on several cases from other jurisdictions that have considered the issue of ownership of client case files. Those cases generally hold that an attorney or accountant, not his client, has property rights in the portions of his client’s case file containing the professional’s self-created work product or working papers, generally defined as the attorney’s or accountant’s notes, drafts, and internal memoranda recording the professional’s ideas, opinions, and impressions. See Corrigan v. Armstrong, Teasdale, Schlafly, Davis & Dicus,
The majority of courts that have considered the issue of whether attorneys or clients own case files have held that clients are the legal owners of their entire case files, including the attorney’s work product for which the client paid when he purchased the attorney’s services. See Swift, Currie, McGhee & Hiers v. Henry,
However, some courts have held that ownership of a case file is divided between attorney and client. These jurisdictions generally hold that an attorney’s work product, including internal legal memoranda and preliminary drafts of documents, remains the property of the attorney; however, the client has superior property rights in the end product of the attorney’s representation, which includes finalized legal documents, pleadings filed, correspondence among parties, and other papers “ ‘exposed to public light by the attorney to further [the] client’s interests’”. Sage Realty Corp. v. Proskauer Rose Goetz & Mendelsohn L.L.P., supra at 881-882 (quoting Fed. Land Bank v. Fed. Intermediate Credit Bank,
The Oklahoma Rules of Professional Conduct generally imply that clients have ownership rights in their case files under Oklahoma law. Rule 1.6 of the Oklahoma Rules of Professional Conduct, which codify general principles regarding an attorney’s ethical duties and fiduciary responsibilities to his client, provides:
(a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation * * * [Okla. Stat. Ann. tit. 5, ch. 1, app. 3-A, R. 1.6(a) (West 2001).]
Petitioners assert that rule 1.6, Oklahoma Rules of Professional Conduct, is irrelevant because petitioner testified without contradiction that McVeigh waived the attorney-client privilege and the protection of the work product privilege.
Rules 1.15 and 1.16 of the Oklahoma Rules of Professional Conduct also support our holding. Rule 1.15 requires that an attorney safeguard all clients’ property in the attorney’s possession and preserve records of account funds and other property for at least 5 years after representation is terminated. Okla. Stat. Ann. tit. 5, ch. 1, app. 3-A, R 1.15(a). Rule 1.16, Oklahoma Rules of Professional Conduct, requires:
(d) Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client’s interests, such as * * * surrendering papers and property to which the client is entitled * * *. The lawyer may retain papers relating to the client to the extent permitted by other law. [Okla. Stat. Ann. tit. 5, ch. 1, app. 3-A, R 1.16(d).]
The Comment to rule 1.16 explains the last clause of the quoted rule above by noting that the attorney may retain papers as a security for a fee only to the extent permitted by law.
The Oklahoma Rules of Professional Conduct cited above illustrate the fiduciary nature of the attorney-client relationship. They emphasize the attorney’s duty to keep details of his representation of a client confidential, even after the representation has been terminated, and they suggest that, while an attorney may retain documents related to his representation of the client in certain situations, those documents rightfully belong to the client and should not be disposed
Petitioners rely primarily on Corrigan v. Armstrong, Teasdale, Schlafly, Davis & Dicus,
Because the materials are not work product, it is not necessary for us to determine in this case whether Oklahoma would follow the majority or minority view with regard to ownership of case files. We are aware of no court that has held that clients have no ownership interests in their respective case files. Rather, as we have summarized above, all jurisdictions that have considered explicitly the issue of ownership of case files have held that clients have superior property rights in at least those items in the case file that are not the attorney’s self-created work product. Those courts that have reserved a property right to the attorney have done so only with regard to the attorney’s personal notes, working drafts and papers, and internal memoranda. The materials in issue in this case fall outside of this work product exception. Thus, under either approach, the documents in issue in this case belong properly to petitioner’s client, McVeigh, and not to petitioner. Petitioner, in effect, was merely the authorized and incidental custodian of the copies in issue and had no ownership rights sufficient to effect a gift or support a charitable contribution deduction under section 170. See Pettit v. Commissioner,
Petitioners argue further that, because it is undisputed that attorneys are entitled to retain copies of their clients’ case files even after surrendering them to their clients and because the materials are copies, not originals, the copies belong legally to petitioner, and thus he may claim an ownership interest in them. We are not persuaded by petitioners’ implicit argument that an attorney’s right to maintain a copy of his client’s file after termination of representation includes a right to publicize, sell, or otherwise dispose of the case file to the attorney’s benefit. Moreover, this argument by petitioners undermines their assertions as to the value of the collection of copies and the amount of their charitable contribution deduction. The appraisal of copied documents from an attorney’s case file as if it contained originals or the only set of documents, even if discounted by 50 percent because all the documents were photocopies, and without regard to the existence of multiple sets of the copies, is a major defect in the Payne appraisal.
Finally, even if the materials were the work product of petitioner such that he was potentially the legal owner of them, petitioners would not be entitled to a charitable contribution deduction for the donation of them. The amount of any charitable contribution of property otherwise taken into account for the deduction under section 170(a) must be reduced by the amount of gain that would not have been long-term capital gain (i.e., by the amount of gain that would have been ordinary gain) if the property contributed had been sold by the taxpayer at its fair market value. Sec. 170(e)(1)(A). Thus, unless the materials were long-term capital
(3) a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—
(A) a taxpayer whose personal efforts created such property, [or]
(B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced * * *
Because the materials would fall under the exclusion of letters, memoranda, or similar property created by the taxpayer’s own efforts, if they had been created by the taxpayer’s own efforts and were work product, we would be required to treat them as ordinary assets. Thus, even if petitioners could fall within the minority work product exception to the general rule that a client’s case file legally belongs to the client, their allowable deduction would be limited to their basis in the materials. Petitioners have presented no evidence that the basis in the materials was greater than zero. Thus, even if we held that petitioner legally owned the materials under a work product exception, section 170(e)(1)(A) would limit petitioners’ deduction to zero, the amount of petitioners’ basis.
Because petitioner was not the legal owner of the materials, he was not legally capable of divesting himself of the burdens and benefits of ownership or effecting a valid gift of the materials. He is therefore not entitled to any deduction under section 170 for his donation of the materials. Because the materials contain merely copies of documents and other items that have been duplicated many times and are in the possession of many different people and entities, we have serious doubts about the value asserted by petitioners’ appraiser. However, because petitioner was not the legal owner of the materials and was not legally entitled to donate them, we need not reach the valuation issue.
We have considered all arguments by the parties, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or without merit.
Decision will be entered for respondent.