The lead lawyer for Timothy McVeigh, the Oklahoma City bomber, received bankers’ boxes full of documents from the prosecution. The boxes contained FBI memoranda, lab reports, computer discs and photographs relating to the bombing. After the trial, he donated them to the Center for American History at the University of Texas. He claimed a tax deduction based on the appraised value, $294,877, beginning on his 1997 income tax return. The unused portion of the deduction was carried forward for a number of years.
In 2004, the IRS caught up with the deduction and disallowed it for the years 2000 ($3675) and 2001 ($11,109.99). By then, most of the deduction had presumably been used up, but the statute of limitations prevented the IRS from going back to 1997 — 1999.
The case wound its way through the courts. In spring 2009, the Tenth Circuit Court of Appeals in Denver ruled in favor of the IRS, finding that the papers and photographs had been assembled and collated for the lawyer and “produced” for him. Consequently, the papers and photographs did not qualify as a capital asset. Because the property could therefore generate no “long term capital gain,” the lawyer could only deduct what he had paid for the property — $0.
What this Case Reminds Us
Most charities are not likely to see a deduction like this. The same principle, though, applies to more everyday donations. A taxpayer cannot, for instance, claim a deduction from donating “a copyright, literary, musical, or artistic composition, a letter or memorandum or similar property” if the taxpayer’s “personal efforts created such property.” Such documents and things do not qualify as “capital assets” and therefore cannot generate deductions based on any increase in value over the taxpayer’s basis — usually what he paid for materials, labor, etc.
The case also reminds us that a taxpayer contemplating a deduction of appreciated property should usually wait a year from his acquisition before donating it. Mr. McVeigh’s lawyer did that. The failure to wait, though, occasionally trips up the donor of property like a conservation easement that has increased in value since the owner-donor bought it. If the owner-donor jumps the gun and donates the conservation easement less than a year after buying the property, part of the charitable-contribution deduction disappears.