109 T.C. No. 12
UNITED STATES TAX COURT
JOHN T. AND LINDA L. HEWITT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17146-95. Filed October 29, 1997.
During 1990 and 1991, Ps donated nonpublicly
traded stock for which they claimed charitable
contribution deductions in amounts which the parties
agree represent the fair market values of such stock.
Ps did not obtain qualified appraisals of the stock
prior to filing their returns, and Ps did not attach a
summary thereof to the returns. Held, Ps have not
substantially complied with sec. 1.170A-13, Income Tax
Regs., and are not entitled to charitable contribution
deductions in excess of that allowed by R.
Neil L. Rose, Donna S. Rucker, and Robert E. Lee, for
petitioners.
Deborah C. Stanley, for respondent.
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OPINION
TANNENWALD, Judge: Respondent determined deficiencies in
petitioners' Federal income taxes and penalties under section
6662(a)1 as follows:
Year Deficiency Penalty
1990 $17,332 $3,466
1991 22,945 4,589
After concessions, the sole issue for decision is whether
petitioners should be allowed charitable deductions in amounts
greater than those allowed by respondent for gifts of nonpublicly
traded stock.
Background
This case was submitted fully stipulated under Rule 122. The
stipulation of facts and attached exhibits are incorporated
herein by this reference.
Petitioners resided in Virginia Beach, Virginia, at the time
they filed their petition. They filed their joint Federal income
tax returns for the years in issue with the Internal Revenue
Service Center, Philadelphia, Pennsylvania.
Petitioner John T. Hewitt, along with about a dozen other
investors, bought Mel Jackson's Tax Service in Tidewater,
1
Unless otherwise indicated, all statutory references are
to the Internal Revenue Code in effect for the years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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Virginia (the company), in 1982. In fiscal year 1987, the
company generated over $1 million in revenues and by 1988, was
operating out of 50 office locations in three States. In 1988,
the company name was changed to Jackson Hewitt Tax Service, Inc.
(Jackson Hewitt).
During the taxable year 1990, petitioners made gifts of
Jackson Hewitt stock to the Hewitt Foundation (the foundation)
and the Foundry United Methodist Church (the church). During
1991, petitioners made gifts of Jackson Hewitt stock to the
foundation and the church.
At the time of the gifts, the market for Jackson Hewitt
stock operated primarily through individuals or organizations
contacting the company and offering to buy or sell at a given
price. In arriving at the price, the potential purchaser had
access to information with respect to the most recent trades and
offers to sell by other shareholders. At the time of the gifts,
approximately 700,000 shares of Jackson Hewitt stock were
outstanding in the hands of approximately 400 individuals and
organizations (among whom were employees, franchisees, and others
unrelated to the company). Between May 1, 1990, and December 31,
1991, 317 stock transfers were recorded in the company's stock
book, involving approximately 100,000 shares.
In addition to the company market, another market operated
through Wheat, First Securities, Inc., in which hundreds to
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thousands of shares of Jackson Hewitt stock were traded between
1990 and 1992 for about 80 individual accounts.
On January 29, 1994, the company began trading on NASDAQ.
Prior to January of 1994, Jackson Hewitt stock did not qualify as
"publicly traded securities" under section 1.170A-13(c)(7)(xi),
Income Tax Regs.
Petitioners filed timely joint Federal income tax returns
for the taxable years 1990 and 1991. Attached to petitioners'
1990 return were Schedule A (Itemized Deductions), noting Gifts
to Charity other than cash or check in the amount of $35,745,2
and Form 8283 (Noncash Contributions). In section B of Form 8283
(Appraisal Summary of $5000 or More Items), petitioners reported
the donation of two blocks of stock valued at $26,000 and $7,000,
respectively, which they reported as acquired by purchase on
August 14, 1982, for $522 and $131, respectively, and for which
they claimed deductions of $26,000 and $7,000, respectively.
Attached to petitioners' 1991 Form 1040 were Schedule A,
noting Gifts to Charity other than cash or check in the amount of
$89,479,3 and Form 8283. In section A of Form 8283 (items of
$5000 or less and certain publicly traded securities),
petitioners reported a contribution to the foundation of stock
acquired by purchase on August 1, 1982, with a basis of $2,832
2
This amount includes $2,745 in gifts not at issue.
3
This amount includes $1,479 in gifts not at issue.
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and a value of $48,000. They also reported a contribution to the
church of stock acquired by purchase on August 1, 1982, with a
basis of $3,057 and a value of $40,000.4 No section B
(Appraisal Summary of $5,000 or More Items) was attached.
Petitioners did not obtain a qualified appraisal, as defined
in section 1.170A-13(c)(3), Income Tax Regs., of the Jackson
Hewitt stock they donated in 1990 and 1991. The fair market
values claimed by petitioners with respect to their gifts of
Jackson Hewitt stock in 1990 and 1991 were based on the average
per-share price of Jackson Hewitt stock traded in bona fide,
arm's-length transactions at approximately the same time as
petitioners made the gifts.
In the notice of deficiency, respondent allowed petitioners
deductions for the gifts of Jackson Hewitt stock in 1990 and 1991
in the amounts of their basis in that stock only.5
Discussion
Section 170(a)(1) provides: "There shall be allowed as a
deduction any charitable contribution * * * payment of which is
made within the taxable year. A charitable contribution shall be
allowable as a deduction only if verified under regulations
4
Petitioners incorrectly allocated the value of the two
blocks of stock on the Form 8283; the correct allocation is
$32,000 for the 800 shares donated to the foundation and $56,000
for the 1,400 shares donated to the church.
5
However, respondent incorrectly computed the basis for
1991; the correct amount is $5,889, instead of $5,189.
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prescribed by the Secretary." Where the charitable contribution
consists of property other than cash, the value of the
contribution, with exceptions not relevant here, is the fair
market value of the donated property at the time of contribution.
Sec. 1.170A-1(c)(1), Income Tax Regs.
A further applicable statutory provision is section 155 of
the Tax Reform Act of 1984 (Division A of the Deficit Reduction
Act of 1984), Pub. L. 98-369, 98 Stat. 494, 691 (hereinafter
referred to as section 155), which had its origins in proposed
amendments to section 170 set forth in section 154 of the
legislation as passed by the Senate. S. Comm. on Finance,
Deficit Reduction Act of 1984, Statutory Language of Provisions
Approved by the Committee on March 21, 1984, S. Prt. 98-169, vol.
II, at 449-459 (S. Comm. Print 1984); H. Conf. Rept. 98-861, at
993-999 (1984), 1984-3 C.B. (Vol. 2) 1, 247-253. The Senate
provision contained detailed rules regarding substantiation of
contributions of property to charitable organizations.6 Section
155, in its final form, adopted an approach which did not amend
section 170 but provided separate rules for such substantiation.
6
The House version did not contain a comparable provision.
H. Conf. Rept. 98-861, at 993 (1984), 1984-3 C.B. (Vol. 2) 1,
247. Subsec. (j)(5) of the proposed Senate amendment to sec. 170
provided that failure to comply with the appraisal provision
would result in the disallowance of the excess of the value of
the charitable contribution over basis rather than the entire
contribution. S. Comm. on Finance, Deficit Reduction Act of
1984, Statutory Language of Provisions Approved by the Committee
on March 21, 1984, S. Prt. 98-169, vol. II, at 451-452 (S. Comm.
Print 1984).
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It incorporated many of the provisions of the Senate version but
left the details of implementation to regulations to be issued by
the Secretary of the Treasury. The provisions relevant to this
case state:
Sec. 155. Substantiation of Charitable Contributions;
Modifications of Incorrect Valuation Penalty.
(a) Substantiation of Contributions of
Property.--
(1) In general.--Not later than December 31,
1984, the Secretary shall prescribe regulations
under section 170(a)(1) of the Internal Revenue
Code of 1954, which require any individual,
closely held corporation, or personal service
corporation claiming a deduction under section 170
of such Code for a contribution described in
paragraph (2)--
(A) to obtain a qualified appraisal for
the property contributed,
(B) to attach an appraisal summary to
the return on which such deduction is first
claimed for such contribution, and
(C) to include on such return such
additional information (including the cost
basis and acquisition date of the contributed
property) as the Secretary may prescribe in
such regulations.
Such regulations shall require the taxpayer to
retain any qualified appraisal.
(2) Contributions to which paragraph (1)
applies.--For purposes of paragraph (1), a
contribution is described in this paragraph--
(A) if such contribution is of property
(other than publicly traded securities), and
(B) if the claimed value of such
property (plus the claimed value of all
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similar items of property donated to 1 or
more donees) exceeds $5,000.
In the case of any property which is nonpublicly
traded stock, subparagraph (B) shall be applied by
substituting "$10,000" for $5,000".
The Secretary of the Treasury has implemented the foregoing
provisions by issuing section 1.170A-13, Income Tax Regs., which,
among other matters, provides that a "qualified appraisal" be
obtained prior to the filing of the return in which the deduction
is claimed and that an appraisal summary be submitted with that
return.
Respondent disallowed the amounts of petitioners' charitable
deductions for the Jackson Hewitt stock in excess of basis due to
the lack of qualified appraisals.7 Respondent does not dispute
that petitioners made charitable contributions to the church and
foundation within the respective taxable years or that the
claimed values did not represent the fair market values of such
contributions.8 Petitioners maintain that they should be allowed
the claimed deductions because their use of the average per-share
price of Jackson Hewitt stock traded in bona fide, arm's-length
transactions constituted substantial compliance with the
7
Respondent has not sought to disallow the contributions
in their entirety. Cf. D'Arcangelo v. Commissioner, T.C. Memo.
1994-572; see also supra note 6.
8
Respondent has conceded the sec. 6662(a) penalty insofar
as it relates to the contributions to the church and the
foundation.
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requirements of section 1.170A-13, Income Tax Regs., and relieved
them of any obligation to obtain a qualified appraisal.
It is clear that petitioners did not obtain any qualified
appraisal, and no summary of any such appraisal was submitted
with the returns. The returns only reflected gifts of stock
without identifying the gifts as Jackson Hewitt stock, without
any indication of the number of shares, and setting forth only
the cost and claimed values. The question is whether petitioners
satisfied the appraisal requirements of the statute and the
regulations.
Petitioners rely on Bond v. Commissioner, 100 T.C. 32
(1993), to sustain their position that a qualified appraisal is
not a requirement under the circumstances herein. In that case,
respondent challenged a charitable deduction for failure to
obtain a qualified appraisal prior to filing the return. The
parties stipulated there was no valuation overstatement. We
found that the taxpayers had had the subject property, two
blimps, appraised by a qualified appraiser within the specified
time frame, and that substantially all of the information
required by respondent's regulations, section 1.170A-13(c)(3)(i),
Income Tax Regs., was contained in an appraisal summary, signed
by a qualified appraiser,9 set forth in the Form 8283 attached to
9
The only omitted item of required information was the
qualifications of the appraiser, which were promptly furnished to
respondent at the beginning of the audit of the return. See Bond
(continued...)
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their return. Accordingly, we held that the taxpayers had
substantially complied with the requirements of the statute and
the regulations even though a separate appraisal had not been
obtained and the qualifications of the appraiser were omitted
from the appraisal summary attached to the return.
In so holding, we stated:
the essence of section 170 is to allow certain
taxpayers a charitable deduction for contributions made
to certain organizations. * * * However, the reporting
requirements [of section 1.170A-13, Income Tax Regs.,]
do not relate to the substance or essence of whether or
not a charitable contribution was actually made. * * *
[Bond v. Commissioner, 100 T.C. at 41.]
As a consequence, we concluded that the reporting requirements of
section 1.170A-13, Income Tax Regs, were directory, not
mandatory, and therefore, that these requirements could be met by
substantial, rather than strict, compliance. Bond v.
Commissioner, 100 T.C. at 41. In effect, we held that the
appraisal summary itself constituted the required appraisal. In
this connection, we note that the appraisal requirements may not
be entirely procedural so as to justify the application of the
substantial compliance rules under any and all circumstances.
See Atlantic Veneer Corp. v. Commissioner, 812 F.2d 158, 160-161
(4th Cir. 1987), affg. 85 T.C. 1075 (1985).
We find nothing in Bond v. Commissioner, supra, which
relieves petitioners of the requirement of obtaining a qualified
9
(...continued)
v. Commissioner, 100 T.C. 32, 41-42 (1993).
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appraisal. Such a requirement is statutorily imposed by section
155(a)(1)(A), and its impact is reflected in the legislative
history of that provision. See H. Conf. Rept. 98-861, at 995-
996 (1984), 1984-3 C.B. (Vol. 2) 1, 249-250, stating:
pursuant to present law (sec. 170(a)(1)), which
expressly allows a charitable deduction only if the
contribution is verified in the manner specified by
Treasury regulations, no deduction is allowed for a
contribution of property for which an appraisal is
required under the conference agreement unless the
appraisal requirements are satisfied.
* * * * * * *
For donations of property as to which the donor
appraisal requirements apply, the donor must obtain and
retain a qualified written appraisal by a qualified
appraiser for the property contributed and must attach
a signed appraisal summary to the return on which the
deduction is first claimed (with such other information
as prescribed by regulations).
Petitioners herein furnished practically none of the
information required by either the statute or the regulations.
Given the statutory language and the thrust of the concerns about
the need of respondent to be provided with appropriate
information in order to alert respondent to potential
overvaluations, see infra p. 13, petitioners simply do not fall
within the permissible boundaries of Bond v. Commissioner, supra,
where an appraisal summary, which was completed by a qualified
appraiser, contained most of the required information and could
therefore be treated as a written appraisal, was attached to the
return. Cf. D'Arcangelo v. Commissioner, T.C. Memo. 1994-572
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(respondent prevailed where no qualified appraisal was obtained).
Petitioners also seek to support their position by claiming
that there was a market which provided support for their use of
the average per-share price of the Jackson Hewitt stock. This
position is without merit. Given the amounts of the gifts in
this case, the exemption from the qualified appraisal
requirements is statutorily limited to "publicly traded
securities". See sec. 155(a)(2)(A). The parties have stipulated
that the Jackson Hewitt stock did not qualify as "publicly traded
securities". See supra p. 4; see also Staff of Joint Comm. on
Taxation, General Explanation of the Revenue Provisions of the
Deficit Reduction Act of 1984, at 506 n.21 (J. Comm. Print 1985).
In this context, the fact that Bond v. Commissioner, 100 T.C. 32
(1993), involved blimps which were not as easily valued as the
Jackson Hewitt stock is irrelevant.
Petitioners' reliance on cases such as Taylor v.
Commissioner, 67 T.C. 1071 (1977); Columbia Iron & Metal Co. v.
Commissioner, 61 T.C. 5 (1973); Sperapani v. Commissioner, 42
T.C. 308 (1964); Cary v. Commissioner, 41 T.C. 214 (1963), where
taxpayers prevailed on the basis of substantial compliance is
likewise without merit. The key to those cases is that, as in
Bond v. Commissioner, supra, the taxpayers had provided most of
the information required, and the single defect in furnishing
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everything required was not significant.10 Cf. Knight-Ridder
Newspapers v. United States, 743 F.2d 781, 793-797 (11th Cir.
1984).
Moreover, it is clear that the principal objective of
section 155 was to provide a mechanism whereby respondent would
obtain sufficient return information in support of the claimed
valuation of charitable contributions of property to enable
respondent to deal more effectively with the prevalent use of
overvaluations. See S. Comm. on Finance, Deficit Reduction Act
of 1984, Explanation of Provisions Approved by the Committee on
March 21, 1984, S. Prt. 98-169, vol. I, at 444-445 (S. Comm.
Print 1984); Staff of Joint Comm. on Taxation, General
Explanation of the Revenue Provisions of the Deficit Reduction
Act of 1984 (J. Comm. Print 1985); cf. Atlantic Veneer Corp. v.
Commissioner, 85 T.C. 1075, 1084 (1985), affd. 812 F.2d 158 (4th
Cir. 1987). Such need exists even though in a particular case,
such as this, it turns out that the taxpayer's deduction was in
fact based on the fair market value of the property. This
happenstance is insufficient to constitute substantial compliance
with a statutory condition to obtaining the claimed deduction.
As we see it, what petitioners are seeking is not the application
10
We recognize that Cary v. Commissioner, 41 T.C. 214
(1963), may not fall within this description, but it is clear
that we were persuaded that the omission involved therein was
solely through inadvertence. Petitioners' failure to comply goes
far beyond inadvertence. Cary is therefore clearly
distinguishable.
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of the substantial compliance principle but an exemption from the
clear requirement of the statute and regulations in a situation
where there is no overvaluation of the charitable contribution.
We are not prepared to follow that path to decision.
We hold that petitioners are not entitled to deduct amounts
in excess of those allowed by respondent for the contributions of
Jackson Hewitt stock. See supra note 7.
To take into account the concessions of the parties,
Decision will be entered
under Rule 155.