129 T.C. No. 16
UNITED STATES TAX COURT
SHERREL AND LESLIE STEPHEN JONES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20253-04. Filed November 1, 2007.
In 1997, P, an attorney practicing in Oklahoma,
donated to a university library photocopied materials
received from the Government in connection with P’s
representation of a criminal defendant.
Held: Under Oklahoma law, an attorney does not
own his client’s case file, but rather maintains
custodial possession of the file. Because P did not
possess an ownership interest in the materials and was
thus incapable of effecting a valid gift of the
materials under Oklahoma State law, sec. 170(c),
I.R.C., precludes the charitable contribution
deduction.
Clarke Lewis Randall, for petitioners.
Elizabeth Downs, for respondent.
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COHEN, Judge: 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 United States
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
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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 pages of FBI notes; copies
of 168 files of medical examiner’s reports; 100,000 color or
black and white photographs taken by Government agencies during
the investigation; copies of 1,417 audio and video cassettes made
by Government agencies during the investigation; copies of 1,320
computer disks compiled by Government agencies during the
investigation; copies of correspondence written by McVeigh to
family and friends and acquired by the Government during its
investigation (98 letters, 17 postcards, and 11 envelopes); a
copy of a text of the Declaration of Independence containing
notes made by McVeigh; copies of investigative materials that
were compiled by the Government in its prior investigation of
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David Koresh (5 boxes of FBI 320s and 5 boxes of transcripts);
and copies of Government expert summary reports. None of the
materials described above bears an original signature of or
original notation by McVeigh or any other person. None of the
original items, of which copies are included in the materials
described above, were prepared personally by petitioner or for
him by anyone under his direction.
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
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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 deceased victims of the Oklahoma City bombing
remain sealed forever. He also required that the University of
Texas provide private work space and staff assistance for
petitioner or his designated agents to review the materials.
Petitioner required that the University of Texas pay both the
storage costs with respect to the materials from the date of
acknowledgment of the deed of gift in December 1997 until the
date of actual delivery of the materials in January 1999 and the
shipping costs for delivery of the materials. Petitioner also
required that the University of Texas pay for his designated
agent to review and organize the materials between the time that
the deed of gift was executed and the date of delivery. The
review for which the University of Texas paid included
determinations by petitioner or his agent about whether certain
documents should be removed from the donated materials due to
privilege and confidentiality concerns.
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
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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 one 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 as part of
McVeigh’s case file, however, consisted primarily of original
documents, handwritten letters, and original signatures of
players in other infamous crimes or scandals. None of the
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materials in issue are original documents, and none contain an
original signature or notation of McVeigh or any other person.
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 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.
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Bank of Commmerce, 472 U.S. 713, 722 (1985); United States v.
Mitchell, 403 U.S. 190, 197 (1971). State law creates legal
interests, while Federal law determines when and how those
interests shall be taxed. United States v. Mitchell, supra at
197. In order to make a valid gift for Federal tax purposes, a
transfer must at least effect a valid gift under the applicable
State law. See Woodbury v. Commissioner, 49 T.C. 180, 193-194
(1967).
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 market
value is limited to the donor’s cost or basis in the contributed
property. Sec. 170(e)(1)(A); Chronicle Publg. Co. v.
Commissioner, 97 T.C. 445, 447-448 (1991).
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, 387
U.S. 456, 465 (1967). Under Oklahoma law, three elements must be
present in order to effect a valid inter vivos gift: First, the
donor must possess a donative intent; second, actual delivery of
the subject matter of the gift must be completed; and, third, the
donor must strip himself of all ownership and dominion over the
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subject matter of the gift. Frazier v. Okla. Gas & Elec. Co., 63
P.2d 11, 13 (Okla. 1936). In order to divest himself of
ownership and dominion over the subject matter of the gift,
petitioner (the donor) must legally own the property in issue.
See Pettit v. Commissioner, 61 T.C. 634, 639 (1974) (“A ‘gift’
has been generally defined as a voluntary transfer of property by
the owner to another without consideration therefor.” (Emphasis
added.)). Beneficial ownership is required. Bare legal title
does not control. See Estate of Davenport v. Commissioner, 184
F.3d 1176, 1182-1185 (10th Cir. 1999), affg. T.C. Memo. 1997-390;
sec. 25.2511-1(g)(1), Gift Tax Regs.
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
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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 considered the issue of ownership
of client files and their specific contents.
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, 131 P. 1093 (Okla. 1913).
Petitioners rely heavily on this general principle of law to
support their assertion of petitioner’s ownership of the
materials. Due to the unique fiduciary relationship between an
attorney and his client, however, we are not persuaded that items
in an attorney’s possession, and especially in a client’s case
file, generally constitute the attorney’s personal property.
Ethical rules regarding an attorney’s obligation to maintain
funds and other property belonging to his client or a third party
separate from the attorney’s own property, for example, indicate
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the attorney’s essential role as a fiduciary charged with
safekeeping his client’s property and interests. See Okla. Stat.
Ann., tit. 5, ch. 1, app. 3-A, R. 1.15 (West 2001). Due to the
fiduciary nature of an attorney’s relationship to his client, we
cannot treat petitioner’s possession of the materials as prima
facie evidence of his ownership. Petitioner’s uncontested
possession of the materials neither proves ownership nor
establishes petitioners’ eligibility for a charitable
contribution deduction with regard to their donation of the
materials.
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, petitioner, as
attorney, is the rightful owner of his clients’ case files.
Alternatively, petitioners argue that, even if we hold that
clients own their case files under Oklahoma law, attorneys are
entitled to keep copies of their clients’ case files, and,
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because the materials contained only copies of documents and
other evidence, petitioner rightfully owned them. We infer that
petitioners’ argument is essentially that an attorney’s right to
copy and keep client files for himself is equivalent to
traditional rights of ownership, including the right freely to
dispose of property.
Central to our analysis of ownership is the principle that
the attorney-client relationship is fundamentally one of agency.
See Commissioner v. Banks, 543 U.S. 426, 436-437 (2005); State ex
rel. Okla. Bar Association v. Taylor, 4 P.3d 1242, 1253 (Okla.
2000); Crisp, Courtemanche, Meador & Associates v. Medler, 663
P.2d 388, 390 (Okla. Civ. App. 1983). Generally, an agency
relationship is one in which the parties agree that one party is
to act on behalf of another. Garrison v. Bechtel Corp., 889 P.2d
273, 283 (Okla. 1995). Because an attorney is the agent of his
client, the delivery of the materials to petitioner occurred
within the scope of the agency relationship. The materials were
delivered to petitioner from the Government in the course of his
preparation for the defense of McVeigh. The materials were for
McVeigh’s benefit and were delivered to allow him and his
attorney better to prepare his case for trial. Indisputably, the
materials were delivered to petitioner within the scope of his
representation of McVeigh’s criminal prosecution for the Oklahoma
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City bombing and thus were received by petitioner as the agent of
McVeigh.
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, 824 S.W.2d 92, 96 (Mo. Ct.
App. 1992). For similar holdings with respect to accountants and
their working papers, see also Ipswich Mills v. Dillon, 157 N.E.
604 (Mass. 1927), and Ablah v. Eyman, 365 P.2d 181 (Kan. 1961).
Although petitioners rely heavily on these cases, they represent
a small fraction of the jurisdictions that have considered the
issue of ownership of an attorney’s or an accountant’s work
product.
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
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when he purchased the attorney’s services. See Swift, Currie,
McGhee & Hiers v. Henry, 581 S.E.2d 37, 39 (Ga. 2003) (citing
Resolution Trust Corp. v. H---, P.C., 128 F.R.D. 647 (N.D. Tex.
1989); In re Kaleidoscope, Inc., 15 Bankr. 232, 241 (Bankr. N.D.
Ga. 1981), revd. on other grounds 25 Bankr. 729 (N.D. Ga. 1982);
In re Sage Realty Corp. v. Proskauer Rose Goetz & Mendelsohn
L.L.P., 689 N.E.2d 879, 882-883 (N.Y. App. Div. 1997)); see also
Averill v. Cox, 761 A.2d 1083, 1092 (N.H. 2000); In re X.Y., 529
N.W.2d 688, 690 (Minn. 1995). These courts have held that the
creation of the case file is part of the services for which the
client pays his attorney, and they have justified their holdings
that clients have full access to and superior property rights in
their entire case file based primarily on the principle that the
fiduciary relationship between attorney and client necessitates
full disclosure. See, e.g., Resolution Trust Corp. v. H---,
P.C., supra at 649-650; see also Swift, Currie, McGhee & Hiers v.
Henry, supra at 40; In re Sage Realty Corp. v. Proskauer Rose
Goetz & Mendelsohn L.L.P., supra at 882.
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
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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’”. In re Sage Realty Corp. v. Proskauer Rose
Goetz & Mendelsohn L.L.P., 689 N.E.2d at 881-882 (quoting Fed.
Land Bank v. Fed. Intermediate Credit Bank, 127 F.R.D. 473, 479
(S.D. Miss. 1989), modified 128 F.R.D. 182 (S.D. Miss. 1989));
see also Apa v. Qwest Corp., 402 F. Supp. 2d 1247, 1250 (D. Colo.
2005) (upon termination of representation, attorney must
surrender case file to client and the “cost of making a copy of a
client file by a withdrawing lawyer belongs to the lawyer, not
the client”; however, duplication costs may be charged to the
client for copies of the attorney’s work product); Loeffler v.
Lanser (In re ANR Advance Transp. Co.), 302 Bankr. 607, 614 (E.D.
Wis. 2003) (concluding that the difference between the majority
and minority rules is primarily who bears the burden of proving
need for disclosure or secrecy, respectively, with regard to the
attorney’s work product); Womack Newspapers, Inc. v. Town of
Kitty Hawk, 639 S.E.2d 96, 104 (N.C. Ct. App. 2007) (“anything in
a client’s file, which is in the hands of the client’s attorney,
belongs to the client, with the exception only of the attorney’s
notes or work product”). One State appellate court has held
explicitly that, while a client may be entitled to access his
attorney’s work product in order to understand the services
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provided by the attorney, the attorney’s fiduciary duties to his
client do not necessitate the conclusion that the client has a
property right or ownership interest in the attorney’s work
product. Corrigan v. Armstrong, Teasdale, Schlafly, Davis &
Dicus, supra at 98. While the opinions of courts in other
jurisdictions are persuasive and helpful in our analysis, we must
ultimately determine whether, and to what extent, an attorney or
his client owns the client’s case file under Oklahoma State law.
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.
Petitioner did not testify about any particulars regarding
McVeigh’s alleged waiver of the attorney-client privilege or
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present any evidence to support his claim that his client did
waive the attorney-client privilege with regard to the materials.
Petitioner’s testimony alone, even if uncontradicted, does not
establish McVeigh’s waiver of the attorney-client privilege. See
Boyett v. Commissioner, 204 F.2d 205, 208 (5th Cir. 1953), affg.
a Memorandum Opinion of this Court. Confidentiality is a
hallmark of the attorney-client relationship, and the attorney’s
mere conclusion that the client waived that privilege is not
sufficient evidence of an explicit waiver. In the absence of
evidence establishing that McVeigh consented to disclosure by his
attorney of the materials in issue, petitioner is bound by his
ethical obligations under the Oklahoma Rules of Professional
Conduct to refrain from disclosing and capitalizing on
information related to his representation of McVeigh.
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.
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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 of or exposed in
a way that may be detrimental to the client. Although McVeigh
cannot and his successors likely will not attempt to have the
Oklahoma Rules of Professional Conduct enforced against
petitioner, the rules do suggest that petitioner is not the
exclusive owner of the materials, regardless of his rightful
possession of the materials themselves or of additional copies of
those materials, and that petitioner was not entitled to dispose
of, publicize, or capitalize on them for his personal gain.
Petitioners rely primarily on Corrigan v. Armstrong,
Teasdale, Schlafly, Davis & Dicus, 824 S.W.2d at 98, to support
their assertion of petitioner’s exclusive legal ownership of the
materials in issue in this case. However, the court in Corrigan
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was faced with the narrow question of ownership of notes, working
papers, drafts, and internal memoranda written by the attorney,
over which the client in that case asserted an ownership interest
superior to that of her attorney. Id. at 96. The materials in
issue in this case are distinguishable from those in the Corrigan
case because they are not petitioner’s work product and do not
contain his ideas, opinions, or impressions. See id.
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
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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, 61 T.C. at 639.
Although not dispositive, it is also relevant that Oklahoma
law recognizes a common law possessory or retaining lien with
respect to an attorney’s retention of his client’s papers, money,
or other property that are in the attorney’s possession until
fees for services rendered are paid by the client. Britton &
Gray, P.C. v. Shelton, 69 P.3d 1210, 1212 (Okla. Civ. App. 2003)
(citing State ex rel. Okla. Bar Association v. Cummings, 863 P.2d
1164, 1168-1170 (Okla. 1993)). The existence of such a retaining
lien supports our conclusion that Oklahoma law generally
considers property that is held by an attorney in the scope of
representing his client as properly belonging to the client,
against whose possessory interest the retaining lien may attach.
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
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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 assets, petitioners’ deduction, if
otherwise allowable, would be limited to their cost or basis in
the materials. See id. Section 1221(a)(3) specifically excludes
from the definition of “capital asset”:
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(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
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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.
To reflect the foregoing,
Decision will be entered
for respondent.