Hewitt v. Commissioner, IRS

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
JOHN T. HEWITT; LINDA L. HEWITT,
Petitioners-Appellants,
v. No. 98-1386
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
Appeal from the United States Tax Court.
(Tax Ct. No. 95-17146)
Argued: October 26, 1998
Decided: November 19, 1998
Before MICHAEL and MOTZ, Circuit Judges, and
BOYLE, Chief United States District Judge for the
Eastern District of North Carolina, sitting by designation.
_________________________________________________________________
Affirmed by unpublished per curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: Mary Jane Hall, MEZZULLO & MCCANDLISH, Nor-
folk, Virginia, for Appellants. Curtis Clarence Pett, Tax Division,
UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C., for Appellee. ON BRIEF: Donna S. Rucker, MEZZULLO &
MCCANDLISH, Norfolk, Virginia, for Appellants. Loretta C.
Argrett, Assistant Attorney General, Richard Farber, Tax Division,
UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C., for Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
John T. Hewitt and Linda L. Hewitt, husband and wife, appeal
from a decision of the United States Tax Court holding that the
Hewitts were not entitled to certain charitable contribution deduc-
tions. Because we find the taxpayers' failure to comply with the sub-
stantiation requirements fatal to the allowance of their charitable
contribution deductions, we affirm.
I.
The parties stipulated to all relevant facts. During the taxable years
1990 and 1991, the Hewitts made gifts of the stock of Jackson Hewitt
Tax Service, Inc. (a company they owned) to the Hewitt Foundation
and the Foundry United Methodist Church. At the time of the gifts,
the market for Jackson Hewitt stock operated primarily through indi-
viduals or organizations contacting the company and offering to buy
or sell shares at a given price. In arriving at the price, a potential pur-
chaser had access to information on the most recent trades and offers
to sell made by other shareholders. At the time of the gifts, approxi-
mately 700,000 shares of Jackson Hewitt stock were outstanding in
the hands of approximately 400 organizations and individuals (includ-
ing employees, franchisees, and others unrelated to the company). In
addition to the company market, another market operated through
Wheat, First Securities, Inc., in which hundreds to thousands of shares
of Jackson Hewitt stock were traded between 1990 and 1992 for
about 80 individual accounts. Not until several years after the gifts,
beginning on January 29, 1994, was the company's stock traded on
NASDAQ.
The Hewitts filed timely joint federal income tax returns for the
taxable years 1990 and 1991. On the 1990 return, the Hewitts claimed
a $26,000 deduction for a gift of 2000 shares of Jackson Hewitt stock
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to the Foundation and a $7,000 deduction for a gift of 500 shares to
the Church. On their 1991 return, the Hewitts claimed a $32,000
deduction for a gift of 800 shares to the Foundation and a $56,000
deduction for a gift of 1400 shares to the Church.
The Hewitts did not obtain any appraisal of the Jackson Hewitt
stock they donated in 1990 and 1991. The fair market values claimed
by the Hewitts with respect to these gifts 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 the Hewitts made
the gifts. The Commissioner concedes that the values the Hewitts
claimed represent the fair market value of the contributed stock.
On audit, the Commissioner disallowed the deductions claimed by
the Hewitts for the gifts of Jackson Hewitt stock because of the
Hewitts' failure to comply with the appraisal requirement set forth in
the regulations. See Treas. Reg. § 1.170A-13(c). The Commissioner
accordingly assessed deficiencies and penalties against them for the
1990 and 1991 tax years. In its notice of deficiency, however, the
Commissioner allowed the Hewitts deductions for the gifts of Jackson
Hewitt stock in 1990 and 1991 to the extent of their basis in that
stock. The Hewitts filed a petition in the Tax Court for redetermina-
tion of the deficiencies and penalties. The Tax Court held that the
Hewitts were not entitled to deduct amounts in excess of those
allowed by the Commissioner. From this decision, the Hewitts appeal.
II.
Whether the Hewitts' failure to comply with the appraisal require-
ments of § 1.170A-13 is fatal to their claimed deduction is a question
of law, which we review de novo. See Ripley v. Commissioner, 103
F.3d 332, 334 (4th Cir. 1996).
Section 155 of the Tax Reform Act of 1984 contains the appraisal
requirements for charitable contribution deductions. Pub. L. No. 98-
369, § 155, 98 Stat. 494, 691 (1984). It provides that
the Secretary shall prescribe regulations under section
170(a)(1) of the Internal Revenue Code of 1954, which
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require an individual . . . claiming a deduction under section
170 . . .
(A) to obtain a qualified appraisal for the property contrib-
uted,
(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 contrib-
uted property) as the Secretary may prescribe in such regu-
lations.
Such regulations shall require the taxpayer to retain any
qualified appraisal.
Id. (emphasis added). The legislative history further indicates that
Congress intended the qualified appraisal requirement to be manda-
tory. The Conference Report for the Tax Reform Act of 1984 states
that "pursuant to present law (sec. 170(a)(1)), which expressly allows
a charitable deduction only if the contribution is verified in the man-
ner 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." H.R. Conf. Rep. 98-861 at 995 (1984), reprinted in 1984
U.S.S.C.A.N. 1445, 1683 (emphasis added).
The Secretary of the Treasury complied with § 155's congressional
mandate by issuing Treasury Regulation § 1.170A-13 pursuant to
§ 170(a)(1) of the Internal Revenue Code. That statute provides:
"[t]here 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 prescribed by the Secretary." I.R.C.§ 170(a)(1); 26
U.S.C.A. § 170(a)(1) (1988 and Supp. 1998). Section 1.170A-13(c) of
the Treasury Regulations requires that a taxpayer who makes a chari-
table contribution of any nonpublicly traded stock with a claimed
value in excess of $10,000 must meet the substantiation requirements:
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(2) In general . . . a donor who claims or reports a deduc-
tion with respect to a charitable contribution to which this
paragraph (c) applies must comply with the following three
requirements:
(A) Obtain a qualified appraisal . . . for such prop-
erty contributed. . . .
(B) Attach a fully completed appraisal summary
. . . to the tax return . . . on which the deduction
for the contribution is first claimed (or reported)
by the donor.
(C) Maintain records containing this information
as required . . . .
Treas. Reg. § 1.170A-13(c)(2).
We have previously recognized that tax deductions are "a matter of
legislative grace" and that "the taxpayer seeking the benefit of a
deduction must show that every condition which Congress has seen
fit to impose has been fully satisfied." Wisely v. United States, 893
F.2d 660, 666 (4th Cir. 1990) (emphasis added); see also INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Boris I. Bittker and
Lawrence Loken, 2 Federal Taxation of Income, Estates and Gifts,
¶35.4.2 (2d ed. and Supp. 1990) ("When the strict substantiation rules
apply to a particular donor . . . the donor must obtain a ``qualified
appraisal' of the property and attach a ``fully completed appraisal sum-
mary' to the return on which the deduction is claimed for the gift.").
Before the tax court, the parties stipulated that, at the time of the
donations, Jackson Hewitt stock was "nonpublicly traded stock" for
the purpose of § 1.170A-13(c). It is undisputed that the Hewitts did
not attempt to obtain any appraisals and that no appraisal summaries
were attached to their returns. Instead, their returns set forth only the
cost and claimed values of the stock, relying on third-party sales of
the contributed stock and unrelated sales of stock around the time of
the charitable contributions. As the charitable contribution was not
verified under the Treasury Regulation's substantiation requirements,
the Hewitts are not entitled to any deduction.
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Relying on Bond v. Commissioner, 100 T.C. 32 (1993), the Hewitts
ask us to excuse their failure to obtain a qualified appraisal based on
the "substantial compliance" doctrine. In Bond, the Tax Court held
that a literal failure to comply with the substantiation requirements
could be excused if the taxpayer substantially complied with those
requirements. 100 T.C. 32. In that case, the taxpayers had contributed
two blimps to a charitable organization. Id. at 33. The taxpayers
obtained a professional appraisal of the blimps. Id. Although the
appraiser never completed a document sufficient to meet the defini-
tion of "qualified appraisal" in § 1.170A-13(c)(3), he did fully com-
plete an appraisal summary which was attached to the income tax
return. Id. at 33-34. With the exception of the qualifications of the
appraiser, which were submitted shortly after the audit began, the
appraisal summary contained all the information required by the regu-
lation to be included in the appraisal. Id. at 34-35, 42.
In holding that the taxpayers had substantially complied with the
regulations, the Tax Court stated that "[i]n the case before us there is
no question that a donation of the two airships was made during the
taxable year, [and] that the subject of the donation was appraised at
the amount claimed by petitioners as a charitable deduction during the
taxable year by a qualified appraiser . . . . In fact, with the exception
of the excellent qualifications of the appraiser all of these facts
appeared on the Form 8283 attached to the return filed by petition-
ers." Id. at 41-42 (emphasis added). The court further distinguished
the situation from that in which no appraisal is obtained, stating "this
is not a case where petitioners failed to obtain a timely appraisal of
the donated property and thereby failed to establish its value for
claiming a contribution deduction on their return." Id. at 42. Thus,
Bond does not suggest that a taxpayer who completely fails to observe
the appraisal regulations has substantially complied with them. See
also D'Arcangelo v. Commissioner, 68 T.C.M. (CCH) 1223 (1994)
(obtaining an appraisal from a nonqualified appraiser does not consti-
tute substantial compliance).
Moreover, in Bond, the taxpayers made a good faith effort to com-
ply with the appraisal requirement. In the case at bar, the Hewitts
utterly ignored the appraisal requirement. Furthermore, unlike the tax-
payers in Bond, the Hewitts failed to supply all the information
required by the regulations. Their returns lacked, among other items,
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any indication of the number of shares donated, and failed to provide
the "method of valuation used to determine the fair market value." See
Treas. Reg. § 1.170A-13(c)(ii)(J). In sum, the Hewitts failed to sub-
stantially comply with the regulations.
Alternatively, the Hewitts attack the validity of§ 1.170A-13's defi-
nition of "publicly-traded securities." They argue that the regulatory
definition of "publicly-traded securities" imposes restrictions not con-
templated by the statute. The Hewitts had ample opportunity to raise
this issue during the tax court proceedings. Because the interests of
justice do not so require, we will not consider this issue raised for the
first time on this appeal. See Brown v. McLean , ___ F.3d ___, 1998
WL 7590826, *7 (4th Cir. Oct. 30, 1998); Muth v. United States, 1
F.3d 246, 250 (4th Cir. 1993).
Finally, the Hewitts argue that the Tax Court should have allowed
them deductions of $10,000 for each year because the statute and the
regulations only require appraisals for charitable contributions of non-
publicly traded stock with a claimed value that exceeds $10,000. See
§ 155(a)(2)(B), 98 Stat. at 691; Treas. Reg.§ 1.170A-
13(c)(2)(ii)(B)(1). Initially, the record contains no evidence that the
Hewitts made a request to the Tax Court for this relief. Furthermore,
it is not the role of the Tax Court, nor of this court, to provide equita-
ble concessions to a taxpayer. See Commissioner v. Mendel, 351 F.2d
580, 582 n.4 (4th Cir. 1965). "What should be allowed as a . . . deduc-
tion is a matter of policy for Congress, not the Courts." Id. (quoting
United States v. Woodall, 255 F.2d 370, 373 (10th Cir. 1958)). The
Hewitts claimed values for their contributions exceeding $10,000.
Therefore, Treasury Regulation § 1.170A-13(c)(1)(i) provides that no
deduction shall be allowed unless the appraisal requirement is satis-
fied. The appraisal requirement in this case was not satisfied, and
therefore the Hewitts' charitable contribution deductions are limited
to those amounts allowed by the Commissioner.
III.
For these reasons, the decision of the Tax Court is
AFFIRMED.
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