Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-88-02983/USCOURTS-ca10-88-02983-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellee
Imogene R. Woodbury
Appellant
Orin R. Woodbury
Appellant

Document Text:

PUBLISH 

P1L.BO 

United Statc5 (m1rt of A1:ip~afa 

Tenth Cin1it 

UNITED STATES COURT OF APPEALS 

APR ... 4 1990 

ROBERT L. HOECKER 

TENTH CIRCUIT Clerk 

ORIN R. WOODBURY and IMOGENE R. 

WOODBURY, 

Petitioners-Appellants, 

v. 

COMMISSIONER OF INTERNAL REVENUE, 

Respondent-Appellee. 

No. 88-2983 

Appeal from the United States Tax Court 

(T.C. No. 25523-85) 

Submitted on the Briefs: 

Craig T. Vincent of Nygaard, Coke & Vincent, Salt Lake City, Utah, 

for Petitioners-Appellants. 

James I.K. Knapp, Acting Assistant Attorney General; and Gary R. 

Allen, Robert S. Pomerance, and Janet Kay Jones, Attorneys, Tax 

Division, Department of Justice, Washington, D.C., for RespondentAppellee. 

Before McKAY and SEYMOUR, Circuit Judges, and KANE*, Senior 

District Judge. 

SEYMOUR, Circuit Judge. 

*Honorable John L. Kane, Jr., United States Senior District Judge, 

District of Colorado, sitting by designation. 

Appellate Case: 88-2983 Document: 01019569589 Date Filed: 04/04/1990 Page: 1 
Petitioners appeal from the judgment and decision of the 

United States Tax Court which denied their petition for review of 

the Commissioner's finding of tax deficiencies. The Tax Court 

rejected petitioners' argument that their election to use the 

"fifty-percent method" in calculating their charitable 

contribution deduction was invalid and, in the alternative, that 

the election was subsequently revocable by them. We likewise 

reject petitioners' arguments and, for the reasons set forth 

below, we affirm. 1 

Petitioners are taxpayers who, in 1977, donated their entire 

one-third interest in the Ben Lomond Hotel to Weber County, a 

political subdivision of the State of Utah. This donation 

qualified as a charitable contribution under I.R.C. § 170(c)(l),2 

and so could be deducted from petitioners' taxable income pursuant 

to section 170(a)(l). Because the hotel interest constituted 

"capital gain property," however, it was subject to the special 

limitations on deducting such property. See id. § 170(b)(l)(C). 

This limitation allowed taxpayers to choose between two 

1 After examining the briefs and appellate record, this panel 

has determined unanimously that oral argument would not materially 

assist the determination of this appeal. See Fed. R. App. P. 

34(a); 10th Cir. R. 34.1.9. The cause is therefore ordered 

submitted without oral argument. 

2 All statutory references are to the Internal Revenue Code of 

1954, as in effect during the relevant years. 

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Appellate Case: 88-2983 Document: 01019569589 Date Filed: 04/04/1990 Page: 2 
alternative methods of calculating the charitable contribution 

deduction. 

Under the first alternative (the thirty-percent method), the 

taxpayer's deduction equals the fair market value of the 

taxpayer's donation at the time of contribution, subject to a 

limit of thirty percent of the taxpayer's contribution base for 

the year the deduction is taken. See id. § 170(b)(l)(C)(i). Any 

amount in excess of thirty percent may be taken as a charitable 

contribution deduction in each of the five succeeding taxable 

years. Id. § 170(b)(l)(C)(ii). 3 The thirty-percent method 

constitutes the general rule with respect to deductions for the 

charitable contribution of capital gain property. See 8 

J. Mertens, Law of Federal Income Taxation, § 31.34 (1987). 

The taxpayer may also elect to calculate her deduction amount 

by a second method. Under this alternative (the fifty-percent 

3 As the Tax Court stated: 

"The contribution base is the taxpayer's adjusted 

gross income calculated without regard to any net 

operating loss carrybacks. [Section 170(b)(l)(F)]. Any 

contributions in excess of the 30-percent contribution 

base limitation are carried over into the succeeding 

five taxable years in order of time. Sec. 

170(b)(l)(C)(ii). The contribution carried over into a 

succeeding year will be allowed as a deduction in such 

succeeding year to the extent the charitable 

contributions in such year not exceed 30 percent of the 

contribution base for that year." 

Woodbury v. Commissioner, 55 T.C.M. (CCH) 1131, 1131 n.4 (1988). 

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Appellate Case: 88-2983 Document: 01019569589 Date Filed: 04/04/1990 Page: 3 
method), the deduction is calculated by subtracting fifty percent 

of the long-term capital gain which would have been realized had 

the property been sold at the time of contribution from the amount 

of the property's fair market value, and then limiting the 

deduction to fifty percent of the contribution base for each year 

in which the deduction is taken. See 21 I.R.C. §§ 

170(b)(l)(C)(iii), 170(e)(l)(B). The taxpayer thus is able to 

deduct a larger share of her contribution base in each year for 

which the deduction may be taken, but the taxpayer will deduct a 

total amount which will be lower than had she employed the 

thirty-percent method. 4 

Petitioners concede that they intended to make an election 

under sections 170(b)(l)(C)(iii) and 170(e)(l)(B) to use the 

fifty-percent method for the tax year 1977, and that they 

calculated their charitable contribution accordingly. They 

attached a separate worksheet to their 1977 federal income tax 

return in which they calculated the deduction for the charitable 

contribution of the hotel interest. The Tax Court characterized 

the information on the worksheet as follows: 

Fair Market Value of 

Donated Property 

Basis of Property 

Potential Long-Term 

Capital Gain 

50 percent of Potential Gain 

Charitable Contribution 

$466,666.67 

82,101.56 

384,565.11 

192,282.55 

$274,384.12 

4 For further explanation of the two methods, see Treas. Reg. 

§ l.170A-8(f) Example (9) (1989). 

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Appellate Case: 88-2983 Document: 01019569589 Date Filed: 04/04/1990 Page: 4 
See Woodbury v. Commissioner, 55 T.C.M. (CCH) 1131, 1132 (1988). 5 

According to the Tax Court, petitioners made other charitable 

contributions in 1977 totalling $7,724.36, and had an adjusted 

gross income of $122,258.00. Applying the charitable deduction 

limitation of fifty percent of the contribution base, petitioners 

had an allowable charitable contribution deduction of $61,129.00, 

with a $220,974.48 contribution carryover. Petitioners again 

calculated their charitable contribution deduction on their 1978 

and 1979 tax returns according to the fifty-percent method. Their 

deduction amount was fully exhausted by the end of the 1979 tax 

year. 

In 1981, petitioners filed amended returns for the years 

1977, 1978, and 1979. In these returns, they recalculated their 

charitable contribution deduction stemming from the 1977 donation 

of their hotel interest. The new calculation utilized the 

thirty-percent method, which gave petitioners a larger overall 

amount to deduct and a longer period in which to deduct the 

contribution carryovers. Petitioners' 1980, 1981, and 1982 tax 

returns contained deduction carryovers for the 1977 charitable 

contribution previously depleted under the fifty-percent method. 

5 On petitioners' worksheet, the fair market value was called 

the "value of gift;" the basis of property was the "book value of 

gift"; and the potential long-term capital gain was ''gift value 

less book value." Petitioners do not contest the Tax Court's 

description of the information on the worksheet. 

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Appellate Case: 88-2983 Document: 01019569589 Date Filed: 04/04/1990 Page: 5 
The Corrunissioner audited petitioners' returns for 1980 

through 1982 and concluded that they had made a valid election in 

1977 to utilize the fifty-percent method for the hotel interest 

donation, and that the election was irrevocable. The Corrunissioner 

therefore disallowed the charitable contribution deduction 

carryover amounts taken in 1980, 1981, and 1982 attributable to 

the 1977 contribution, and found income tax deficiencies for each 

of those years. Petitioners challenged the Commissioner's 

determination, but the Tax Court held for the Commissioner. 

The parties have stipulated to the relevant facts. We review 

the Tax Court's determination of law de novo. Leder v. 

Commissioner, F.2d , No. 88-1125, slip op. at 6 

(10th Cir. Dec. 28, 1989). 

Petitioners make two arguments to support their 

recalculation. First, they contend that they never made a valid 

election to utilize the fifty-percent method and so are not bound 

by their initial calculation. Second, they argue that even if 

they made a valid election to employ the fifty-percent method, 

that election is revocable. 

In support of their first argument, petitioners refer us to 

the statutory and regulatory language. They note that an election 

to use the fifty-percent method must be "made at such time and in 

such manner as the Secretary prescribes by regulations." I.R.C. § 

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Appellate Case: 88-2983 Document: 01019569589 Date Filed: 04/04/1990 Page: 6 
170(b) (1) (C) (iii). According to the regulations, "[t]he 

election . . . shall be made by attaching to the income tax return 

for the election year a statement indicating that the election 

under section 170(b)(l)(D)(iii) and this subparagraph is being 

made." Treas. Reg.§ l.170A-8(d)(2)(iii) (emphasis added). 6 The 

Commissioner further emphasized the requirements by stating that 

the election "must be made by attaching a statement to the 'income 

tax return for the election year' indicating that the election is 

being made." Rev. Rul. 77-217, 1977-1 C.B. 64 (emphasis added). 

Petitioners assert that the use of the words "shall" and "must" in 

the Regulation and the Revenue Ruling evinces an intent to require 

that taxpayers attach to their tax return an "express statement 

that the Election was being made." Appellants' Brief at 9. 

Petitioners contend that without such an express statement, and 

without any specific reference to the election, the Code, or the 

Regulation, they cannot be considered to have made a valid 

election under section 170(b)(l)(C)(iii). They argue that they 

"are therefore required and entitled to calculate 

the ... charitable contribution deduction under the 

[thirty-percent] limitation of [s]ection 170(b)(l)(C)(i)." 

Appellants' Brief at 13. 

Petitioners have no support for their implicit contention 

that the "must" and "shall" language necessitates literal 

6 The present section 170(b)(l)(C) was codified at section 

170(b)(l)(D) at the time the regulations were adopted. 

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Appellate Case: 88-2983 Document: 01019569589 Date Filed: 04/04/1990 Page: 7 
compliance with the requirements for an election. It is well 

established that in determining whether an election has properly 

been made absent adherence to literal requirements, a court should 

assess whether the taxpayer has substantially complied with the 

requirements, notwithstanding the "shall" and "must" language. 

See, ~, Atlantic Veneer Corp. v. Commissioner, 812 F.2d 158, 

160-61 (4th Cir. 1987); Young v. Commissioner, 783 F.2d 1201, 1206 

(5th Cir. 1986); Knight-Ridder Newspapers, Inc. v. United States, 

743 F.2d 781, 794-96 (11th Cir. 1984). 

In assessing substantial compliance, a court must ask whether 

the requirements are mandatory in nature, or merely procedural 

details established to facilitate the Commissioner's 

administration of the Internal Revenue Code. See Columbia Iron & 

Metal .v. Commissioner, 61 T.C. 5, 8 (1973). As the court stated 

in Atlantic Veneer, 

"[a]t the heart of the inquiry into whether a particular 

election is procedural or mandatory is whether the 

failure in complying with the literal requirements by 

the taxpayer goes to the 'essence' of the provision, or 

whether it is merely a relatively ancillary, minor 

procedural infirmity." 

812 F.2d at 160-61. 

In support of their position, petitioners cite to two cases 

in which the circuit court rejected taxpayers' arguments that they 

had substantially complied with election requirements. In the 

first of those cases, Knight-Ridder, the court observed that one 

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Appellate Case: 88-2983 Document: 01019569589 Date Filed: 04/04/1990 Page: 8 
of the "essential purposes" of the relevant Code section was "that 

the Commissioner actually know an election has been made." 743 

F.2d at 795. The court held that the taxpayer had not 

substantially complied "because its tax returns contained nothing 

to alert the Commissioner" that an election had been made. Id. at 

783. In the second case, Young, the court also found part of the 

"essence" of the relevant election statute to be notice to the 

Commissioner. 783 F.2d at 1206 ("The essence of the statute, 

then, is that a taxpayer unequivocally communicates his election 

and binds himself to his decision .... "); see also Atlantic 

Veneer, 812 F.2d at 161 ("The common denominator among the cases 

seems to be that, at a minimum, the taxpayer needs to provide the 

Service with sufficient notice of his intent to make the 

election."). 

Petitioners do not question that the essence of the election 

requirement is notice to the Commissioner, but they attempt to 

analogize their case to Knight-Ridder and Young by characterizing 

their manner of election as "so subtle that [the Commissioner] 

might easily have overlooked the calculation employed." 

Appellants' Brief at 11. We reject this argument and agree with 

the Tax Court, which observed that "[i]n contrast [to the 

taxpayers in Knight-Ridder and Young], petitioners provided a 

supplemental worksheet in their 1977 Federal income tax return 

which clearly and unambiguously indicates that their charitable 

contribution deduction was being calculated pursuant to [section] 

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Appellate Case: 88-2983 Document: 01019569589 Date Filed: 04/04/1990 Page: 9 
170(b)(l)(C)(iii)." Woodbury, 55 T.C.M. (CCH) at 1133 n.7. We 

hold that petitioners provided the Commissioner with adequate 

notice of their election and that a valid election was thus made. 

Petitioners next contend that even if their election of the 

fifty-percent method was valid, they nevertheless should be able 

to file amended returns in accordance with the thirty-percent 

method since their initial election was revocable. Specifically, 

petitioners urge us not to apply the "doctrine of election" as set 

out in Pacific National Co. v. Welch, 304 U.S. 191 (1938), to 

elections under section 170(b)(l)(C)(iii). Since Pacific National 

did not address itself to the charitable contribution section in 

question here, they argue, it should not have precedential value 

for elections under that section. They further argue that the 

administrative burden of revocable elections to the Internal 

Revenue Service would be minor, and that neither the legislative 

history nor canons of statutory construction suggest that Congress 

intended section 170(b)(l)(C)(iii) to be irrevocable. 

In Pacific National, the taxpayer had filed its tax returns 

according to the deferred payment method, but later attempted to 

file a claim for a refund based upon a recalculation of its 

prof its under the installment method. The Supreme Court refused 

to allow this, holding that 

"[c]hange from one method to the other ... would 

require recomputation and readjustment of tax liability 

for subsequent years and impose burdensome uncertainties 

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Appellate Case: 88-2983 Document: 01019569589 Date Filed: 04/04/1990 Page: 10 
upon the administration of the revenue laws ...• 

There is nothing to suggest that Congress intended to 

permit a taxpayer, after expiration of the time within 

which return is to be made, to have his tax liability 

computed and settled according to the other method." 

Pacific Nat'l, 304 U.S. at 194; see also Keeler v. Commissioner, 

180 F.2d 707, 710 (10th Cir. 1950). 

The rule of Pacific National "is often regarded as the 

fundamental authority for the development of this law" and it has 

enjoyed widespread application. Grynberg v. Commissioner, 83 T.C. 

255, 261 (1984) (quoting Estate of Stamos v. Commissioner, 55 T.C. 

468, 473 (1970)). It was applied specifically to section 

170(b}(l)(C)(iii) by the Tax Court in Grynberg, a case also 

involving taxpayers who, having initially elected the 

fifty-percent method, later wanted to revoke that election. The 

court found in Grynberg that the two elements of the doctrine of 

election had been met, that is, there had been a free choice 

between two or more alternatives and there had been an overt act 

by the taxpayer communicating the choice to the Commissioner. 

Once the taxpayer makes this elective choice, the court held, '"he 

is stuck with it."' Grynberg, 83 T.C. at 261 (quoting Roy H. Park 

Broadcasting, Inc. v. Commissioner, 78 T.C. 1093, 1134 (1982)). 

Our holding today does not preclude us from permitting an 

amended return "where the taxpayer desires to correct errors or 

miscalculations in [the] original return." Keeler, at 710. Nor 

are we prevented from allowing revocation of an election where the 

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taxpayer, in good faith, erred by making an improper or 

impermissable choice. See Scallen v. Commissioner, 877 F.2d 1364, 

1373-74 (8th Cir. 1989); Mamula v. Commissioner, 346 F.2d 1016, 

1018-19 (9th Cir. 1965); see also Grynberg, 83 T.C. at 261-62 

(discussing the limited exceptions to the doctrine of election). 

But where, as in this case, the taxpayer's initial election later 

becomes, through hindsight, less financially advantageous than 

some other option, the improvident election does not entitle the 

taxpayer to revoke that election. See, ~' Keeler, 180 F.2d at 

710. 

Neither the legislative history nor the canons of statutory 

construction to which petitioners refer us convince us that 

Congress intended an election under section 170(b)(l)(C)(iii) to 

be freely revocable. See Woodbury, 55 T.C.M. (CCH) at 1133-34. 

Nor do we agree that the administrative burden of allowing freely 

revocable elections would be "minimal." Accordingly, we hold that 

petitioners elected a permissible method of calculating their 

charitable contribution deduction and are bound by their election 

to employ that method of calculation. 

The judgment of the Tax Court is AFFIRMED. 

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