Hobby Lobby's Charitable Deduction Dispute With IRS Headed for Trial

(Parker Tax Publishing October 2025)

The Tax Court held, in a case involving whether Hobby Lobby, Inc. properly substantiated its charitable donations of biblical artifacts to a Code Sec. 501(c)(3) organization, that genuine issues of material fact existed as to the potential application of the reasonable cause defense under Code Sec. 170(f)(11)(A) and therefore, summary adjudication was not warranted. In a separate opinion, the Tax Court held that the IRS properly obtained supervisory approval of valuation misstatement penalties under Code Sec. 6751(b). The David and Barbara Green 1993 Dynasty Trust, Mart D. Green, The Trustee, et al. v. Comm'r, 165 T.C. No. 7 (2025); The David and Barbara Green 1993 Dynasty Trust, Mart D. Green, Trustee, et al., T.C. Memo. 2025-100.

Background

Hobby Lobby, Inc., an arts and crafts retailer, is an S corporation. Hobby Lobby is owned by three electing small business trusts - the David and Barbara Green 1993 Dynasty Trust, the Green Stewardship Trust, and the Green Family Delta Trust (together, Trusts) - and two married couples, Mart and Diana Green as well as Steven and Jackie Green.

In 2011 and 2012, Hobby Lobby donated to the Museum of the Bible, Inc. (Museum), a Code Sec. 501(c)(3) organization, more than 1,200 Hebrew biblical scrolls, biblical manuscripts in Hebrew, Greek, Latin, and Aramaic, and printed books and Bibles dating between 1455 and 1782 (Contributed Artifacts). On its income tax returns for those years, Hobby Lobby claimed noncash charitable contribution deductions of $23,038,000 and $61,633,000 with respect to the Contributed Artifacts. Consistent with the rules governing S corporations and their shareholders, the Trusts and the Greens reported their ratable shares of the deductions on their federal income tax returns.

Hobby Lobby attached Form 8283, Noncash Charitable Contributions, to its 2011 and 2012 Forms 1120-S. Hobby Lobby used the services of accounting firm Grant Thornton LLP to review its work papers and Forms 1120-S, including the Forms 8283, before the returns' filing. On its Forms 8283, Hobby Lobby reported the aggregate basis and appraised fair market value of the Contributed Artifacts and the dates of the contributions. It also attached appraisal reports prepared by Lee Raffaele Biondi of Biondi Rare Books and Manuscripts.

The IRS examined Hobby Lobby's returns for the years at issue. On September 10, 2015, an IRS agent issued to Hobby Lobby Form 5701, Notice of Proposed Adjustment (NOPA), for each year. The attached Explanation of Items included a proposed adjustment and stated that if Hobby Lobby had additional information that would alter or reverse the proposal, it should send such information as soon as possible. Each NOPA included an electronic signature of an IRS supervisor. On October 21, 2015, the IRS agent's immediate supervisor signed a workpaper approving the proposed penalties. On November 18, 2015, the IRS agent issued to Hobby Lobby a Form 4605-A, Examination Changes, outlining the adjustments and stating that a valuation misstatement penalty under Code Sec. 6662 would be assessed.

Eventually, the IRS issued Notices of Deficiency to the Trusts and the Greens in connection with the adjustments. The Notices of Deficiency determined that no deductions should be allowed with respect to the Contributed Artifacts because the Trusts and the Greens failed to satisfy the requirements of Code Sec. 170. The Notices also determined gross valuation misstatement penalties under Code Sec. 6662(a), (b)(3), and (h) or, in the alternative, substantial valuation misstatement penalties under Code Sec. 6662(a), (b)(3), and (e). The Trusts and the Greens took their case to the Tax Court.

The IRS filed a motion for summary judgment asking the court to hold that no deductions were allowed for the Hobby Lobby's contributions because the Forms 8283 included in Hobby Lobby's returns did not include the individual basis and date of acquisition of each of the Contributed Artifacts on its Forms 8283 for the years at issue as required by Code Sec. 170(f)(11)(A)(i) and Reg. Sec. 1.170A-13(c)(4)(ii). Because Hobby Lobby included only aggregate information, the IRS contended, its Forms 8283 were insufficient to substantiate the claimed deductions. Moreover, with respect to the Form 8283 for 2012, the IRS maintained that two appraisers in addition to Biondi contributed to the appraisal report, but did not sign the Form 8283 as required by Reg. Sec. 1.170A-13(c)(5)(iii). In a separate motion, the IRS also asked the court to hold that it obtained supervisory approval of the initial determination of valuation misstatement penalties as required by Code Sec. 6751(b).

The Trusts and the Greens argued that, even if they failed to comply with the substantiation rules, their noncompliance was attributable to reasonable cause on account of their reliance on the services of Grant Thornton and was thus protected by Code Sec. 170(f)(11)(A)(ii)(II), which expressly provides that the substantiation requirements under Code Sec. 170(f)((11)(A)(i) "shall not apply if it is shown that the failure to meet such requirements tis due to reasonable cause and not to willful neglect." With respect to the supervisor approval requirement, the Trusts and the Greens contended that such approval was required no later than the date the examiner sent the NOPAs and that the electronic supervisor signature on the NOPAs did not satisfy Code Sec. 6751(b).

Analysis

The Tax Court denied the IRS's motion for summary judgment on the substantiation issue and granted the IRS summary judgment for the IRS on the Code Sec. 6751(b) supervisor approval requirement.

The court said that its analysis of the substantiation issue began (and ended) with the Trusts' and the Greens' invocation of the reasonable cause defense under Code Sec. 170(f)(110(A)(ii)(II). The court explained that if that defense applied, the taxpayers would no longer have to worry about the requirements of Code Sec. 170(f)(11), and the court would not have to decide whether the Forms 8283 for the years at issue complied with the relevant statutory and regulatory requirements, either strictly or substantially. But the court found that deciding whether the reasonable cause defense was available was a factual question that required a trial. The court explained that the reasonable cause inquiry is inherently a fact-intensive one, and facts and circumstances must be judged on a case by case basis. Moreover, the court found that where (as here) taxpayers claim to have relied on a professional, such as a CPA, the court must evaluate the expertise of the adviser, the information provided to the adviser, the taxpayers' views concerning the adviser's competence, and the taxpayers' reliance on the adviser's advice.

Regarding the supervisor approval issue, the Tax Court held that the NOPAs did not embody an "initial determination" under Code Sec. 6751(b) because they indicated that the Examination Division had not completed its work and invited the taxpayers to submit additional information that might alter or reverse the Examination Division's proposed penalties. Accordingly, the court found that no supervisory was required for the proposal of the penalties in the NOPAs. The initial determination of the penalties, the court found, was made in a Form 4605-A sent to Hobby Lobby two months after the NOPAs were issued. Given that the penalty workpaper was signed by the examiner's immediate supervisor before the Form 4605-A was issued, the court concluded that the Code Sec. 6751(b) supervisory approval requirement was satisfied.

For a discussion of the reporting requirements for charitable contributions, see Parker Tax ¶84.195. For a discussion of the supervisor approval requirement, see Parker Tax ¶262,195.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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