On October 2, 2025, the U.S. Tax Court released two significant opinions in the consolidated cases involving the shareholders of Hobby Lobby Stores, Inc. (The David and Barbara Green 1993 Dynasty Trust, et al. v. Commissioner). The first, a reviewed opinion by the full court (Green 1993 Dynasty Trust v. Commissioner, 165 T.C. No. 7), addresses complex substantiation issues for noncash charitable contributions and the application of various Code sections governing deductions for trusts. The second, a memorandum opinion (Green 1993 Dynasty Trust v. Commissioner, T.C. Memo. 2025-100), focuses on the procedural requirements for penalty assessments under I.R.C. § 6751(b) and the reasonable cause defense for valuation misstatement penalties.

These concurrent opinions are directly related, stemming from the same set of facts and involving the same taxpayers, but they resolve different motions for partial summary judgment filed by the parties. This article provides a technical analysis of the facts, legal arguments, and the Court’s reasoning in both decisions, including a review of the dissenting opinions in the full Tax Court case, to offer practitioners a comprehensive understanding of their implications.

Factual Background

The petitioners in these consolidated cases are three electing small business trusts (ESBTs) and two married couples who collectively owned over 99% of Hobby Lobby Stores, Inc., an S corporation, during the 2011 and 2012 tax years. In those years, Hobby Lobby donated more than 1,200 biblical artifacts—including scrolls, manuscripts, and rare books—to the Museum of the Bible, Inc., a § 501(c)(3) organization.

Hobby Lobby claimed noncash charitable contribution deductions of $23,038,000 for 2011 and $61,633,000 for 2012 on its Forms 1120-S. The petitioners, as S corporation shareholders, deducted their pro rata shares of these amounts on their respective income tax returns.

With its returns, Hobby Lobby attached Forms 8283, Noncash Charitable Contributions. For both years, these forms provided an aggregate basis, an aggregate fair market value, and a range of acquisition dates for the group of donated artifacts rather than itemized information for each artifact. The returns also included portions of appraisal reports prepared by Lee Raffaele Biondi that described and valued each item. For the 2012 donation, the appraisal report noted that two other individuals, Michael Thompson and Carol Sandberg, provided "personal property valuation assistance," and they signed statements in the report concurring with Mr. Biondi’s valuations for several items, but they did not sign the Form 8283 appraiser declaration. Before filing, Hobby Lobby engaged the accounting firm Grant Thornton, LLP to review its federal tax returns and workpapers, including the Forms 8283. According to a declaration from a Hobby Lobby executive, the company relied on Grant Thornton to raise any compliance issues, and none were raised regarding the Forms 8283.

Upon examination, the IRS disallowed the deductions in full, asserting that the petitioners failed to establish compliance with the requirements of I.R.C. § 170. The IRS also determined gross valuation misstatement penalties under § 6662(h) or, in the alternative, substantial valuation misstatement penalties under § 6662(b)(3).

The Reviewed Opinion (165 T.C. No. 7): Substantiation and Trust Deductions

The parties filed cross-motions for partial summary judgment on two primary sets of issues: (1) whether Hobby Lobby failed to meet the substantiation requirements of § 170, and (2) specific rules governing charitable contribution deductions for the ESBT petitioners.

The Commissioner’s Position

The IRS argued that the deductions should be disallowed because Hobby Lobby’s Forms 8283 were defective. Specifically, the IRS contended:

Failure to Itemize Basis and Acquisition Date: Treasury Regulation § 1.170A-13(c)(4)(ii), promulgated under the directive of the Deficit Reduction Act of 1984 (DEFRA), required Hobby Lobby to report the individual basis and acquisition date for each contributed artifact, not aggregate figures.
Missing Appraiser Signatures: For the 2012 contribution, the Form 8283 was invalid because Mr. Thompson and Ms. Sandberg, who contributed to the appraisal, failed to sign the appraiser’s declaration as required by Treasury Regulation § 1.170A-13(c)(5)(iii).
Trust-Specific Disallowance: In a separate motion, the IRS argued the Trusts’ deductions should be disallowed entirely under I.R.C. § 681 because the contributions were allocable to unrelated business income. Alternatively, citing Green v. United States, 880 F.3d 519 (10th Cir. 2018), the IRS argued the Trusts’ deductions should be limited to their share of Hobby Lobby’s basis in the artifacts, not fair market value.

The Taxpayers’ Position

The taxpayers countered with several arguments:

They had strictly or substantially complied with the substantiation rules.
Even if they failed to comply, the failure was excused under the statutory reasonable cause defense of I.R.C. § 170(f)(11)(A)(ii)(II), based on their reliance on Grant Thornton.
They also argued that as S corporation shareholders, their substantiation obligations were limited, and that the DEFRA-based regulations did not apply to the Trusts.
Regarding the trust-specific issues, the taxpayers argued that Treasury Regulation § 1.681(a)-2(a) permitted partial deductions allocable to unrelated business income and that the Tenth Circuit’s decision in Green was distinguishable because the deductions for ESBTs are governed by a different statutory framework (§ 641(c)).

The Tax Court’s Majority Opinion

Writing for the majority, Judge Toro denied all motions for partial summary judgment, concluding that genuine issues of material fact precluded a ruling as a matter of law.

The Court’s analysis centered on the reasonable cause defense under § 170(f)(11)(A)(ii)(II). This provision, enacted as part of the American Jobs Creation Act of 2004 (AJCA), provides an "escape hatch" for taxpayers who fail to meet the stringent substantiation requirements of § 170(f)(11) if the failure is "due to reasonable cause and not to willful neglect". The Court noted this statutory defense is broader than the prior regulatory version and is construed similarly to reasonable cause defenses for penalties.

The majority concluded that the availability of this defense is an inherently fact-intensive inquiry that cannot be resolved on summary judgment. Key factual questions requiring a trial include the nature of the taxpayers’ reliance on their professional advisor, Grant Thornton. The Court must evaluate the adviser’s expertise, the information provided to the adviser, and the taxpayer’s good faith reliance. The declaration from Hobby Lobby’s tax executive was sufficient to raise genuine issues of material fact on these points, defeating the Commissioner’s motion.

Because a successful reasonable cause defense would render the other complex substantiation arguments moot—such as whether the taxpayers strictly or substantially complied with the regulations—the Court deemed it prudent to defer ruling on those legal issues until after a trial resolves the factual question of reasonable cause. Similarly, the Court declined to rule on the intricate trust-related deduction issues, stating that neither side had demonstrated it was clearly entitled to a ruling and that a full record developed at trial was necessary.

The Dissenting Opinions

The reviewed opinion drew two strong dissents, arguing that the majority abdicated its responsibility to resolve purely legal questions presented by the parties.

Judge Marshall’s Dissent: Joined by Judges Guider and Jenkins, Judge Marshall argued that the purpose of summary judgment is to decide legal issues where facts are not in dispute. He contended that by filing voluminous cross-motions, the parties were asking the Court to answer "complicated questions of law," and the majority’s refusal to do so was a "drastic remedy" that harmed the parties by failing to narrow the issues for trial or facilitate settlement.
Judge Jenkins’ Dissent: Joined by four other judges, Judge Jenkins offered a more detailed critique. He argued that the majority improperly put the "cart before the horse" by focusing on reasonable cause. The applicability of the reasonable cause defense is predicated on a finding that the taxpayer first failed to comply with the substantiation requirements. Therefore, the Court should have first addressed the purely legal questions of whether the taxpayers strictly or substantially complied. If the Court found compliance, the reasonable cause issue would be irrelevant, thus narrowing the scope of the trial. Judge Jenkins noted that in prior cases like Belair Woods, Alli, and Crimi, the Court analyzed compliance before turning to reasonable cause. He also criticized the majority’s deferral on the trust-specific issues, arguing that since the parties presented them as questions of law, the Court should have provided an explanation for its refusal to rule.

The Memorandum Opinion (T.C. Memo. 2025-100): Penalty Approval and Procedures

This opinion addressed separate motions for partial summary judgment concerning the valuation misstatement penalties asserted by the IRS.

Taxpayers’ Arguments for Invalidating Penalties

The taxpayers argued that the penalties were invalid for three primary procedural reasons:

Lack of Supervisory Approval (§ 6751(b)): The initial determination to assert penalties was not properly approved in writing by the revenue agent’s immediate supervisor. They claimed the approval needed to occur before the issuance of the Notice of Proposed Adjustment (NOPA) and that the approval document improperly named Hobby Lobby (the S corporation) instead of the individual petitioners.
Failure to Value Property-by-Property: The IRS calculated the penalties assuming a zero value for all artifacts, violating Treasury Regulation § 1.6662-5(f)(1), which requires a "property-by-property" analysis.
Defective Penalty Notice (§ 6751(a)): The penalty computation in the Notice of Deficiency was invalid because it was based on an assumed zero value rather than an actual valuation of each item.

The Tax Court’s Analysis and Conclusions

Judge Toro, writing for the Court, granted the Commissioner’s motion in part and denied the taxpayers’ motion.

Supervisory Approval was Timely and Proper: The Court held that the "initial determination" of the penalty occurred not with the NOPA, but with the later Form 4605-A, which formally communicated the examination changes and the opportunity to request an Appeals conference. The supervisor, Ms. Van Camp, had signed a workpaper approving the substantial and gross valuation misstatement penalties on October 21, 2015, which was before the Form 4605-A was issued on November 18, 2015. This timing satisfied the requirements of § 6751(b) as interpreted in Belair Woods, LLC v. Commissioner, 154 T.C. 1 (2020).

Furthermore, the Court rejected the argument that the approval was invalid because it named Hobby Lobby. Because the existence of a valuation misstatement for a passthrough entity is determined at the entity level, obtaining supervisory approval that names the entity is consistent with the statute’s text and objective.
Procedural Arguments on Penalty Computation Rejected: The Court dismissed the taxpayers’ other procedural challenges. The Court stated it "will not look behind the Notices of Deficiency" to examine how the IRS made its determination. A procedural "foot fault" by the Examination Division, such as failing to conduct a property-by-property valuation before issuing the notice, does not invalidate the penalty itself. The substantive question of how the penalty is ultimately calculated is a matter for trial, not a basis for summary judgment on procedural grounds. Similarly, the notice satisfied § 6751(a) because it included the name of the penalty, the imposing Code section, and a computation; the statute does not require that the computation be substantively correct at that stage.
Reasonable Cause for Penalties Remains a Triable Issue: The Court denied the Commissioner’s request for a ruling that valuation penalties could apply even if the underlying deduction were disallowed on non-valuation grounds (e.g., for failure to substantiate). While the Court acknowledged its precedent in cases like RERI Holdings I, LLC v. Commissioner, 149 T.C. 1 (2017), allows for this, it found such a ruling premature. The taxpayers had raised the reasonable cause defense under § 6664(c) in their petitions, which remains a disputed issue of material fact requiring a trial. The Court noted that this defense is available for substantial valuation misstatements (if based on a qualified appraisal and good-faith investigation) but is unavailable for gross valuation misstatements of charitable property.

Key Takeaways for Tax Professionals

The Green opinions offer several crucial insights for practitioners handling large noncash charitable contribution cases:

The Primacy of the Reasonable Cause Defense: The Tax Court’s majority opinion highlights the strategic importance of the statutory reasonable cause defense under § 170(f)(11)(A)(ii)(II). For taxpayers who have relied on competent tax advisors, this defense can be a powerful tool to overcome technical substantiation defects. However, practitioners must be prepared to litigate the factual elements of this defense, as the Court is unwilling to decide it on summary judgment.
Debate Over Judicial Efficiency: The dissents in the reviewed opinion underscore a significant internal debate at the Tax Court regarding the proper role of summary judgment. Practitioners should be aware that the Court may defer ruling on complex, purely legal questions if a fact-based issue like reasonable cause could ultimately be dispositive.
Penalty Approval for Passthrough Entities: The memorandum opinion provides clear guidance that for passthrough entities, supervisory approval of penalties under § 6751(b) is properly obtained at the entity level. This holding in Green affirms the approach taken in Rogers v. Commissioner, T.C. Memo. 2019-61, and provides a useful precedent for S corporation and partnership cases.
Distinction Between Procedural and Substantive Penalty Challenges: The Court drew a sharp line between procedural defects that can invalidate a penalty (like lack of § 6751(b) approval) and alleged errors in the IRS’s pre-litigation methodology for calculating a penalty. The latter are considered substantive matters to be resolved at trial and will not serve as a basis to invalidate the penalty assessment itself.

Ultimately, the Green cases are far from over. The Tax Court has set the stage for a trial that will focus on the taxpayers’ reasonable cause defense for both the deduction disallowance and the potential penalties, as well as the underlying valuation of the contributed artifacts. Tax professionals should monitor the outcome of this trial for further developments in this critical area of tax law.

Prepared with assistance from NotebookLM.