Upen G. Patel and Avanti D. Patel v. Commissioner

UPEN G. PATEL AND AVANTI D. PATEL, PETITIONERS

v. COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT

Docket No. 11694–09. Filed June 27, 2012.

At the end of May 2006, Ps purchased property in Vienna,

Virginia (Vienna property), with the intention to demolish the

house situated thereon (house) and construct a new one on

the site. Their realtor told them about the Fairfax County

Fire and Rescue Department (FCFRD) Acquired Structures

Program, where a property owner allows FCFRD to conduct

live fire training exercises on his or her property. As part of

the exercises, FCFRD destroys, by burning, the designated

building on the owner’s property. Within a few weeks of pur-

chasing the Vienna property, Ps contacted FCFRD and

obtained information about the requirements for participating

in the program. After Ps obtained a demolition permit and

completed all of the other requirements, they executed docu-

ments granting FCFRD the right to conduct training exercises

on the Vienna property and to destroy the house by burning

during the exercises. During October 2006, FCFRD, along

with six other fire departments, used the Vienna property to

conduct live fire training exercises, during which the house

was destroyed. On their 2006 Federal income tax return, Ps

reported a noncash charitable contribution of $339,504 on

Schedule A, Itemized Deductions, for the donation of the

house to FCFRD. R disallowed the deduction Ps claimed for

2006 and asserts that Ps’ donation to FCFRD was a contribu-

tion of a partial interest in property, a deduction for which is

denied by I.R.C. sec. 170(f)(3). Held: A landowner’s grant to

a fire department of the right to conduct training exercises on

his property and destroy a building thereon during the exer-

cises is a mere license that permits the fire department to do

an act which without such a grant would be illegal and which

conveys no interest in the property to the fire department.

Held, further, taxpayers who grant a fire department the right

to conduct training exercises on their property and destroy a

building thereon during the exercises do not donate any

ownership interest in property to the fire department, and

I.R.C. sec. 170(f)(3) denies them a charitable contribution

deduction for the donation of the use of their property regard-

less of the value of that use. Held, further, Ps donated only

395

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396 138 UNITED STATES TAX COURT REPORTS (395)

the use of the Vienna property and the house to FCFRD, a

partial interest in the property, and pursuant to I.R.C. sec.

170(f)(3) are not entitled to the $92,865 noncash charitable

contribution deduction claimed on their 2006 income tax

return under I.R.C. sec. 170(a). Held, further, Ps acted with

reasonable cause and in good faith and are accordingly not

liable for any accuracy-related penalty under I.R.C. sec.

6662(a) or (h).

Upen G. Patel and Avanti D. Patel, pro sese.

Erin R. Hines, for respondent.

OPINION

DAWSON, Judge: Petitioners petitioned the Court for

redetermination of a deficiency of $32,672 in their Federal

income tax for 2006 and an accuracy-related penalty of

$6,534.40 under section 6662. 1 This case is before us on

respondent’s motion for partial summary judgment pursuant

to Rule 121 filed on July 19, 2011. Petitioners object to the

motion and filed a response. Summary judgment may be

granted with respect to all or any part of the legal issues in

controversy ‘‘if the pleadings, answers to interrogatories,

depositions, admissions, and any other acceptable materials,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that a decision may

be rendered as a matter of law.’’ Rule 121(b); Sundstrand

Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff ’d, 17

F.3d 965 (7th Cir. 1994); Zaentz v. Commissioner, 90 T.C.

753, 754 (1988). The moving party bears the burden of

proving that there is no genuine issue of material fact, and

factual inferences will be read in a manner most favorable to

the party opposing summary judgment. Dahlstrom v.

Commissioner, 85 T.C. 812, 821 (1985); Jacklin v. Commis-

sioner, 79 T.C. 340, 344 (1982).

Although the parties have not stipulated any of the facts

in this case, they agree there are no disputes as to genuine

issues of material facts. On the basis of our review of the

record, we are satisfied that there is no genuine issue as to

any material fact and that judgment may be rendered as a

matter of law.

1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect

for the year in issue as amended, and all Rule references are to the Tax Court Rules of Practice

and Procedure.

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(395) PATEL v. COMMISSIONER 397

After concessions by respondent, 2 the issues for decision

are (1) whether petitioners are entitled to the noncash chari-

table contribution deduction under section 170(a) in connec-

tion with their granting the Fairfax County Fire and Rescue

Department (FCFRD) the right to conduct training exercises

on their property and demolish the house thereon during the

exercises, and (2) whether petitioners are liable for the

accuracy-related penalty under section 6662.

Background

Petitioners resided in Virginia when their petition was

filed. In 2006 petitioners resided in Haymarket, Virginia. On

May 31, 2006, they purchased property in Vienna, Virginia

(Vienna property), for $625,000 and acquired the fee simple

interest therein. The Vienna property consisted of a 1,221-

square-foot brick house (house) situated on a 22,786-square-

foot lot. Petitioners purchased the Vienna property with the

intent to demolish the house, which had been built in 1960,

and build a new one to their specifications. Petitioners never

resided in the house, nor did they reside on any part of the

Vienna property during 2006. In May 2006, before closing on

the Vienna property, petitioners engaged Atlantic Coast

Inspection Services, LLC, to complete a home inspection of

the house that included an asbestos report. They also

obtained an appraisal dated May 14, 2006, from William

Fluharty of Reliable Appraisal Service. Mr. Fluharty valued

the entire property (including the house and land) at

$625,000. Petitioners subsequently obtained a second

appraisal from Mr. Fluharty, dated September 1, 2006, that

valued the entire property at $660,000.

Petitioners learned of the FCFRD Acquired Structures Pro-

gram from the realtor who represented them in their pur-

chase of the Vienna property. The program was designed to

provide ‘‘real life’’ training for emergency personnel by using

structures for training exercises. Under the program the

property owner allows the FCFRD to conduct live fire training

exercises on his or her property. As part of the exercises,

FCFRD destroys, by burning, the designated building on the

2 Respondent has conceded that petitioners are entitled to deductions claimed on Schedule A,

Itemized Deductions, for taxes of $18,074 and mortgage interest of $37,428 for 2006. These

amounts will be allowed and reflected in the Rule 155 computations.

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398 138 UNITED STATES TAX COURT REPORTS (395)

owner’s property. In June 2006, petitioners contacted the

FCFRD about its program. On June 12, 2006, FCFRD acknowl-

edged petitioners’ interest in participating in the program

and sent them a Standard Property Owner Package.

In order to participate in the program, petitioners were

required to (1) permit FCFRD to inspect the house to deter-

mine its training value; (2) have the house inspected and

remove any asbestos found as a result of such inspection; (3)

obtain a demolition permit; (4) sign certificates of authoriza-

tion and temporary release forms; (5) disconnect and/or

remove any utilities from the house; and (6) provide all

required documentation to FCFRD at least two weeks before

the planned demolition.

Petitioners hired MW Construction in Alexandria, Virginia,

to construct a new house on the Vienna property after the

old house was demolished. As part of the contract, MW

Construction was to remove the debris from the burning of

the house after the fire training exercises were completed.

On or about July 20, 2006, petitioners requested a demoli-

tion permit for the Vienna property from Fairfax County.

The application for the permit required petitioners to provide

the name, address, telephone number, State contractor’s

license number, and Fairfax County business license number

of the licensed contractor that would perform the work. 3 On

September 28, 2006, Fairfax County issued a demolition

permit to ‘‘Demolish Entire Structure’’ (permit No. 62010212)

to Upen Patel showing MW Construction as the contractor.

Because the May 2006 home inspection report indicated

that asbestos was present in the house in the basement floor

tile and baseboard, petitioners hired Young Environmental to

remove the asbestos. Young Environmental removed the

materials containing asbestos on or about July 24, 2006, and

sent a letter of completion to petitioners, along with an

invoice for its services.

On August 25, 2006, petitioners obtained a construction

mortgage loan of $943,575 from Suntrust Mortgage, Inc.

They used a portion of the loan to pay off a mortgage from

3 Under Virginia law contracting without the proper license or certificate to remove improve-

ments on real property owned, controlled, or leased by another person is a class 1 misdemeanor

and a violation of the Virginia Consumer Protection Act. Va. Code Ann. sec. 54.1–1115(A)(1),

(B) (2009); see Tuggle Masonry, Inc. v. Dailey, 2010 WL 7372379, at *1 (Va. Cir. Ct. 2010).

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(395) PATEL v. COMMISSIONER 399

Wells Fargo Bank, N.A., and a home equity loan from

National City.

On September 14, 2006, petitioners executed two forms

required by FCFRD for participation in the program: (1) the

Live Fire Training Exercise Certificate of Authorization Form

(authorization form), and (2) the Certificate of Authorization/

Temporary Liability Release Form (release form). On the

authorization form petitioners certified that they were the

true owners of the Vienna property and granted FCFRD

permission to use the Vienna property as follows:

This is to certify that: UPEN PATEL & AVANTI PATEL * * * is the true

owner or authorized agent of the property located at (address): * * * [the

Vienna property address] * * *.

Permission is herby [sic] granted to the Fairfax County Fire and Rescue

Department to utilize for training such building(s) designated on the above

describe property. In return, Fairfax County agrees not to bring suit to

exercise its right of subrogation under Virginia Code 65.1–41 (Repl. Vol.

1980) against the property owner and/or his/her representative for any per-

sonal injury to a Fairfax County Career or Volunteer Firefighter during

the training period. Fairfax County further agrees not to bring suit for

damage to any self-insured equipment during the training session.

Signed: Upen Patel and Avanti Patel Date: 9/14/06

Property Owner or Authorized Representative

Signed: llllllllllllllllllllll Date: llll

Fairfax County Representative

On the release form petitioners certified that they were the

owners of the Vienna property and that they had obtained a

permit to demolish the house on the Vienna property and

granted FCFRD permission to use the house for training as

follows:

This is to certify that I, UPEN PATEL & AVANTI PATEL * * * am the

true owner or authorized agent of the owner of the property located at

(address): * * * [the Vienna property address] * * *.

I further certify that a Demolition Permit has been secured from the

Department of Environmental Management, Permit Branch, and is

described as Permit # 62010212 issued on (date) 9/2/2006, and that all

public utilities have been removed or disconnected from the above

described property.

I herby [sic] grant permission to the Fairfax County Fire and Rescue

Department to conduct a training exercise on the above premises and to

destroy, by burning, such building(s) as designed on the above described

property. I agree to remove any remaining hazardous conditions including

but not limited to open pits, basements and wells, standing walls and

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400 138 UNITED STATES TAX COURT REPORTS (395)

chimney, and burned and unburned debris after the completion of the

training exercise. I understand that the designated building(s) may not be

destroyed or may only be partially destroyed by the Fairfax County Fire

and Rescue Department if circumstances beyond the control of the Fairfax

County Fire and Rescue Department should arise.

It is agreed that I will not hold Fairfax County or the Fairfax County

Fire and Rescue Department or any of its officers, agents, or employees

liable for any damage to the above described property. In return, Fairfax

County agrees not to bring suit to exercise its right or subrogation under

Virginia Code 65.1–41 (1987) against me and/or my representative for any

personal injury to a Fairfax County Career or Volunteer Firefighter

incurred during the training exercise on the site. Fairfax County further

agrees not to bring suit for damage to any self-insured equipment incurred

during the training exercise on the site.

Signed: Upen Patel and Avanti Patel Date: 9/14/06

Property Owner or Authorized Representative

Signed: llllllllllllllllllllll Date: llll

Fairfax County Representative

On September 29, 2006, petitioners sent to FCFRD all of the

documents necessary to participate in the program. None of

the documents purport to transfer title to the house or the

Vienna property or any ownership interest therein to Fairfax

County or FCFRD.

During October 2006, FCFRD, along with six other fire

departments, used the Vienna property to conduct live fire

training exercises. The house was demolished by fire during

the training exercises. On October 23, 2006, FCFRD sent peti-

tioners an acknowledgment letter thanking them for their

donation and expressing their appreciation for petitioners’

allowing them to use the Vienna property for the training

exercises.

On October 23, 2006, MW Construction was given access

to the Vienna property to remove the debris and begin

construction of the new house. The construction was com-

pleted in July 2007. Petitioners subsequently obtained a resi-

dential use permit and moved into the new house, where

they currently reside.

On their 2006 Federal income tax return, petitioners

reported a noncash charitable contribution of $339,504 on

Schedule A. The contribution of $339,504 consisted of only

the claimed donation of the house on the Vienna property. In

accordance with the limitations of section 170(b) and the

regulations thereunder, petitioners deducted $92,865 as a

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(395) PATEL v. COMMISSIONER 401

noncash charitable contribution for 2006. 4 Petitioners filed

their 2006 tax return electronically. They submitted Form

8283, Noncash Charitable Contributions, with the return;

however, Form 8283 was not signed by the appraiser or the

donee because of the electronic submission. Petitioners

retained a fully signed copy of Form 8283 which they later

submitted to respondent upon request.

On February 17, 2009, respondent sent petitioners a notice

of deficiency for their 2006 tax year disallowing their claimed

noncash charitable contribution deduction of $92,865 and

determined an income tax deficiency of $32,672 and an

accuracy-related penalty of $6,534 under section 6662.

Discussion

I. Charitable Contribution Deduction

A. Noncash Charitable Contribution Deduction Under

Section 170

Section 170(a)(1) provides in relevant part that a deduction

is allowed for any charitable contribution, payment of which

is made within the taxable year. Section 170(c)(1) defines the

term ‘‘charitable contribution’’ to include a contribution or

gift to or for the use of, inter alia, a political subdivision of

a State, but only if the gift is made for exclusively public pur-

poses. Contributions or gifts to nonprofit volunteer fire

companies are deemed to be for the use of a political subdivi-

sion of a State for exclusively public purposes and are

deductible under section 170(c)(1). Rev. Rul. 71–47, 1971–1

C.B. 92; see also Rev. Rul. 74–361, 1974–2 C.B. 159.

Before 1969 a taxpayer could deduct contributions to chari-

table organizations of partial interests in the taxpayer’s prop-

erty, including income and remainder interests and the right

to use the property. See, e.g., Thriftimart, Inc. v. Commis-

sioner, 59 T.C. 598 (1973). The only limitation placed on con-

tributions of partial interests, found in what was then section

170(f), delayed the deduction for contributions of future

interests in tangible personal property until all intervening

interests in the property had expired. For purposes of that

4 The remaining $246,639 of the reported contribution for 2006 has been carried forward by

petitioners under sec. 170(d) and the regulations thereunder. The full amount of the contribu-

tion, which includes the amount deducted for 2006 and the carryover amounts, is at issue in

this case.

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402 138 UNITED STATES TAX COURT REPORTS (395)

limitation, a fixture that was intended to be severed from

real property was treated as a future interest in tangible per-

sonal property and not as real property.

Congress became concerned that the amount of a chari-

table contribution deduction for a partial interest in property

might not correspond to the value of the benefit ultimately

received by the charity and that taxpayers were receiving a

double benefit from donations of the use of property for a

period of time. See S. Rept. No. 91–552, at 83–87 (1969),

1969–3 C.B. 423, 477–479; see also H.R. Rept. No. 91–413, at

57 (1969), 1969–3 C.B. 200, 237–239. In the Tax Reform Act

of 1969, Pub. L. No. 91–172, sec. 201(a), 83 Stat. at 549, Con-

gress amended section 170 to address those concerns by,

inter alia, moving the limitation previously provided in sec-

tion 170(f) to new section 170(a)(3) and adding a new section

170(f). Section 170(f)(2) denies a charitable contribution

deduction for certain contributions of interests in property

placed in trust: Section 170(f)(2)(A) disallows a deduction for

contributions of remainder interests in property placed in

trust unless the trust is a charitable remainder annuity trust

or a charitable remainder unitrust or a pooled income fund,

and section 170(f)(2)(B) disallows a deduction for the value of

any other interest in property placed in trust, unless the

interest is a guaranteed annuity or fixed percentage of the

trust property distributed annually. Section 170(f)(3) denies

a charitable contribution deduction for certain contributions

of partial interests in property and provides as follows:

(3) DENIAL OF DEDUCTION IN CASE OF CERTAIN CONTRIBUTIONS OF PAR-

TIAL INTERESTS IN PROPERTY.—

(A) IN GENERAL.—In the case of a contribution (not made by a transfer

in trust) of an interest in property which consists of less than the tax-

payer’s entire interest in such property, a deduction shall be allowed

under this section only to the extent that the value of the interest

contributed would be allowable as a deduction under this section if such

interest had been transferred in trust. For purposes of this subpara-

graph, a contribution by a taxpayer of the right to use property shall be

treated as a contribution of less than the taxpayer’s entire interest in

such property.

(B) EXCEPTIONS.—Subparagraph (A) shall not apply to—

(i) a contribution of a remainder interest in a personal residence or

farm,

(ii) a contribution of an undivided portion of the taxpayer’s entire

interest in property, and

(iii) a qualified conservation contribution.

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(395) PATEL v. COMMISSIONER 403

Congress described the purpose of section 170(f)(3) as follows:

General reasons for change.—An individual receives what may be

described as a double benefit by giving a charity the right to use property

which he owns for a given period of time. For example, if the individual

owns an office building, he may donate the use of 10 percent of its rental

space to a charity for 1 year. As a result, he may report for tax purposes

90 percent of the income which he otherwise would have had if the

building was fully rented, and may claim a charitable deduction

(amounting to 10 percent of the rental value of the building) which offsets

his reduced rental income. [H.R. Rept. No. 91–413, supra at 57, 1969–3

C.B. at 237.]

Accord S. Rept. No. 91–552, supra at 83, 1969–3 C.B. at 477.

Section 170(f)(3) is considerably broader in scope than that

articulated purpose, Stark v. Commissioner, 86 T.C. 243, 250

(1986), and it reflects Congress’ concern that the amount of

a charitable contribution deduction might not correspond to

the value of the benefit ultimately received by the charity.

Respondent contends that petitioners donated to FCFRD

merely the right to use the Vienna property. Respondent

argues alternatively that if petitioners transferred an owner-

ship interest in the house to FCFRD, they nonetheless

retained substantial interest in the Vienna property and the

house. Respondent concludes therefore that petitioners

contributed a partial interest in the property, a deduction for

which is prohibited under section 170(f)(3)(A).

Petitioners assert that their granting FCFRD the right to

destroy the house by burning conveyed to FCFRD all of their

rights, title, and interest in the house and not merely the use

of the Vienna property. 5 They assert that there is no require-

ment that the land be transferred with the house and, there-

fore, they are entitled to a charitable contribution deduction

for the value of the house.

Whether petitioners’ contribution to the FCFRD constitutes

a transfer of a partial interest in property for the purposes

of section 170(f) is ultimately a question of Federal law. See

United States v. Craft, 535 U.S. 274, 278 (2002). The answer

5 Petitioners assert that had they given FCFRD only the use of the house, they would have

expected FCFRD to return it in essentially the same state as it was before the use. We do not

think that such an expectation is particularly relevant where a donor intends to make improve-

ments to his real property that require the destruction of the existing building situated on the

land. Allowing FCFRD to burn the house during its training exercises so that petitioners might

construct a new house on the site is consistent with and necessary for petitioners’ intended use

of the Vienna property.

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404 138 UNITED STATES TAX COURT REPORTS (395)

to this Federal question, however, depends in part upon

State law, which creates and governs the nature of interests

in property. United States v. Nat’l Bank of Commerce, 472

U.S. 713, 722 (1985); United States v. Mitchell, 403 U.S. 190,

197 (1971); Commissioner v. Estate of Bosch, 387 U.S. 456,

465 (1967).

‘‘A common idiom describes property as a ‘bundle of

sticks’—a collection of individual rights which, in certain

combinations, constitute property.’’ Craft, 535 U.S. at 278–

279. ‘‘Likewise, ownership of property is not a single indivis-

ible concept but rather an aggregate or bundle of rights per-

taining to the property involved.’’ Molbreak v. Commissioner,

61 T.C. 382, 390 (1974), aff ’d, 509 F.2d 616 (7th Cir. 1975).

‘‘State law determines only which sticks are in a person’s

bundle.’’ Craft, 535 U.S. at 279. Once property rights are

determined under State law, as announced by the highest

court of the State, the tax consequences are decided under

Federal law. Commissioner v. Estate of Bosch, 387 U.S. 456;

Aquilino v. United States, 363 U.S. 509, 512–513 (1960);

Morgan v. Commissioner, 309 U.S. 78 (1940).

Accordingly, we first look to Virginia law to determine

what property rights petitioners had in the house and what

property rights in the house were given to FCFRD. In looking

to State law, we consider the substance of the property rights

State law provides, including the benefits and burdens of

such rights, not merely the labels the State gives these rights

or the conclusions it draws from them. Craft, 535 U.S. at

279.

B. Virginia Real Property Law: House Is Part of the Land

In Virginia the common law continues in full force except

as altered by the General Assembly of Virginia. 6 Va. Code

Ann. sec. 1–200 (2011); Brown v. Brown, 32 S.E.2d 79, 80

(Va. 1944). By the original rule of common law everything

that was affixed to land held in fee simple was considered to

be a part of it. Marraro v. State, 189 N.E.2d 606, 610 (N.Y.

1963). Under Virginia statutory law the terms ‘‘land’’,

‘‘lands’’, and ‘‘real estate’’ are synonymous and include

6 Va. Code Ann. sec. 1–200 (2011) provides: ‘‘The common law of England, insofar as it is not

repugnant to the principles of the Bill of Rights and Constitution of this Commonwealth, shall

continue in full force within the same, and be the rule of decision, except as altered by the Gen-

eral Assembly.’’

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(395) PATEL v. COMMISSIONER 405

‘‘lands, tenements[7] and hereditaments,[8] and all rights and

appurtenances thereto and interests therein, other than a

chattel interest’’. 9 Va. Code Ann. sec. 1–219 (2011) (formerly

sec. 1–13.12). In Stuart v. Pennis, 22 S.E. 509, 510 (Va.

1895), the Supreme Court of Appeals of Virginia held:

Land includes everything belonging or attached to it, above and below the

surface. It includes the minerals buried in its depths, or which crop out

of its surface. It equally includes the woods and trees growing upon it.

Rooted and standing in the soil, and drawing their support from it, they

are regarded as an integral part of the land, just as the coal, the iron, the

gypsum, and the building stone which enter so largely into the business

of commerce. Attached to the soil, they pass with the land, as a part of

it. * * *

The definition of land under Virginia law, as interpreted

by the Virginia Court, is the widely recognized ordinary legal

definition of land that derives from the common law. See 1

Tiffany Real Prop., secs. 3, 10 (2011); Webster’s Third New

International Dictionary 1268 (2002); Black’s Law Dictionary

954 (9th ed. 2009). Under the common law, a fixture 10

attached to the land, 11 including a structure erected on the

land, is regarded as part of the land and remains so unless

and until it is severed from the land. 12 Myers v. Hancock, 39

S.E.2d 246, 248 (Va. 1946); Stuart, 22 S.E. at 510; Baker v.

Jim Walter Homes, Inc., 438 F. Supp. 2d 649 (W.D. Va.

2006).

7 ‘‘The word ‘tenement’ means either an estate or holding of land, or a house or other building

used as a residence.’’ Pardoe & Graham Real Estate, Inc. v. Schulz Homes Corp., 525 S.E.2d

284, 286 (Va. 2000) (citing Black’s Law Dictionary 1480 (7th ed. 1999), and 1 Raleigh Colston

Minor & Frederick Deane Goodwin Ribble, The Law of Real Property sec. 17 (2d ed. 1928)).

8 ‘‘The term ‘hereditament,’ in general, signifies any interest in real property that may be in-

herited by an owner’s heirs.’’ Pardoe, 525 S.E.2d at 286 (citing 1 Minor & Ribble, supra sec.

17, and Caroline N. Brown, 4 Corbin on Contracts sec. 17.1 (rev. ed. 1997)).

9 A chattel interest is an interest that is less than a freehold such as a lease for a year or

term of years. Hannan v. Dusch, 153 S.E. 824, 827 (Va. 1930).

10 A fixture is an article of personal property that ‘‘by being affixed to the realty, became ac-

cessory to it and parcel of it.’’ Green v. Phillips, 67 Va. [26 Gratt. 752] 250, 252, 1875 WL 5726

(1875). ‘‘A thing is deemed to be affixed to land when it is attached to it by roots, imbedded

in it, permanently resting upon it, or permanently attached to what is thus permanent, as by

means of cement, plaster, nails, bolts, or screws’’. Dowdy v. Silverstein, 1981 WL 180584, 2 (Va.

Cir. Ct. 1981) (citing Black’s Law Dictionary 574 (5th Ed. 1979)).

11 Movable buildings and fixtures that have never been attached to the land never become a

part of the land and remain personal property. Pardoe, 525 S.E.2d at 286; Commonwealth v.

Pembroke Limestone Works, 134 S.E. 717, 720 (Va. 1926). However, once a structure is erected

and attached to the land, it becomes real property and part of the land. Pardoe, 525 S.E.2d at

286.

12 The common law definition of land is recognized in all 50 States. See, e.g., cases listed infra

app. A wherein the courts apply the law of fixtures to determine whether an item is sufficiently

‘‘attached’’ to the land that it is considered part of the real property.

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406 138 UNITED STATES TAX COURT REPORTS (395)

Where a taxpayer contributes to a charity an interest in a

building that is part of the land under State law but retains

all title to and interest in the remaining land, the taxpayer

has donated less than his entire interest in the land. The

taxpayer will not be allowed a charitable contribution deduc-

tion unless the donated interest falls within the exceptions of

section 170(f)(3)(B).

In the case at hand, the house was attached to the land

and was conveyed to petitioners along with the land when

they purchased the Vienna property. Under the common law

and the laws of Virginia, the house was part of the land that

is the real estate we refer to as the Vienna property. Peti-

tioners’ purported contribution of the house to FCFRD was a

contribution of less than their entire interest in the Vienna

property.

C. Permissible Partial Interests: Section 170(f)(3)(B)

Pursuant to section 170(f)(3), where a taxpayer contributes

to a charitable organization an interest in a house considered

part of the land under State law but retains a substantial

interest in the remaining land the taxpayer will not be

allowed a charitable contribution deduction unless the

donated interest is (i) an undivided portion of the taxpayer’s

entire interest in property, (ii) a remainder interest in a per-

sonal residence, or (iii) a qualified conservation contribution.

1. Undivided Portion of Property

Pursuant to section 170(f)(3)(B)(ii) a taxpayer is allowed a

deduction for a contribution of ‘‘an undivided portion of the

taxpayer’s entire interest in property’’. Section 1.170A–

7(b)(1)(i), Income Tax Regs., provides in relevant part:

(1) Undivided portion of donor’s entire interest. (i) An undivided portion

of a donor’s entire interest in property must consist of a fraction or

percentage of each and every substantial interest or right owned by the

donor in such property and must extend over the entire term of the donor’s

interest in such property and in other property into which such property

is converted. For example * * * . * * * If a taxpayer owns 100 acres of

land and makes a contribution of 50 acres to a charitable organization, the

charitable contribution is allowed as a deduction under section 170.

If a donor contributes some of the rights in the property

and retains other substantial rights, the donated rights in

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(395) PATEL v. COMMISSIONER 407

the property are not an undivided portion of the entire

interest. The substantiality of the donor’s interest in the

retained property is determinative. Stark v. Commissioner,

86 T.C. 243 (Tax Court held mineral interest retained by tax-

payer was insubstantial).

In Walshire v. United States, 288 F.3d 342 (8th Cir. 2002),

the Court of Appeals for the Eighth Circuit upheld the

validity of section 25.2518–3(b), Gift Tax Regs., which pro-

vides the same definition for an undivided portion of a

disclaimant’s entire interest in property for purposes of sec-

tion 2518. 13 In discerning the meaning of ‘‘undivided

interest’’, the Court of Appeals stated:

The term ‘‘undivided’’ in its common usage means ‘‘not separated out into

parts or shares.’’ Webster’s Third New International Dictionary 2492

(1986). We are most familiar with the concept of undivided interests in the

context of a tenancy in common, which is ‘‘[a] tenancy by two or more per-

sons, in equal or unequal undivided shares, each person having an equal

right to possess the whole property.’’ Black’s Law Dictionary 1478 (17th

[sic] ed. 1999). ‘‘ ‘The central characteristic of a tenancy in common is

simply that each tenant is deemed to own by himself, with most of the

attributes of independent ownership, a physically undivided part of the

entire parcel.’ ’’ Id. (quoting Thomas F. Bergin & Paul G. Haskell, Preface

to Estates in Land and Future Interests 54 (2d ed. 1984)). From these uses

of the term ‘‘undivided,’’ we discern that an undivided portion of an

interest is a portion that does not separate out the bundle of rights associ-

ated with the interest being apportioned. Thus, * * * an undivided portion

of that [fee simple] interest would have to include all of the rights associ-

ated with the fee. * * * [Walshire, 288 F.3d at 347–348. 14]

The ‘‘bundle of sticks’’ that constitutes land situated in Vir-

ginia includes the rights with respect to the surface of the

land, the minerals in the land, the timber growing on the

land, structures attached to the land, and the air space over

the land. An undivided portion of a donor’s entire interest in

the land must consist of a fraction or percentage of each and

13 Sec. 2518 allows the donee of an interest in property to disclaim an undivided portion of

a transferred interest, and that portion of the interest is treated as having never been trans-

ferred to him for gift or estate tax purposes.

14 If a landowner who owns a 100-acre parcel of land conveys 50 acres to a charitable organi-

zation, the conveyance severs the 50 acres from 50 acres retained by the landowner and creates

two separate lots. The example provided in the regulations treats the 50 acres as an undivided

interest in the 100 acres. Sec. 1.170A–7(b)(1)(i), Income Tax Regs. This is consistent with and

reflects the cotenants’ right to have the land partitioned. Under the regulations the transfer of

the 50-acre lot to the charitable organization is a contribution of a partial interest in the original

100-acre parcel—an undivided interest in the 100 acres for which a charitable contribution de-

duction is permitted.

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408 138 UNITED STATES TAX COURT REPORTS (395)

every one of those ‘‘sticks’’ and must extend over the entire

term of the donor’s interest in such property. Thus, a chari-

table contribution of an interest in the land does not con-

stitute a contribution of an undivided portion of the donor’s

entire interest if the donor transfers some sticks and retains

substantial rights in others. Stark v. Commissioner, 86 T.C.

243.

We observe that while some of the sticks, e.g., minerals

buried in the land and soil covering the surface of the land,

extend over the entire property, others such as fixtures

attach to one specific location; e.g., a building occupies only

the land immediately under its footprint. A landowner can

convey by metes and bounds any part of the land or convey

all or a portion of his interest in the minerals, the timber,

or the structures, severing the transferred interest in the

land from the interest retained, creating separate estates in

the land. 15 See, e.g., United Masonry, Inc. v. Jefferson Mews,

Inc., 237 S.E.2d 171, 181–182 (Va. 1977) (area above the land

may be subdivided into a number of three-dimensional air

spaces, each susceptible of being separately conveyed; sever-

ance of condominium units from the soil is ‘‘an estate in the

subdivided cubes in the sky’’ analogous to the accepted rule

that minerals below the topsoil may be severed from the sur-

face lot); Morison v. Am. Ass’n, 65 S.E. 469 (Va. 1909) (land

was divided into a surface estate and a mineral estate); Blue-

field Timber, LLC v. Harlan Lee Land, LLC, 2006 WL

6185856, at *1 (Va. Cir. Ct. 2006) (the interests in the parcel

consisted of three separate and distinct estates: an undivided

interest in 60% of the timber; a 60% undivided interest in

the surface; and a 40% interest in the fee simple).

When a taxpayer transfers a fee interest in land to a chari-

table organization while retaining substantial mineral rights,

he does not transfer an undivided interest in the land. See

Stark v. Commissioner, 86 T.C. at 254. Similarly, the

transfer of mineral rights would constitute an undivided

interest in the land only if the taxpayers’ retained interest

15 In Virginia, an interest in land must be conveyed by deed or will. Va. Code Ann. sec. 55–

2 (2007); FDIC v. Hish, 76 F.3d 620, 623 (4th Cir. 1996). ‘‘The requirements for a deed are ‘com-

petent parties, a lawful subject matter, a valuable consideration, apt words of conveyance, and

proper execution.’ ’’ Lim v. Choi, 501 S.E.2d 141, 143 (Va. 1998) (quoting Morison v. Am. Ass’n,

65 S.E. 469, 470 (1909)). Use of technical words or strict compliance with the Virginia statute

regarding form of deed is not necessary to effect a transfer if the language used plainly shows

on the face of the document a clear intent to convey title. Id. at 144.

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(395) PATEL v. COMMISSIONER 409

in the land is insubstantial; i.e., the value of the retained

interest in the land (the surface estate) is de minimis in

comparison to the mineral estate. See id. at 247–248, 255.

Hypothetically, because the regulations treat a division of

land into separate lots as an undivided interest, a taxpayer

could donate just the land under the building’s footprint,

including the building, to a charitable organization. If local

law permitted a landowner to divide his land into two such

separate lots, the donation of an interest in the building

alone would be an undivided interest in the land if the

retained rights in the building and the land immediately

under its footprint were insubstantial.

Under the common law, a fixture that is attached to the

land, including a building, is regarded as part of the land

unless and until it is severed from the land. Baker, 438 F.

Supp. 2d 649; Myers, 39 S.E.2d at 248; Stuart, 22 S.E. at

510. When a landowner conveys the building and retains the

land, unless the building is to be moved from the land, the

building remains real property 16 and certain easements by

necessity are implicitly granted to the building. An easement

by necessity arising from an implied grant or implied res-

ervation stems from the principle that whenever a party con-

veys property, he conveys whatever is necessary for the bene-

ficial use of that property and retains whatever is necessary

for the beneficial use of land he still possesses. Middleton v.

Johnston, 273 S.E.2d 800, 803 (Va. 1981); Jennings v.

Lineberry, 21 S.E.2d 769, 771 (Va. 1942); see also Powell v.

Magee, 60 S.E.2d 897, 899 (Va. 1950) (if a landowner conveys

the land but retains a building surrounded by the land con-

veyed, it will be assumed that the parties intended that the

grantor has reserved a right of way (easement) over the land

conveyed). Thus, if a landowner conveys the building and

retains the land, it will be assumed that the parties intended

that the grantor has granted the right to have the building

supported by the land (the right of subjacent support),

Tunstall v. Christian, 80 Va. 1, 1885 WL 4179 (1885); 17 see

16 ‘‘ ‘ ‘‘A man may have an inheritance in an upper chamber, though the lower buildings and

soile be in another, and seeing it is an inheritance corporeall it shall passe by livery.’’ ’ ’’ United

Masonry, Inc. v. Jefferson Mews, Inc., 237 S.E.2d 171, 181 (Va. 1977) (quoting commentator

quoting Lord Coke).

17 In Tunstall v. Christian, 80 Va. 1, 1885 WL 4179, at *1–*3 (1885), the Supreme Court of

Virginia held:

Continued

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410 138 UNITED STATES TAX COURT REPORTS (395)

also Large v. Clinchfield Coal Co., 387 S.E.2d 783, 786 (Va.

1990), and a right of way over the lands has been retained

by the grantor, Powell, 60 S.E.2d at 899 (citing 1 Minor on

Real Property (2d ed.), 1 Ribble, at 140, sec. 101); Jennings,

21 S.E.2d 769. 18 These easements by necessity pass to the

successors in title of the building, and they will not be extin-

guished by the destruction of the building but will survive

and adhere to the new building the owner of the destroyed

building erects on its ruins. Stevenson v. Wallace, 68 Va. 77

(1876).

Granting a fire department the right to destroy the

building while conducting training exercises on the property

does not transfer to the fire department all the benefits and

burdens of ownership and title to the building. The fire

department does not have the right to keep and use the

building in its current condition with ingress and egress over

the land retained by the landowner, to sell the building with

all the rights attached thereto, or to construct a new building

on the site of the destroyed building. The landowner retains

those substantial rights. Indeed, petitioners granted FCFRD

the right to burn the house so that they could exercise those

rights. Nor does the contribution transfer the burdens of

ownership of the building. The landowner must make the

building suitable for use in the training exercises; e.g., by

removing any asbestos present in the building, obtaining any

permits required by local government, and disconnecting

It is well settled that the right to support for land from the adjacent and subjacent soil is

a natural right, analogous to the flow of a natural river or of air. It stands on natural justice,

and is not dependant upon grant; * * *. But the right is confined to the soil in its natural condi-

tion. It does not extend to buildings or other artificial burdens thereon, increasing the downward

and lateral pressure. * * *

The right to support for artificial burdens on land is an easement, and can be acquired only

by grant, express or implied. * * *

* * * * * * *

* * * The right [to subjacent support] is also implied where property, consisting of a house

and unimproved land, is severed by sale. And the right to support, thus granted and reserved,

is transmitted to the successors in title of the parties respectively. * * *

18 An easement is the privilege to use the land of another in a particular manner and for a

particular purpose. Russakoff v. Scruggs, 400 S.E.2d 529, 531–532 (Va. 1991) (citing Brown v.

Haley, 355 S.E.2d 563, 567–568 (Va. 1987)). If one part of the land is used for the benefit of

another part (the dominant tract), a ‘‘quasi-easement’’ exists over the ‘‘quasi-servient’’ portion

of the land. Id. at 532. That easement is conveyed by implication when the dominant tract is

severed from the servient tract. The existence of the easement is established on a showing that

(1) the dominant and servient tracts originated from a common grantor, (2) the use was in exist-

ence at the time of the severance, and that (3) the use is apparent, continuous, and reasonably

necessary for the enjoyment of the dominant tract. Id. (citing Brown, 355 S.E.2d at 569, and

Fones v. Fagan, 196 S.E.2d 916, 919 (1973)).

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(395) PATEL v. COMMISSIONER 411

utilities. The landowner is also responsible for safeguarding

the public from hazardous conditions remaining after the

training exercises are completed, such as open pits, base-

ments and wells, standing walls and chimney, and burned

and unburned debris.

If the landowner conveys the building and retains the land

with the intent that the building be detached and removed

from the land, the easements by necessity are not granted to

the building. Severance of the building from the land may be

actual, by detachment of the building from the land, or it

may be constructive, by express or implied agreement that it

will be detached. Myers, 39 S.E.2d at 248. Constructive

severance of a fixture that is to be detached from the land

‘‘makes the fixture an entity distinct from the land, so that

it will not pass with the land upon a conveyance of the latter,

if the purchaser of the land have notice of such agreement.’’

Id. However, since the fixture is real property until sever-

ance, a transfer of the fixture is a transfer of real property.

Id.

To effect a constructive severance of a building from land,

the transfer ordinarily must be in a writing in a form suffi-

cient for a conveyance of land, 2 Tiffany Real Property, sec.

624 (3d ed. 1939); i.e., to effect a constructive severance, the

writing must convey ownership and title to the building. The

grant of an easement, a lease, or a license will not construc-

tively sever the building from the land.

Granting a fire department the right to destroy the

building while conducting training exercises on the property

is not a conveyance of ownership, title, or possession of the

building or any other property interest in the building or the

Vienna property. Rather it is a mere license to use the prop-

erty.

A license is a right, given by some competent authority, to

do an act which without such authority would be illegal, a

tort, or a trespass. Bunn v. Offutt, 222 S.E.2d 522 (Va. 1976).

A license is a mere unassignable privilege that is personal

between the licensor and the licensee and passes no interest

in any portion of the land to the licensee. Peabody v. United

States, 175 U.S. 546, 550 (1899) (citing De Haro v. United

States, 72 U.S. 599, 627 (1866)); Bunn v. Offutt, 222 S.E.2d

522. The stated definition, scope, and effect of a license is the

widely recognized ordinary legal definition of license that

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412 138 UNITED STATES TAX COURT REPORTS (395)

derives from the common law. 19 See 3 Tiffany Real Prop.,

supra, secs. 829, 831; Webster’s Third New International Dic-

tionary 1304; Black’s Law Dictionary 1002–1003.

The Supreme Court of Appeals of Virginia has established

a well-marked dividing line between the class of agreements

that constitute revocable licenses and those that grant either

an estate or easement in land. Church v. Goshen Iron Co., 72

S.E. 685, 686 (Va. 1911). In order to ascertain whether an

instrument must be construed as more than a mere license,

it is only necessary to determine whether the grantee has

acquired by it any estate in the land in respect of which he

might bring an action of ejectment. Id. For an instrument to

constitute more than a mere license, there must be an exclu-

sive right of possession vested in the grantee. If the land is

still to be considered in the possession of the grantor, the

instrument will only amount to a license. Id.

In Bostic v. Bostic, 99 S.E.2d 591, 594 (Va. 1957), the

Supreme Court of Appeals of Virginia held that a grant

merely of the right to enter and take minerals from the land

is not an absolute grant of the minerals in place as real

estate. Such a grant creates a mere incorporeal right, privi-

lege, or license in the grantee that carries with it no interest

in the land. Id. at 594–595. The grantee of the license will

be entitled to do the permitted acts according to the terms

of his grant and appropriate the minerals to his own use, but

he will acquire no interest in the minerals until they are

actually separated from the land and have become recover-

able in an action of trover. Id. at 595; Church, 72 S.E. at 686.

In Young v. Young, 63 S.E. 748, 749 (Va. 1909), the Vir-

ginia Supreme Court held that a license to cut and sell

timber on the land created no estate or property in the

timber itself until it was actually severed from the land. In

reaching that conclusion the court pointed out that a license

to cut and sell timber does not vest title to the timber in the

licensee before the actual severance of such timber. See also

Bostic, 99 S.E.2d 591.

Granting a fire department the right to conduct training

exercises on one’s property and destroy a building thereon by

fire grants the fire department the right ‘‘to do an act which

19 Cases cited infra app. B indicate that license has the same definition and scope in 47 States

and the District of Columbia. Our limited search on Westlaw did not identify any opinions on

the issue issued by the courts of Alaska, Louisiana, or Nevada.

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(395) PATEL v. COMMISSIONER 413

without such authority would be illegal, a tort, or a tres-

pass’’. The fire department does not acquire the right to eject

the landowner from the building and cannot force the land-

owner to allow the destruction of the building should he

change his mind before the house has been destroyed. The

fire department has acquired a mere revocable license that

does not vest any property interest in the fire department. 20

Because the grant does not convey an interest in any prop-

erty, it does not constructively sever the building from the

land.

Moreover, when a taxpayer grants a fire department the

right to destroy a building while conducting training exer-

cises on his property, it is the destruction of the building that

actually severs it from the land. Since the landowner retains

rights and responsibility for the debris (everything that has

not disintegrated), at the time of severance, there is no prop-

erty to which title could vest in the fire department.

Although the value of the remnants of the building may be

de minimis after the training exercises, property rights

include not only the benefits of ownership but also its bur-

dens. At all times, petitioners retained all the burdens of

ownership of the house, except for liability for any injury to

a fireman incurred during the training exercises. Petitioners

as owners of the house obtained the demolition permit from

the county. They were responsible for safeguarding the public

from hazardous conditions created by the destruction of the

house including any open pits, standing walls and chimneys,

and debris remaining after the training exercises were com-

pleted. They retained a substantial ownership interest in the

house in the form of their liability for any injury that might

be caused by the hazardous conditions of the remnants of the

building remaining after FCFRD completed its exercises.

Petitioners assert that under the holding of Scharf v.

Commissioner, T.C. Memo. 1973–265, allowing FCFRD to

destroy the house was a conveyance of the house. In Scharf

the taxpayer owned a building that had been partially

destroyed by fire, and he allowed a volunteer fire department

to destroy it by fire for training purposes. Although the facts

20 In Virginia, land must be conveyed by deed or will. Va. Code Ann. sec. 55–2; FDIC v. Hish,

76 F.3d at 623. Use of technical words or strict compliance with the Virginia statute regarding

form of deed is not necessary to effect a transfer if the language used plainly shows on the face

of the document a clear intent to convey title. Lim, 501 S.E.2d at 144.

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414 138 UNITED STATES TAX COURT REPORTS (395)

in Scharf are nearly indistinguishable from the facts in this

case, petitioners’ reliance on Scharf is unfounded for multiple

reasons. First, in deciding the amount of the deduction in

Scharf, the Court held that it was not necessary to choose

between the fair market value of the building in its damaged

condition and the value of the donated use of the building

because the values were the same. Thus, the Court did not

decide in Scharf whether the taxpayer had donated the

building or just the use of the building. Second, the Court

allowed a charitable contribution deduction for the donation

in Scharf because it held that the public benefit of firefighter

training greatly exceeded the demolition benefit received by

the donor taxpayer. In Rolfs v. Commissioner, 135 T.C. 471,

487 (2010), aff ’d, 668 F.3d 888 (7th Cir. 2012), we held that

the public benefit standard applied in Scharf has been super-

seded by the quid pro quo standard established by the

Supreme Court in United States v. Am. Bar Endowment, 477

U.S. 105, 118 (1986). Third, one significant and distinguish-

able fact in Scharf makes the opinion inapplicable here;

namely, the taxpayer in Scharf made the contribution in

1967, before Congress amended section 170 to disallow a

deduction for contributions of partial interests in property.

The amendment to section 170 makes Scharf inapplicable to

contributions made after 1969.

We hold that petitioners did not contribute the house or an

undivided interest in the Vienna property to the FCFRD.

2. Remainder Interest in a Personal Residence

A remainder is a future interest in property ‘‘limited in

favor of a transferee in such manner that it can become a

present interest upon the expiration of all prior interests

simultaneously created’’. 2 Restatement, Property, sec. 156

(1936). A vested remainder ripens into title in fee upon the

death of the life tenant. See, e.g., Miller v. Citizens Nat’l

Bank, 60 S.E.2d 868, 870 (Va. 1950). When a taxpayer grants

a fire department a license to conduct training exercises on

his land and destroy the house situated thereon during the

exercise, the fire department does not receive a remainder

interest, or any other interest, in the house.

Additionally, in the case at hand, petitioners never used

the house as their personal residence before FCFRD destroyed

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(395) PATEL v. COMMISSIONER 415

it while conducting its training exercises. See sec. 1.170A–

7(b)(3), Income Tax Regs.; see also Estate of Brock v.

Commissioner, 71 T.C. 901, 906–907 (1979), aff ’d, 630 F.2d

368 (5th Cir. 1980).

We hold that petitioners did not contribute a remainder

interest in a personal residence to FCFRD.

3. Qualified Conservation Contribution

A qualified conservation contribution is a contribution of a

qualified real property interest to a qualified organization

exclusively for conservation purposes. Sec. 170(h)(1). Section

170(h)(4)(A) generally provides that a contribution is for a

conservation purpose if it: (1) preserves land for outdoor

recreation by, or the education of, the general public, (2) pro-

tects a relatively natural habitat of fish, wildlife, or plants,

or similar ecosystem, (3) preserves open space for the scenic

enjoyment of the general public or pursuant to a Federal,

State, or local governmental conservation policy, and this

preservation will yield a significant public benefit, or (4) pre-

serves a historically important land area or a certified his-

toric structure. See also sec. 1.170A–14(d)(1), Income Tax

Regs. A contribution of a qualified real property interest may

be exclusively for conservation purposes only if it is protected

in perpetuity. Sec. 170(h)(5)(A). We recognize that contribu-

tion of a taxpayer’s house to a volunteer fire department for

destruction by burning during training exercises provides

valuable training experience for the volunteer firefighters

that serves to further the protection of property. However,

that is not a conservation purpose for purposes of section

170.

We hold that petitioners did not make a qualified conserva-

tion contribution to FCFRD.

D. Conclusion

As with this case, taxpayers usually grant a fire depart-

ment license to destroy a building on their land because they

wish to have it removed from the land, either to increase the

value of the land (Scharf) or so that they may construct a

new building on the land (Rolfs). The Court of Appeals for

the Seventh Circuit accurately described such donations as

follows: ‘‘The taxpayers here gave away only the right to

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416 138 UNITED STATES TAX COURT REPORTS (395)

come onto their property and demolish their house, a service

for which they otherwise would have paid a substantial

sum.’’ Rolfs v. Commissioner, 668 F.3d at 895. The taxpayers

retain all property rights appertaining to the building. See

id. (‘‘None of the value of the house, as a house, was actually

given away.’’). Such taxpayers, including petitioners, give

only the use of their property to the fire department. 21 Sec-

tion 170(f) denies them a charitable contribution deduction

for the contribution of the use of their property regardless of

the value of that use or the fact that the value of the debris

remaining after the training exercises was de minimis. 22 Cf.

Logan v. Commissioner, T.C. Memo. 1994–445. We hold that

petitioners are not entitled to any deduction for their

granting FCFRD the right to conduct training exercises on the

Vienna property and to destroy the house by burning during

those exercises.

II. Accuracy-Related Penalties

Respondent determined that petitioners are liable for an

accuracy-related penalty under section 6662(a) and (b)(1) and

(2) for negligence and substantial understatement of income

tax. Under section 6664(c), however, generally no penalty is

imposed under section 6662 with respect to any portion of an

underpayment if it is shown that there was reasonable cause

for such portion and that the taxpayer acted in good faith

21 This is consistent with the following explanation in Fairfax County Fire and Rescue Ac-

quired Structure Powerpoint published on the Internet at www.fairfaxcounty.gov/fr/academy/Ac-

quiredlStructurelPowerpoint.pdf, of which we take judicial notice:

When a property owner loans their property to the program for training, they are performing

a valuable service to their community. * * *

Each property that is offered to the program must meet extensive requirements prior to ac-

ceptance and utilization (e.g. acquiring the appropriate permits, the structural stability assess-

ment, asbestos free inspection, and confirmation that utilities have been disconnected).

For live burn training, the structures are not completely burned to the ground and remain the

responsibility of the property owner for demolition and removal.

[Emphasis added.]

22 In Rolfs v. Commissioner, 135 T.C. 471 (2010), aff ’d, 668 F.3d 888 (7th Cir. 2012), we held

that the taxpayers did not make a charitable contribution because they did not prove that the

value of the house (taking into account the requirement that it be destroyed) exceeded the sub-

stantial benefit they received in the form of demolition services. In affirming this Court, the

Court of Appeals opined: ‘‘Perhaps the best ‘comparable sales’ comparison might have been the

price paid by the fire department to rent a burn tower for the length of time the department

conducted exercises in and around the lake house, but there is no such evidence here.’’ Rolfs

v. Commissioner, 668 F.3d at 895. However, the Court of Appeals held that the taxpayers gave

away only the right to come onto their property and demolish their house. Id. Where only the

use of the taxpayers’ property is donated, a charitable contribution deduction is denied by sec.

170(f)(3) and the value of the contribution is irrelevant.

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(395) PATEL v. COMMISSIONER 417

with respect to such portion. The determination of whether

a taxpayer acted with reasonable cause and in good faith ‘‘is

made on a case-by-base basis, taking into account all perti-

nent facts and circumstances.’’ Sec. 1.6664–4(b)(1), Income

Tax Regs.

When petitioners filed their return, the legal issues raised

by their charitable contribution deduction claim were not set-

tled. Importantly, in Scharf v. Commissioner, T.C. Memo.

1973–265, this Court held that a charitable contribution

deduction was available for the donation of a building to a

volunteer fire department for demolition in firefighter

training exercises. The donation in Scharf was made in 1967

before Congress amended section 170 to disallow a charitable

contribution deduction for the contribution of a partial

interest in property, and the standard applied in Scharf was

subsequently superseded by the quid pro quo standard for

charitable contribution deductions established by the

Supreme Court in Am. Bar Endowment, 477 U.S. 105. No

Federal court had reconsidered or questioned Scharf until

2010 when this Court issued Rolfs v. Commissioner, 135 T.C.

471, wherein we applied the quid pro quo standard. 23 In

Rolfs we held the taxpayers had not made a charitable con-

tribution because they received a substantial benefit in the

form of demolition services, the value of which exceeded the

value of the interest in the house donated. We did not decide

whether section 170(f)(3) applied.

Given all the facts and circumstances, including the uncer-

tain state of the law, we find that petitioners acted with

reasonable cause and in good faith. Therefore, we hold that

they are not liable for any penalty under section 6662.

Respondent is entitled to summary judgment only on the

charitable contribution issue. We have ruled in petitioners’

favor on the penalty issue, and there are no other issues to

be decided in this case.

23 We have found only two other cases involving the contribution of a building to a fire depart-

ment for training purposes made after the amendment to sec. 170. In each case the taxpayers

were not entitled to a deduction for the contribution regardless of whether the building was part

of the land. In the first case, Lawver v. Commissioner, T.C. Memo. 1981–192, this Court held

that the taxpayer was allowed a deduction for the loss on the building which precluded an addi-

tional deduction for the donation to the fire department. In Hendrix v. United States, 106

A.F.T.R.2d (RIA) 2010–5373, 2010–2 U.S. Tax Cas. (CCH) para. 50,541, 2010 WL 2900391 (S.D.

Ohio 2010), the U.S. District Court for the Southern District of Ohio held that the taxpayers

were not entitled to the deduction because they did not obtain a qualified appraisal and attach

it to their tax return as required by sec. 170(f)(11)(C).

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418 138 UNITED STATES TAX COURT REPORTS (395)

Accordingly,

An appropriate order will be issued, and

decision will be entered under Rule 155.

Reviewed by the Court.

COLVIN, COHEN, VASQUEZ, THORNTON, MARVEL, GUSTAF-

SON, and MORRISON, JJ., agree with this opinion of the

Court.

PARIS, J., concurs in the result only.

KERRIGAN, J., dissents.

APPENDIX A

The following cases show that fixtures are considered part

of the land under the common law in all 50 States: Sycamore

Mgmt. Grp., LLC v. Coosa Cable Co., Inc., 42 So. 3d 90, 93

(Ala. 2010); K & L Distribs., Inc. v. Kelly Elec., Inc., 908 P.2d

429, 432 (Alaska 1995); Fish v. Valley Nat’l Bank of Phoenix,

167 P.2d 107, 111 (Ariz. 1946); Ozark v. Adams, 83 S.W. 920,

921 (Ark. 1904); R. Barcroft & Sons Co. v. Cullen, 20 P.2d

665 (Cal. 1933); Rare Metals Min. & Mill. Co. v. W. Colo.

Power Co., 213 P. 124 (Colo. 1923); Merritt-Chapman & Scott

Corp. v. Mauro, 368 A.2d 44, 47 (Conn. 1976); Della Corp. v.

Diamond, 210 A.2d 847, 850 (Del. 1965); Burbridge v.

Therrell, 148 So. 204, 206 (Fla. 1933); Nat’l Cmty. Builders,

Inc. v. Citizens & So. Nat’l Bank, 207 S.E.2d 510, 512 (Ga.

1974); Ahoi v. Pacheco, 1914 WL 1743, at *1 (Haw. Terr.

1914); Beeler v. C.C. Mercantile Co., 70 P. 943 (Idaho 1902);

White Way Elec. Sign & Maint. Co. v. Chi. Title & Trust Co.,

14 N.E.2d 839, 841 (Ill. 1938); State ex. rel. Green v. Gibson

Circuit Court, 206 N.E.2d 135, 138 (Ind. 1965); Ford v.

Venard, 340 N.W.2d 270 (Iowa 1983); Blankenship v. School

Dist. No. 28 of Wyandotte Cnty., 15 P.2d 438, 439 (Kan.

1932); Tarter v. Turpin, 291 S.W.2d 547 (Ky. 1956); Prevot v.

Courtney, 129 So.2d 1, 3 (La. 1961); Searle v. Town of

Bucksport, 3 A.3d 390, 396 (Me. 2010); Supervisor of Assess-

ments of Anne Arundel Cnty. v. Hartge Yacht Yard, Inc., 842

A.2d 732, 738 (Md. 2004); Meeker v. Oszust, 30 N.E.2d 246

(Mass. 1940); Sequist v. Fabiano, 265 N.W. 488 (Mich. 1936);

Merch. Nat’l Bank of Crookston v. Stanton, 56 N.W. 821, 822

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(395) PATEL v. COMMISSIONER 419

(Minn. 1893); Connolly v. McLeod, 52 So. 2d 473, 476 (Miss.

1951); Marsh v. Spradling, 537 S.W.2d 402, 404 (Mo. 1976);

Grinde v. Tindall, 562 P.2d 818 (Mont. 1977); Fuel Explo-

ration, Inc. v. Novotny, 374 N.W.2d 838, 842 (Neb. 1985);

Flyge v. Flynn, 166 P.2d 539, 552 (Nev. 1946); New England

Tel. & Tel. Co. v. City of Franklin, 685 A.2d 913 (N.H. 1996);

Gen. Motors Corp. v. City of Linden, 696 A.2d 683 (N.J.

1997); Garrison Gen. Tire Serv., Inc. v. Montgomery, 404 P.2d

143 (N.M. 1965); Marraro v. State, 189 N.E.2d 606, 610 (N.Y.

1963); Lee-Moore Oil Co. v. Cleary, 245 S.E.2d 720, 722 (N.C.

1978); Strobel v. Northwest G. F. Mut. Ins. Co., 152 N.W.2d

794, 796 (N.D. 1967); Masheter v. Boehm, 307 N.E.2d 533

(Ohio 1974); Akers v. Hintergardt, 203 P.2d 883, 884 (Okla.

1949); First State & Sav. Bank v. Oliver, 198 P. 920 (Or.

1921); First Nat’l Bank of Mount Carmel v. Reichneder, 91

A.2d 277, 280 (Pa. 1952); Butler v. Butler’s Diner, Inc., 98

A.2d 875, 876 (R.I. 1953); Carroll v. Britt, 86 S.E.2d 612 (S.C.

1955); Killian v. Hubbard, 9 N.W.2d 700 (S.D. 1943); Knox-

ville Gas Co. v. W. I. Kirby & Sons, 32 S.W.2d 1054 (Tenn.

1930); O’Neil v. Quilter, 234 S.W. 528 (Tex. 1921); Couch v.

Welsh, 66 P. 600 (Utah 1901); Sherburne Corp. v. Town of

Sherburne, 207 A.2d 125, 127 (Vt. 1965); Island Cnty. v.

Dillingham Dev. Co., 662 P.2d 32 (Wash. 1983); Ohio Cel-

lular RSA Ltd. P’ship v. Bd. of Pub. Works of State of W. Va.,

481 S.E.2d 722, 727 (W. Va. 1996); Milburn By-Prod. Coal

Co. v. Eagle Land Co., 93 S.E.2d 231 (W. Va. 1956);

Premonstratensian Fathers v. Badger Mut. Ins. Co., 175

N.W.2d 237 (Wis. 1970); Wyo. State Farm Loan Board v.

FCSCC, 759 P.2d 1230 (Wyo. 1988).

APPENDIX B

The following cases indicate that, consistent with the

common law in Virginia as set forth in Bunn v. Offutt, 222

S.E.2d 522 (Va. 1976), a license does not convey an interest

in the property under the common law in the 49 remaining

States (listed alphabetically) and the District of Columbia:

Davis v. Miller Brent Lumber Co., 44 So. 639 (Ala. 1907);

Laverty v. Alaska R.R. Corp. 13 P.3d 725, 735 (Alaska 2000);

Charlebois v. Renaud, 300 P. 190 (Ariz. 1931); Harbottle v.

Cent. Coal & Coke Co., 203 S.W. 1044 (Ark. 1918); Beckett v.

City of Paris Dry Goods Co., 96 P.2d 122 (Cal. 1939); Radke

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420 138 UNITED STATES TAX COURT REPORTS (395)

v. Union Pac. R. Co., 334 P.2d 1077 (Colo. 1959); Bland v.

Bregman, 192 A. 703, 705 (Conn. 1937); Timmons v. Cropper,

172 A.2d 757 (Del. Ch. 1961); Burdine v. Sewell, 109 So. 648

(Fla. 1926); Henson v. Airways Serv., Inc., 136 S.E.2d 747

(Ga. 1964); Kiehm v. Adams, 126 P.3d 339 (Haw. 2005);

Shultz v. Atkins, 554 P.2d 948 (Idaho 1976); Cook v. Univ.

Plaza, 427 N.E.2d 405 (Ill. App. Ct. 1981) (citing Holladay v.

Chi. Arc Light & Power Co., 55 Ill. App. 463 (1st Dist. 1894));

One Dupont Centre, LLC v. Dupont Auburn, LLC, 819 N.E.2d

507, 513–514 (Ind. Ct. App. 2004); Baker v. Kenney, 124 N.W.

901 (Iowa 1910); Denver Nat’l Bank of Denver, Colo. v. State

Comm’n of Revenue, 272 P.2d 1070 (Kan. 1954); Polley v.

Ford, 227 S.W. 1007 (Ky. 1921); Blackshear v. Hood, 45 So.

957 (La. 1908); Benham v. Morton & Furbish Agency, 929

A.2d 471, 475 (Me. 2007); Condry v. Laurie, 41 A.2d 66 (Md.

1945); Baseball Publ’g Co. v. Bruton, 18 N.E.2d 362 (Mass.

1938); Kitchen v. Kitchen, 641 N.W.2d 245, 249 (Mich. 2002);

Hotel Markham v. Patterson, 32 So. 2d 255 (Miss. 1947);

Kuhlman v. Stewart, 221 S.W. 31 (Mo. 1920); Johnson v.

Skillman, 12 N.W. 149 (Minn. 1882); Herigstad v. Hardrock

Oil Co., 52 P.2d 171 (Mont. 1935); Brown Cnty. Agric. Soc’y,

Inc. v. Brown Cnty. Bd. of Equalization, 660 N.W.2d 518

(Neb. App. Ct. 2003); Paul v. Cragna, 59 P. 857 (Nev. 1900);

Houston v. Laffee, 46 N.H. 505, 1866 WL 1951 (1866);

Mandia v. Applegate, 708 A.2d 1211 (N.J. Super. Ct. App.

Div. 1998); Bd. of Cnty. Comm’rs of Dona Ana Cnty. v. Sykes,

394 P.2d 278 (N.M. 1964); Cahoon v. Bayard, 25 N.E. 376

(N.Y. 1890); Moon v. Central Builders, Inc., 310 S.E.2d 390

(N.C. Ct. App. 1984); Lee v. N.D. Park Serv., 262 N.W.2d 467

(N.D. 1977); Rodefer v. Pittsburg, O. V. & C. R.R. Co., 74

N.E. 183, 185–186 (Ohio 1905); McKenna v. Williams, 167

P.2d 368, 370 (Okla. 1946); McCarthy v. Kiernan, 245 P. 727

(Or. 1926); Baldwin v. Taylor, 31 A. 250 (Pa. 1895); Fish v.

Capwell, 29 A. 840 (R.I. 1894); Briarcliffe Acres v. Briarcliffe

Realty Co., 206 S.E.2d 886 (S.C. 1974); Polk v. Carney, 112

N.W. 147 (S.D. 1907); Harris v. Miller, 19 Tenn. 158, 1838

WL 1108 (Tenn. 1838); Settegast v. Foley Bros. Dry Goods

Co., 270 S.W. 1014, 1016 (Tex. 1925); Kennedy v. Combined

Metals Reduction Co., 51 P.2d 1064 (Utah 1935); Price v.

Rowell, 159 A.2d 622 (Vt. 1960); Bakke v. Columbia Valley

Lumber Co., 298 P.2d 849 (Wash. 1956); Campbell Brown &

Co. v. Elkins, 93 S.E.2d 248 (W. Va. 1956); French v. Owen,

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(395) PATEL v. COMMISSIONER 421

2 Wis. 250, 1853 WL 1760 (Wis. 1853); Seven Lakes Dev. Co.,

L.L.C. v. Maxson, 144 P.3d 1239 (Wyo. 2006); Jackson v.

Emmons, 19 App. D.C. 250, 254, 1902 WL 19620 (D.C. 1902).

GALE, J., dissenting: The opinion of the Court holds that

petitioners’ grant of permission to the local fire department

to destroy the house on their property merely granted a

license to use the house, making it a contribution of less than

their entire interest in the house, disallowed under section

170(f)(3) because it did not constitute a contribution of an

undivided portion of their entire interest in the property as

provided in section 170(f)(3)(B)(ii). I disagree. Petitioners’

grant of permission to destroy conveyed more than a license

to use the house. When an owner of property grants a license

for its use, that grant necessarily includes the premise that

the property will be returned to the owner when the licensed

use terminates, subject to ordinary wear and tear. Permis-

sion to destroy eliminates that premise, and upon destruction

the property interests formerly held by the owner are trans-

ferred to the licensee with such permission.

Here, the fire department’s destruction of the house sev-

ered it from the land (as the opinion of the Court concedes,

see op. Ct. p. 413) pursuant to petitioners’ written permission

and thus rendered the structure personal property. See 2 Tif-

fany Real Property sec. 623 (3d ed. 1939) (actual severance

of a fixture from land converts it to personal property if the

owner intends the severance to be permanent). Petitioners

ceded every substantial interest they held in that personal

property and at best retained only insubstantial interests

(such as ownership of the postburn debris). They did not

expect the structure to be returned to them, and it was not.

As it was tangible personal property, all of petitioners’

substantial property interests in the structure were con-

sumed by the fire department when it destroyed the struc-

ture in furtherance of its training objectives.

An exception to disallowance under section 170(f)(3) is

made where the taxpayer makes a contribution of an undi-

vided portion of his entire interest in property. The regula-

tions interpret an undivided portion of a donor’s entire

interest as follows:

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422 138 UNITED STATES TAX COURT REPORTS (395)

An undivided portion of a donor’s entire interest in property must consist

of a fraction or percentage of each and every substantial interest or right

owned by the donor in such property and must extend over the entire term

of the donor’s interest in such property and in other property into which

such property is converted. * * * [Sec. 1.170A–7(b)(1)(i), Income Tax Regs.;

emphasis added.]

We have interpreted this ‘‘insubstantiality rule’’ in the regu-

lations as permitting the retention by the donor of insubstan-

tial interests in the donated property without triggering a

disallowance of his deduction under section 170(f)(3). Stark v.

Commissioner, 86 T.C. 243, 252 (1986). In Stark we held that

section 170(f)(3) was not triggered even though the donor of

land retained the interest in all minerals and the right to

mine for them, subject to certain U.S. Forest Service regula-

tions. We reasoned that the mineral interest as so restricted

was so insubstantial that the donor had ‘‘in substance’’ trans-

ferred his entire interest in the land for purposes of section

170(f)(3). Id. at 252–253. The mineral interest retained by

the donor was not a ‘‘ ‘substantial interest or right’ ’’ within

the meaning of section 1.170A–7(b)(1)(i), Income Tax Regs.,

we concluded. Id. at 255; see also Rev. Rul. 75–66, 1975–1

C.B. 85, 86 (retention of right to train hunting dogs and

maintain trails for that purpose on donated land ‘‘not

substantial enough to affect the deductibility of the property

contributed’’).

Once the fire department destroyed the structure as con-

templated, petitioners retained no substantial interest in it

that would trigger the section 170(f)(3) limitation on their

charitable contribution deduction. 1 Under Virginia property

law (as discussed more fully below), petitioners’ written

permission to enter their land and destroy the house con-

veyed to the fire department a property interest in the struc-

ture, effective upon its severance via demolition. The opinion

of the Court contends that petitioners nonetheless retained a

substantial property interest in the house after its destruc-

tion, arguing that a property interest includes not only the

1 The opinion of the Court appears to suggest that petitioners’ donation to the fire department

was of a partial interest in property for purposes of sec. 170(f)(3) because the fire department

did not receive the right ‘‘to sell the building with all the rights attached thereto’’. See op. Ct.

p. 410. However the mere fact that a donee does not receive the donor’s unrestricted fee simple

interest in the donated property but instead receives it encumbered with restrictions does not

trigger sec. 170(f)(3). See, e.g., Rev. Rul. 85–99, 1985–2 C.B. 83; G.C.M. 39380 (July 9, 1985)

(sec. 170(f)(3) not triggered where donor with fee simple interest in land donates it with condi-

tion that it be used only for agricultural purposes).

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(395) PATEL v. COMMISSIONER 423

benefits of ownership but also its burdens. The opinion of the

Court reasons that the structure’s postdemolition remnants

imposed significant burdens on petitioners, such as responsi-

bility for clearing debris and liability for injury from haz-

ardous conditions created by the remnants. Petitioners

shoulder the liability for such hazardous conditions, however,

as owners of the land from which the house was severed. All

substantial property interests of an owner in his structure

are eliminated when the structure is demolished.

The contention of the opinion of the Court that petitioners

merely gave a license also does not account fully for

applicable Virginia property law. The opinion of the Court

contends that petitioners never transferred any property

interest in the house to the fire department but instead

granted only a revocable license to use it. The opinion of the

Court cites Bostic v. Bostic, 99 S.E.2d 591 (Va. 1957), and

Young v. Young, 63 S.E. 748 (Va. 1909), in an effort to show

that under Virginia property law petitioners’ grant of permis-

sion to destroy the house would be construed as a mere

license to use that did not convey any property interest in

the house. In Bostic, the Virginia Supreme Court of Appeals

held that a grant of the right to enter and take minerals is

a mere license that creates no property interest in the min-

erals until they are separated from the land. Bostic, 99 S.E.2d

at 594–595. Young cites a similar principle with respect to

timber; namely, a license to cut and sell timber conveys no

property interest in the timber until it is cut, i.e., severed

from the land. Young, 63 S.E. at 749; see also Minor on Real

Property, 2d ed., sec. 51 (‘‘the grant of * * * [a] license * * *

under which the grantee is entitled to mine the ore, stone,

etc., and remove it * * * [gives the grantee] no interest in

the land or in any ore save that actually mined’’), cited with

approval in Bostic, 99 S.E.2d at 594.

Virginia has by statute modified the common law of prop-

erty with respect to structures to be removed from realty,

adopting the Uniform Commercial Code provision that deems

a contract for the sale of such a structure to be one for the

sale of goods where the structure is to be severed by the

seller. See Va. Code Ann. sec. 8.2–107(1) (2001). (If the buyer

is to sever, the contract remains one for the sale of land. See

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424 138 UNITED STATES TAX COURT REPORTS (395)

U.C.C. sec. 2–107(1) cmt. 1. 2) Notably, however, the Virginia

statute (consistent with the Uniform Commercial Code) pro-

vides that while a contract for the sale of a structure to be

severed by the seller is one for goods, ‘‘until severance a pur-

ported present sale * * * [of the structure] which is not

effective as a transfer of an interest in land is effective only

as a contract to sell.’’ Va. Code Ann. sec. 8.2–107(1). Con-

versely, once severance has occurred, the structure con-

stitutes goods, the sale of which is governed by statute and

need not be effective as a transfer of an interest in land. In

short, actual severance converts the structure from an

interest in land to personal property.

On the basis of Bostic and Young the opinion of the Court

concludes that petitioners’ grant to the fire department of the

right to destroy the house conveys no property interest but

only a license. Because such a license did not convey a prop-

erty interest, the opinion of the Court argues, it did not

constructively sever the house from the land. But the opinion

of the Court ignores the second prong of the principle in

Bostic and Young and the Virginia statute governing struc-

tures to be severed from land: severance effects a change in

property interests. While the grant of permission to mine or

cut conveys no property interest, such an interest does

transfer to the licensee when he mines the ore or cuts the

timber—that is, when severance occurs—according to both

cases. The same is true under Virginia statutory law for a

structure that is to be severed from land. Once severed, the

structure constitutes goods that need not be conveyed as an

interest in land.

While the opinion of the Court concedes that the destruc-

tion of the house severed it from the land (which rendered

it personalty), the opinion of the Court does not consider

whether this severance itself effected a transfer of property

interests analogous to the transfer of an interest in ore or

timber that occurs when the licensee severs either pursuant

to his license. However, by virtue of the fire department’s

severance and destruction of the house, petitioners in sub-

stance ceded all substantial property interests they held in

the structure to the department. Once severed, the structure

2 The Virginia Supreme Court of Appeals has noted that the Official Comments concerning

the Uniform Commercial Code ‘‘are frequently helpful in discerning legislative intent’’. Leake v.

Meredith, 267 S.E.2d 93, 95 (Va. 1980).

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(395) PATEL v. COMMISSIONER 425

was personal property. Petitioners retained no substantial

interest in that personal property; they were left only with

the debris into which it was converted.

Petitioners gave more than the use of their house and

retained no substantial interest therein by virtue of their

grant of permission to destroy. ‘‘Where the interest retained

by the taxpayer is so insubstantial that he has, in substance,

transferred his entire interest in the property, the tax treat-

ment should so reflect. Such a taxpayer satisfies the original

congressional purpose behind section 170(f)(3)’’. Stark v.

Commissioner, 86 T.C. at 252. As in Stark, petitioners’ reten-

tion of an interest in the charred debris into which the struc-

ture was converted was not a ‘‘substantial interest or right’’

within the meaning of section 1.170A–7(b)(1)(i), Income Tax

Regs. Because petitioners in substance transferred their

entire interest in the house, section 170(f)(3) does not limit

their deduction and provides no basis for an award of sum-

mary judgment to respondent in this case.

While section 170(f)(3) does not bar petitioners’ charitable

contribution deduction, it must still satisfy the ‘‘sine qua non

of a charitable contribution’’; namely, a transfer of money or

property without adequate consideration in return. United

States v. Am. Bar Endowment, 477 U.S. 105, 118 (1986);

Rolfs v. Commissioner, 668 F.3d 888 (7th Cir. 2012), aff ’g

135 T.C. 471 (2010). Petitioners must show that the value of

the house, taking into account the conditions on its donation,

exceeded the value of the benefit they received from the fire

department in the form of demolition services. See Rolfs v.

Commissioner, 668 F.3d at 892. I would deny the motion for

summary judgment and, if petitioners wished, proceed to

trial on that question of fact.

HALPERN, FOLEY, GOEKE, WHERRY, KROUPA, and HOLMES,

JJ., agree with this dissent.

f

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