UNITED STATES TAX COURT

138 T.C. No. 23

UNITED STATES TAX COURT

UPEN G. PATEL AND AVANTI D. PATEL, Petitioners y.

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 purchasing the Vienna property, Ps contacted FCFRD and obtairied

information about the requirements for participating in the program.

After Ps obtained a demolition permit and completed all of the other

requirements, they executed documents 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

SEllVED JUN 2 7 2012

-2reported 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 contribution 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 exercises 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 regardless of the value of that use.

Held, further, Ps donated only 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.

-3OPINION

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

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.

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.

After concessions by respondent,2 the issues for decision are (1) whether

petitioners are entitled to the noncash charitable contribution deduction under

section 170(a) in connection 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

2Respondent 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.

-5the 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 Program from the

realtor who represented them in their purchase 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 owner's property. In June 2006, petitioners contacted the FCFRD about its

program. On June 12, 2006, FCFRD acknowledged petitioners' interest in

participating in the program and sent them a Standard Property Owner Package.

- 6In order to participate in the program, petitioners were required to.(1) permit

FCFRD to inspect the house to determine 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 authorization 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 demolition 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

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

remove improvements on real property owned, controlled, or leased by another

person is a class 1 misdemeanor and a violation of the Virginia Consumer

(continued...)

-7issued 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 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

3(...continued)

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).

-8Vienna 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 personal 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

Property Owner or Authorized Representative

Date: 9/14/06

Signed:

Date:

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.

-9I 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 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

Property Owner or Authorized Representative

Date: 9/14/06

Signed:

Date:

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 petitioners an acknowledgment letter thanking them for their donation and

- 10 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 completed in July 2007. Petitioners subsequently obtained a

residential 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 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.

4The 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 contribution, which includes the amount deducted for 2006

and the carryover amounts, is at issue in this case.

- l'1 -

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 publìc purposes. Contributions or gifts

to nonprofit volunteer fire companies are deemed to be for the use of a political

subdivision of a State for exclusivély 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 charitable

organizations of partial interests in the-taxpayer's property, including income and

remainder interests and the right to use the property. See, e.g., Thriftimart., Inc. v.

- 12 Commissioner, 59 T.C. 598 (1973). The only limitation placed on contributions of

15artial 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 limitation, a fixture that

was intended to be severed from real property was treated as a future interest in

tangible personal property and not as real property.

Congress became concerned that the amount of a charitable 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, Congress amended section

170 to address those concerns by, inter alia, moving the limitation previously

provided in section 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

- 13 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

partial 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 taxpayer'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 subparagraph, 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.

- 14 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 ownership 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).

- 15 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

requirement that the land be transferred with the house and, therefore, 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 propeì·ty 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 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).

5Petitioners 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 improvements 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.

- 16 "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 indivisible

concept.but rather an aggregate or bundle of rights pertaining 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.

- 17 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 042

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 "lands, tenementsM and hereditaments,© and all rights and appurtenances

thereto and interests therein, other than a chattel interest".9 Va. Code Ann. sec. 1-

6Va. Code Ann. sec. 1-200 (201.1) 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 General Assembly."

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 inherited 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)).

9A 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).

- 18 219 (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 fixturei° attached to the land," including a

°A fixture is an article of personal property that "by being affixed to the

realty, became accessory 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)).

.

"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.

- 19 structure erected on the land, is regarded as part of the land and remains so unless

and until it is severed from the land." 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).

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 deduction 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. Petitioners' purported contribution

of the house to FCFRD was a contribution of less than their entire interest in the

Vienna property.

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.

- 20 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

personal 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 the property are not an undivided portion

of the entire interest. The substantiality of the donor's interest in the retained

-21 property is determinative. Stark v. Commissioner, 86 T.C. 243 (Tax Court held

mineral interest retained by taxpayer 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 provides the same definition for an undivided portion of a

disclaimant's entire interest in property for purposes of section 2518." 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 persons, 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 associated

with the interest being apportioned. Thus, * * * an undivided portiön

"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 transferred to him for gift or estate tax purposes.

- 22 of that [fee simple] interest would have to include all of the rights 042

associated with the fee. * * * [Walshire, 288 F.3d at 347-348."]

The "bundle of sticks" that constitutes land situated in Virginia 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 every one of those "sticks" and must extend

over the entire term of the donor's interest in such property. Thus, a charitable

contribution of an interest in the land does not constitute 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

"If a landowner who owns a 100-acre parcel of land conveys 50 acres to a

charitable organization, 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 deduction is permitted.

- 23 land immediately under its footprint. A landowner can convey by metes and

bounds any part of the land or to 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." 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; severance 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 surface lot);

Morison v. Am. Ass'n, 65 S.E. 469 (Va. 1909) (land was divided into a surface

estate and a mineral estate); Bluefield 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).

"In Virginia, an interest in land must be conveyed by deed or aill. Va.

Code Ann. sec. 55-2 (2007); FDIC v. Hish, 76 F.3d 620, 623 (4th Cir. 1996).

"The requirements for a deed are 'competent 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.

- 24 When a taxpayer transfers a fee interest in land to a charitable 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 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

- 25 to be moved from the land, the building remains real property'6 and certain

easements by necessity are implicitly granted to the building. An easement by

necessity arising from an implied grant or implied reservation stems from the

principle that whenever a party conveys property, he conveys whatever is

necessary for the beneficial 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 conveyed, 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);" see also Large

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).

"In Tunstall v. Christian, 80 Va. 1, 1885 WL 4179, at *l-3 (1885), the

Supreme Court of Virginia held:

(continued...)

- 26 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,

(...continued)

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 condition. 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. * * *

18An 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, 531532 (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 existence at the time of the severance, and that (3) the use is apparent,

(continued...)

- 27 and they will not be extinguished 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 utilities.

The landowner is also responsible for safeguarding the public from hazardous

(...continued)

continuous, and reasonably necessary for the enjoyment of the dominant tract. Id.

at 532 (citing Brown, 355 S.E.2d at 569, and Fones v. Fagan, 196 S.E.2d 9.16, 919

(1973)).

- 28 conditions remaining after the training exercises are completed, such as open pits,

basements 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 severance, a

transfer of the fixture is a transfer of real property. Id.

To effect a constructive severance of abuilding from land, the transfer

ordinarily must be in a writing in a form sufficient 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 constructively sever the building from

the land.

- 29 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 property.

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 defimition of license that derives from the common law.'' See 3

Tiffany Real Prop., supra, secs. 829, 831; Webster's Third New International

Dictionary 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

19Cases 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.

- 30 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 exclusive 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, privilege, 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

recoverable 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 Virginia Supreme

Court held that a license to cut and sell timber on the land created no estate or

-31property 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 without such authority would be illegal, a tort, or a trespass".

The fire department does not acquire the right to eject the landowner from the

building and cannot force the landowner to allow the destruction of the building

should he change his rnind 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 property, 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 exercises on his property, it is the destruction

of the building that actually severs it from the land. Since the landowner retains

20Iri 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.

- 32 rights and responsibility for the debris (everything that has not disintegrated), at

the time of severance, there is no property 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 burdens. 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 completed. 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 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 superseded 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 distinguishable

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.

- 34 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. S

3, 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 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.

-35 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) protects 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) preserves a historically important land area or a certified

historic 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 contribution 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 conservation contribution

to FCFRD.

-36D.

Conclusion

As with this case, taxpayers usually grant a fire department 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 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. S_ee ii ("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." Section 170(f) denies them a charitable contribution

This is consistent with the following explanation in Fairfax County Fire

and Rescue Acquired Structure Powerpoint published on the Internet at

www.fairfaxcounty.gov/fr/academy/Acquired_Structure Powerpoint.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 acceptance and utilization (e.g.

acquiring the appropriate permits, the structural stability assessment,

(continued...)

- 37 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? 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.

21(...continued)

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.]

22In 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 substantial 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.

- 38 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 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 pertinent 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 settled. 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

- 39 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 guid pro quo standard.4 In Rolfs we held the

taxpayers had not made a charitable contribution 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 uncertain 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.

"We have found only two other cases involving the contribution of a

building to a fire department 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, Lawyer 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

additional 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).

- 40 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.

Accordingly,

An appropriate order will be

issued, and decision will be entered

under Rule 155.

Reviewed by the Court.

COLVIN, COHEN, VASQUEZ, THORNTON, MARVEL, GUSTAFSON,

and MORRISON, J_J., agree with this opinion of the Court.

PARIS, L, concurs in the result only.

KERRIGAN, L, dissents.

-41 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, (Ca. 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 Assessments of Anne Arundel

Cnty. v. Hartae 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 (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 Exploration, Inc. v. Novotny, 374 N.W.2d 838, 842 (Neb. 1985); Flyee 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. Hinteraardt, 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); Knoxville 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 Cellular

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).

- 42 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.

_C.o p. 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); Radke v. Union Pac. R. Co., 334 P.2d

1077 (Colo. 1959); Bland v. Breaman, 192 A. 703, 705 (Conn. 1937); Timmons v. Cropper, 172

A.2d 757 (Del.Ch. 1961); Beckett v. City of Paris Dry Goods Co., 96 P.2d 122 (Cal. 1939);

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 1.070 (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'a 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);

Heriastad v. Hardrock Oil Co., 52 P.2d 171 (Mont. 1935); Brown Cnty. Aaric. 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. Rd. 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); Setteaast 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, 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).

- 43 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. Permission to destroy eliminates that

premise and upon destruction the property interests formerly held by the owner are

transferred to the licensee with such permission.

Here, the fire department's destruction of the house severed it from the land

(as the opinion of the Court concedes, see op. Ct. p. 31) pursuant to petitioners'

written permission and thus rendered the structure personal property. See 2 Tiffany

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

post-burn 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 consumed by the fire department when it

destroyed the structure 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 undivided portion of his entire interest in

property. The regulations interpret an undivided portion of a donor's entire interest

as follows:

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 regulations as permitting the

retention by the donor of insubstantial 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 regulations.

We reasoned that the mineral interest as. so restricted was so insubstantial that the

- 45 donor had "in substance" transferred 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 contemplated, petitioners

retained no substantial interest in it that would trigger the section 170(f)(3)

limitation on their charitable contribution deduction.T Under Virginia property law

(as discussed more fully below), petitioners' written permission to enter their land

and destroy the house conveyed to the fire department a property interest in the

structure, effective upon its severance via demolition. The opinion of the Court

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. 27. 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 condition that it be used only for agricultural purposes).

-46contends that petitioners nonetheless retained a substantial property interest in the

house after its destruction, arguing that a property interest includes not only the

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 responsibility for clearing debris and liability for injury from hazardous

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 permission 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

- 47 property interest in the minerals 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 property 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 U.C.C. sec. 2-107(1) emt. 1.2) Notably, however, the Virginia statute

(consistent with the Uniform Commercial Code) provides that while a contract for

the sale of a structure to be severed by the seller is one for goods, "until severance

a purported present sale * * * [of the structure] which is not effective as a transfer

2The 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).

- 48 of an interest in land is effective only as a contract to sell." Va. Code Ann. sec.

8.2-107(1). Conversely, once severance has occurred, the structure constitutes

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

property 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 structures 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 destruction of the house

severed it from the land (and rendered it personalty), the opinion of the Court does

-49not 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 substance ceded

all substantial property interests they held in the structure to the department. Once

severed, the structure 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 treatment 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'

retention of an interest in the charred debris into which the -structure 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

- 50 and provides no basis for an award of summary 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), afff'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. Se 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.