UNITED STATES TAX COURT

CLC

135 T.C. No.- 24

UNITED STATES TAX COURT

THEODORE R. ROLFS AND JULIA A. GALLAGHER, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No.

9377-04.

Filed Novetúber 4,

2010.

In 1998 Ps donated a house to their local

volunteer fire department (VFD) to be used for

firefighter and police training exercises and eventual

demolition. Within several days, the VFD conducted two

training exercises at the house and burned it down.

Ps claimed a deduction for a charitable

contribution of $76, 000 on their Federal income tax return for 1998 on account of their donation of the

house'to the VFD and amended their petition to assert

that they are entitled to deduct $235,350, the house's

reproduction*cost.' R contends that Ps are not entitled

to any deduction because Ps received, in exchange for

the property donated, ~a substantial' benefit in the form

of demolition services, the value of which exceeded the

value of the property.donated (quid pro quo argument).

R determined that Ps are liable for an accuracy-related

penalty under sec. 6662(a), ,I.R.C. and, in his answer,

asserted in.the alternative an accuracy-related, penalty

under sec . 6662 (h) , I . R . C.

Ps contend~ that the Court ~

should not consider R' s quid pro quo argument because

SERVED Nov 04 2010

- 2 it is new matter that R raised for the first time on

brief.

Held: R's quid pro quo argument is not new matter

and will be considered, as Ps raised the issue in their

petition.

Held, further: Ps did not make a charitable

contribution within the meaning of sec. 170(c) as a

result of their donation of the house because they

received a substantial benefit in exchange for the

donation and have failed to show that the value of the

property donated exceeded the value of the benefit

received.

United States v. Am. Bar Endowment, 477 U.S.

105

(1986),

followed.

Held, further: Ps acted with reasonable cause and

are accordingly not liable for any accuracy-related

penalty under sec. 6662(a) or (h), I.R.C.

Michael G. Goller, Robert E. Dallman, and Michelle L.

Mukhtar, for petitioners.

James E. Schacht and Mark J. Miller, for respondent.

GALE, Judge:

Respondent determined a deficiency of $19,940

in petitioners' Federal income tax for 1998 and an accuracyrelated.penalty. equal to 20 percent of the underpayment under

section 6662(a)..I

By theirsamended petition, petitioners aver

that they are entitled to a charitable contribution deduction of

$235,350, rather than the $76,000 claimed on their return, as a

Unless 'otherwise indicated, all section references are to

the Internal Revenue Code of 1986, as in effect for the year in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

result of a donation of a house to a local volunteer fire

department, resulting in an overpayment of $39,672 for 1998.

answer to the amended petition, respondent asserts that

By

,

petitioners are liable for a penalty under section 6662(h) for a

gross valuation misstatement.

The.issues for decision are:

(1)

Whether petitioners are entitled to a deduction for a charitable

contribution under section 170(a) in conn~ection with theirdonation of a house to a local volunteer fire department for

training exercises and demolition and (2) whether petitioners are

liable for any accuracy-related penalty under section 6662.

FINDINGS OF FACT

Some of the facts have been stipulated, and the 'stipulated

facts and attached exhibits are incorporated in our- findings by

this reference.

Theodore R. Rolfs and Julia A. Gallagher

(hereafter, petitioners, and Theodore R. Rolfs alone, petitioner)

were married during the taxable year 1998 and filed a joint

Federal income tax return for that year.

Petitioners resided in

Wisconsin at the time the petition was filed.

The Lake Property

- -

On November 27, 1996, petitioners paid $600,000 for a fee

simple interest in a 3-acre lakefront property at 5892 Oakland

Road in the Village of Chenequa, Wisconsin (lake proþerty).

The

lake property was on Pine Lake in an area known locally as "lake

country"--a desirable residential area where lakefront houses

4 -

have historically commanded,premium prices.,

The lake property

was accessed by a private;road owned- by an association, the

members of which were the.homeowners living on the road.

Att the time of purchase there were several improvements on

the lake property -including a house.(lake house), a detached 4

garage, a boathouse, and a well and septic system.

The lake

house, originally built in -approximately 1900, was a ,1½-story

structure with 3.,138 square :feet of living space, including a

stone,.facade addition that was.constructed in the 1950s.

The

lake.house was in good condition and habitable,- though in need of

remodeling in petitioner's view."

For 1998 the Village of Chenequa, Waukesha County,

Wisconsin, assessed the lake property at $460,100, allocating.«

$323,000 to ,the land andr$137,100 to,the improvements, for local

property tax purposes..

After acquiring the lake house, petitioners -were initially

.undecided regarding whether- to remodel it or tear it down.

Their

deliberations were resolved when petitioner Julia A." Gallagher's

mother, Beatrice Gallagher (Mrs. Gallagher), suggested in late

1997.that petitioners demolish the lake house, build a new house

to he

specifications as her residence. in its place, and then

exchange the lake property for her existing residence.

Petitioners agreed to Mrs. Gallagher's proposal, and they carried

out the plan as described below.

5 -

Petitioners .had a cordial relationship wit h Mrs . Gallagher

during the periods relevant te this case .

Demolition of the Lake House

Sometime in the latter part of 1997 petitioner determined

that it would cost $10, 000 t

and remove the debris .

$1 , 000 to demolish the lake house

Around the same time, petitioner learned

from his brother of an individual who had claimed a charitable

contribution deduction for donating a residence to a local fire

department to be burned down.

Petitioner decided to donate the

lake house to-the Village of Chenequa Volunteer Fire Department

(VFD) for firefighter training exercises and demolition in a

controlled burn and to claim a charitable contribution deduction

for the value of the lake house.

In early October 1997 petitioner obtained the necessary

approval for the burn from the Wisconsin Department of Natural

Resources (DNR), subject to petitioner's notifying the DNR of the

actual date of the burn.

On February 10, 1998, petitioner sent a letter to Gary

Wieczorek, the chief of the VFD and of the Chenequa Police

Department (Chief Wieczorek) , which stated:

As we have discussed, I would like to donate our house

located at 51922 Oakland. Road in the Village of . - - a

Chenequa to t-he Fire and Police departments of the

Village for traininglandi eventually demolition. 1 This

2The letter contains a typographical error in that the

correct address of the lake property is 5892 Oakland Road.

- 6 letter shall serve as an acknowledgment that it is my

intention to donate the house for such purposes. The

house is available immediately. : If any further

approvals are needed please, contact me .

Chief Wieczorek understood that petitioners donated the lake

house to the Village of Chenequa for the limited purpose of using

the structure for training exercises of firefighters and police,

and with the ultimate aim of having the VFD burn it down.

He

also understood that petitioners expected that the lake- house

would be destroyed within "the first part of that year [1998]".

Chief Wieczorek further understood th'at the VFD could not use the

lake house for any other purpose than training exercises that

would include its destruction by fire.

Sometime shortly before February 18, 1998, the Chenequa

Police Department used the lake house for a training exercise.

On February 18, 1998, the VFD conducted an initial training

exercise at the lake house.

On February 21, 1998, 11 days after

petitioner's letter donating the lake house, the VFD conducted a

second training exercise and burned the structure to the ground.

The firefighter training exercises at the lake house allowed

the VFD to satisfy monthly training requirements imposed under

Wisconsin State law.

Chief Wieczorek believed the firefighter

training exercises conducted at the-lake house were-superior to

the training exercises otherwise available ,to the VFD.

On April 1, 1998, Chief Wieczorek sent a letter to

petitioner which stated:

- 7 -

This letter is in receipt of your doríation to the

Village of Chenequa and its Fire Department in the

amount of $1, OOO, ,check #4820eand the donation of the

use of your home at 5892 Oakland Road for training

purposes. 'The home at 5892 OaklandaRoad was used

'

during the month of February for training by the

Critical Incident Team and the Police Departiment and

for further training by the Fire Department in roof

ventilation and smoke drills. "On~February 21, 1998,

the home was destroyed at a practice fire with our

mutual' aid fire departments in which we practiced using

water supply in a non-hydranted area.

Chief Wieczorek solicited the $1, 000 payment from

petitioners (referred to in the letter quoted above) to defray

the costs that the Village of Chenequa otherwise would incur in

connection with the training exercises the VFD conducted at the

lake house.

On March 30, 1998, approximately 5 weeks after the

destruction o'f the lake house, petitioners entered into a

contract to have a new residence constructed on the lake property

at a cost of approximately $383,000.

The construction contract

did not itemize the costs of construction.

Petitioners' 1998 Income Tax Return

Petitioners timely filed a joint Federal income tax return

for the taxable year 1998 .

Petitioners attached to the return a

Form 8283, Noncash Charitable Contributions, reporting that the

lake house had a cost or adjusted basis of $100, 000, and that the

lake house was appraised at a fair market value of $76,000.

The

Form 8283 included a "Declaration of Appraiser" signed, by Richard

S'. Larkin and a "Donee Acknowledgment" slgned by Chief Wieczorek.

- 8 -

Petitioners claimed on Schedule.,A,- Itemized Deductions, a

deduction of $12, 626 attributable to charitable. contributions by

cash or checks and a, deduction of $83, 632 attributable ·to

charitable contributions other than by cash or check (which

included a $76,000 deduction claimed for the donation of the lake

house) .

Petitioners - attached to the return a sum(nary appraisal

report prepared by Richard S. Larkin of Larkin Appraisals, Inc.,

dated December 31, 1997, in support of the charitable

contribution deduction claimed with respect to the lake house.

Respondent's Examination and the Notice of Deficiency

For their 1998 taxable year petitioners retained all

documentation that a taxpayer exercising ordinary care and

prudence in claiming a charitable contribution deduction would

normally keep, and they maintained all records required under the

Internal Revenue Code.

The parties have stipulated that

petitioners cooperated timely with all of respondent's requests

for witnesses, information, documents, meetings, and interviews

during the examination of their 1998 return.

During the

examination, respondent did not request access to the lake

property.

3The record does not include an itemization of this amount,

and it is unclear whether petitioners claimed a deduction for the

$i, 000 remitted to the Village of Chenequa Volunteer Fire

Department (VFD) to defray the costs incurred in connection with

the use of the lake house for training exercises.

- 9 -

Respondent issued to petitioners a notice of deficiency for

1998 disallowing' the charitable contribution deduction of $763 000

claimed with respect to the donation of .the lake -house.

The

notice of deficiency stated in pertinent part

On- Schedule A, line 18 ðf your retui-n .fòrthe year

ended December 31, 1998, you claimed an itemized

deduction of $96,258.00 for Gifts to?Charity.

It has

not been established that any amount more than

$7,632.00 qualifies for deduction under any- section of

the Internal Revenue Code.

Therefore, your taxable

income for the year ended December 31,~1998 is

3 a

increased by $76,000.

A schedule of examination ad-justments attached to the notice of

deficiency shows that respondent actually determined that

petitioners were entitled to a deduction for charitable

contributions totaling $20, 258 for 1998 (rather than the $7, 632

referred to in the statement quoted above) .

The Pleadings

Petitioners filed a timely petition for redetermination

alleging that they were entitled to a charitable contribution

deduction of $76,000 related to their donation of the lake house.

Petitioners subsequently filed an amended petition in which they

averred that they were entitled to a charitable contribution

deduction for their donation of the lake house of at least

$235, 350, the reproduction cost of the house, resulting in an

overpayment of their 1998 tax liability by $39, 672.

Respondent

filed an answer to amended petition denying t-he averments.

summarized above and asserting Ehat, as, an alternative to the

- 10 -

determination in the notice of ,deficiency, petitioners swere

liable for a penalty for a gross valuation misstatement equal to

40 percent of .the underpayment under section 6662 (h) .

Pretrial Proceedings

As part of the pretrial proceedings, respondent requested

permission for his ,expert witness - to visit the lake property.

On

September 19, .2005, petitioners' counsel informed respondent's

counsel that the laker propertyswas then owned by Mrs. Gallagher.

That same day, respondent's counsel contacted Mrs. Gallagher and

requested that respondent's expert witness be permitted to enter

the private road leading to the lake property for the purpose of

viewing the site to aid in the preparation of a valuation report.

Mrs. Gallagher denied the request.

Respondent's counsel informed

petitioners' counsel of this development, and petitioners'

counsel subsequently informed respondent's counsel that

petitioners were unable to arrange for respondent's expert to

gain access to the lake property.

Respondent never made a

request pursuant to Rule 72 for permission to visit the lake

property.4

4Rule 72 (a) (i) allows any party to serve on any other party

a reque.st to permit entry upon designated land or other property

in the possession oi- control of the other party.

- 11 -

Valuation Experts

A.

Richard S. Larkin

Petitioners' expert witness, Richard S. Larkin, is president

of Larkin Appraisals, Inc., and he prepared the summary appraisal

report attached to petitioners'.1998 return.

Mr. Larkin is-a ai

member of the Appraisal Institute, is a Wisconsin certified

residential appraiser, and is qualified to give an opinion as to

the value of real estate.

In his originalareport Mr. Larkin used the so-called before

and after approach to determine the value of the lake house; that

is, treating'the fai·r market value of the lake house as equal to

the' difference between fair market value of the lake property

with the lake house and the fair market value of the lake

property without the lake housé.

More specifically, Mr. Larkin

determined the value of- the lake property with all improvement to

be $675,000, on the basis tof a comparison to the direct -sales of

comparable properties.

He then subtracted from this amount:

(i)

The value of the land (estimated at $550,000 on the basis-of

direct sales of comparable vacant land),

(ii) the value-of the

structura'l improvements other than the lake house (estimated at

$29,000 on the basis of their replacement-cost less physical

depreciation) and (iii) certain site improvements estimated at

$20,000.

By subtracting the value of the land and improvements

other than the lake house (totaling $599,000)

from the "direct

- 12 -

sales" market value of the lake property with all improvements

($675,000), Mr. Larkin arrived at what he considered the

"contributory value" of the -lake house: $76,000,- as of December

20, 1997.5

As part of. his analysis, Mr. Larkin also estimated

that the reproduction cost of the lake house was. $235,350.

Mr. :Larkin later supplemented his original report to-

acknowledge- that during the period in question there existed in

Wisconsin what he considered a submarket in which single-family

residences were sold for the purpose of moving them to other

locations.

Fur. Larkin= concluded that-this market was not

relevant to the valuation exercise he performed with regard to

the lake house because the +lake house.was not going- to be moved.

B.

Robert A. George

Respondent's expert Robert A. George,is a professional

"house mover".s Mr. George has contracted to move numerous houses

throughout Wisconsin, and he is qualified to give an opinion as

to the value of houses that are sold for the purpose of moving

them-to other locations.

After considering the height of.the «

lake house and his determination that the lake house could be

moved only after removing the stone facade addition to the house

and cutting down surrounding mature trees, Mr. George.concluded

SThere apparently is no dispute that this valuation would

remain the same if the valuation date were changed to Feb. 10,

1998-Ithe date~ that petitioners donated the lake house to the

VFD.

- 13 -

that it would cost approximately $100;000 to move the lake house

to another location in the Chenequa -area.

However, Mr. George

concluded that in view of the high cost of land in the Chenequa

area in comparison with the modest nature of the lake house, no

one would purchase the lake house for the purpose of moving it,

as any land close enough to render a move feasible would be too

expensive to justify siting the modest lake house there.

Mr.

George expressed the further opinionethat any buyer would pay no

more than a nominal "courtesy" amount of $100 to $1,000 for the

structure as oof February 10, 1998, essentially for the purpose-of

ensuring that there was sufficient-consideration to render the :

purchase contract binding.

Mr. George'also opined that any

salvage value attributable:to the structure (or components within

the house) would be offset by the cost of labor to remove those

components.

C.

Marcia Solko

Respondent's expert Marcia Solko is a real estate specialist

employed by the Wisconsin Department of Transportation.

Her

primary responsibilities were to arrange for the clearing or

removal of all improvements (including houses)

from real estate

designated by the State of Wisconsin for highway construction

projects.

Ms. Solko is qualified to give an opinion as to the

value of houses that are sold for the purpose of moving them to

other locations.

- 14 -

-

Taking many factors into account, including the height of

the lake house, the stone facade addition, and the fact that the

house sat on a-concrete slab foundation, Ms. Solko concluded that

it would be very costly to attempt to move the lake house, and

she doubted that anyone would buy the.lake house in order to move

it to another property.

OPINION

I.

Charitable Contribution Deductions

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 1.70(c) (1) defines the term

"charitable contribution" to include ascontribution 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 purposes.'

The Supreme Court has defined "contribution or gift" for

purposes of section 170 as follows:

- The legislative history of the "contribution or

gift" limitation [of section 170), though sparse,

reveals that Congress intended to differentiate between unrequited payments to qualified recipients and

payments made to such recipients in return for goods or

s.ervices. Only the former were deemed deductible. The

House and Senate Reports on the 1954 tax bill-, for

example, both define "gifts" as payments "made with no

expectation of a financial return commensurate with the

amount of the gift." * * * [Hernandez v. Commissioner, 490

U.S. 680,.- 690 (1989).]

!

There is no dispute that the Village of Chenequa (and by

extension the VFD) qualifies as a political subdivision of a ~

State within the meaning of sec. 170(c).

- 15 -

Thus,

"A payment of money generally cannot- constitute a

charitable contribution if the contributor expects a substantial

benefit in return.-"

United States vl Am. Bar Endowment,.477 U.S.

105, 116 (1986); see also Transam. Corp. v. United States, 902

F.2d 1540,

States,

1543-1546

196 Ct. Cl.

(Fed. Cir.

90,

1990); Singer Co. v. United

449 F.2d 413

(1971).

The Supreme Court has further instructed that in

ascertaining whether a givèn payment or property transfer was

made with the expectation of anya return benefit or quid pro quo,

we are to examine the external, structural features of the

transaction; which obviates the need for imprecise inquiries into

the motivations of individual taxpayer's.

Hernandez v.

Commissioner, supra at 690-691:

If a charitable contribution -is made in property other than

money, the amount of the contribution is-generally the fair

market value of the property at the time of the contribution.

Sec. 1.170A-1(c) (1), Income Tax Regs..

"[F]air market value" for

this purpose '"is the price at which the property would change

,

hands between a willing buyer and a willing seller, neither.being

under any compulsion to buy or sell and both having reasonable :

knowledge of the- relevant facts.'I

Tax Regs.

Sec. 1.170A-1(c) (2), Income

Restrictions on the property's use or marketability on

the date of the contribution must be taken into account in the

determination of fair market value.

See Cooley v. Commissioner,

- 16 33 T.C. 223, 225.(1959), affd. 238 F.2d 945

(2d Cir. 1960);

.

Deukmeiian v. Commissioner, T.C. Memo. 1981-24; Dresser v.

Commissioner, T.C. Memo. 1956-54; see also Rev. Rul. 85-99, 19852 C.B.

II.

83.

The Parties' Arguments

A.

Respondent's Position

Respondent contends that petitioners are not entitled to a

deduction for a charitable contribution in connection with their

donation of the lake house to the VFD because they anticipated

and received a substantial benefit in exchange for the

contribution; namely, demolition services.

Petitioners therefore

did not make a charitable contribution within the meaning of

section 170(c), as interpreted in United States ar. Am. Bar

Endowment,- supra, because the fair market value of the lake house

as donated did not,exceed the fair market value of the demolition

services petitioners received from the VFD in exchange for the

donation (quid pro quo argument).

Respondent argues.in the

alternative that (1) the charitable contribution deduction in

dispute is disallowed under section 170(f) (3) (A) because

petitioners transferred to the VFD less than their entire

interest in the, lake house; and (2) the lake house as donated to

the VFD was worthless.

17 -

B.

Petitioners' Position

Petitioners first contend that the burden of proof on -all

issues is shifted to respondent pursuant to section 7491(a) .

Petitioners assert that the Court should not consider

respondent's quid pro quo .argument (to,the effect that

petitioners received a. benefit i-n exchange for their donation)

-

because this arcjument constitutes new matter that respondent .

raised for the first time in his opening brief .

However, if

respondent is allowed to raise the quid pro quo argument,

petitioners contend thatetheyedonated property with a fair márket

value of $76,000 -(according to a qualified appraisal) which they

have shown should be valued at its reproduction cost of $235; 350

and that they -received only an 'lincidental benefit" in return.7

Petitioners contendnthat section 170 (f) (3) (A) is inapplicables

becauáe in tránsferring the slake house to the VFD w.ith the right

to-demolish it, they transferred their entire .interest in the

property.

7A $235, 350 deduction woulS

1998 .

iv

rise to an overpayment for

- 18 -

III.

Section 7491(a) Shift in theeBurden of,Proof

We consider- as a preliminary matter petitioners' contention

that the burden ofoproof has shifted to respondent pursuant to,

section 7491(a).

In general, the Commissioner's determination as set forth in

a notice of deficiency is presumed correct.

290 U.S: 111,

115

(1933).

Rule 142(a) (1)

Welch v. Helvering,

sets forth the -general

rule that the burden of proof shall be on the taxpayer, except as

otherwise provided by statute or determined by the;Court, and

except that the burden of proof shall be upon -the -Commissioner in

respect of any new matter, increases in deficiency,.and

affirmative defenses.

Section 7491(a) (1), however, provides an exception that

shifts the burden of proof to the Commissioner as to:anysfactual

issue relevant to a taxpayer's liability for tax- if (1) the

taxpayer introduces credible evidence with respect to such, issue,

sec. 7491(a) (1); and (2) the taxpayer satisfies certain other

conditions, including substantiation of any item and cooperation

with the Government's requests,for witnesses and information,

sec. 7491(a) (2); see also Rule 142(a) (2):

Petitioners contend that they have satisfied the

requirements of section 7491(a) and the burden of proof as to all

factual issues affecting the deficiency in their tax should be

shifted to respondent.

Respondent contends that because he was

- 19 -

denied'access to the lake- þroperty incident to his trial'

preparation, petitioners have hèt satisfied the section

7491(a) (2) (B) requirement that they cooperate with "reasonable

requests by the Secretary for witnesses, information, documents,

meetings, and intettiews".

Specifically, respondent argues,

e

petitioners have failed tor show that they took reasonable steps

to secure Mrs. Gallagher's permission for respondent's expert

witness to-view the lakesproperty.

Petitioners contend that they

had no control over Mrs. Gallagher and that in any event section

7491(a) (2) (B) imposes a cooperation-requirement on taxpayers only

during the examination process .

A taxpayer'béars the burden of proving that he or she has

met the *requirements of section 7491(a).

Commissioner, T.C. Memo. 2005-143; H.

(1998)5, 1998-3 C.B-. 747, 993.

See Richardson v.

Conf. Rept.

105-599, at 239

The legislative history underlying

section 7491(a)" states in pertinent part:

the taxpayer must cooperate with reasonable requests by

the Secretary for meetings interviews, witnesses,

information and documents (including providing, within

a reasonable period of time, saccess to and inspection

of "witnesses, information, and documents within the

control of the taxpayer, as reasonably requested by the

Secretary). , Cooperation also includes providing

reasonable assistance to the Secretary in obtaining

access to and inspection oft witnesses, information, or

documents not within the control of the taxpayer

(including any eitnesses, information, or documents

located in foreign countries). * * * [H. Conf. Rept.

105-599, supra at 240

a

1998-3 C.B. at 994.]

- 20 -

We first observe that petitioners' contention that the

section 7491(a) (2) (B) requirement of cooperation extends only .

through the examination of their return is meritless.

For

purposes of section 7491(a) (2) (B), the requirement of cooperation

continues through the pretrial proceedings in the Tax Court.

See, e.g., Connors v. Commissioner, 277 Fed. Appx.- 122 (2d Cir.

2008), affg. T.C. Memo.

2006-239; Yearout Mech. & Enqq.,

Inc. v.

Commissioner, T.C. Memo. 2008-217; Krohn v. Commissioner, T.C.

Memo.

2005-145; Lopez v. Commissioner, T.C. Memo.

on this issue 116 Fed. Appx. 546

(5th Cir.

2003-142, affd.

2004).

We likewise are not persuaded that petitioners have met

their burden of proving that they fully cooperated with

respondent's reasonable requests during the pretrial phase.

The

parties stipulated in pertinent part that after respondent's

counsel informed petitioners' counsel that Mrs.- Gallagher had,

denied respondent's request for access-to the lake property,

"Petitioners-' counsel subsequently advised Respondent's counsel

that no arrangements could be made by the Petitioners to have

Respondent's expert witness see the Property."

What is lacking

in this record is any evidence of what effort, if any,

petitioners undertook to assist in securing Mrs..Gallagher's

cooperation to permit respondent's expert to visit the lake

property.

As reflected in the legislative history, Congress

intended that the duty of cooperation extend to "providing

- 21 reasonable assistance to the Secretary in obtaining access to and

inspection of * * * information * * * not within the control of

the.taxpayer".

Petitioners offered no testimony concerning their

efforts to obtain Mrs. Gallagher's cooperation, stating only that

they had a good relationship with her.

Mrs. Gallagher did not

testify."

In view of this evidentiary vacuum, petitioners have failed

to show what "reasonable assistance" they offered, if any, with

respect to respondent's effort-to obtain access to information ;

from a person not within petitioners' control.

As a result, they

have not satisfied the cooperation requirement of section

7491(a) (2) (B).

Accordingly, we hold that section 7491(a) :Us

inapplicable.

Since the condition of the lake property permeates

all factual issues inithis case, petitioners retain the burden of

proof with respect to all factual issues.

IV.

Analysis

A.

Respondent's Quid Pro Quo Argument

1.

Status as New Matter

We must first decide whether respondent is allowed to raise

his quid pro quo argument, premised on United States v. Am; Bar

"Although petitioners' cdunsel suggested to the Court that

Mrs. Gallagher's previous experience with the Internal Revenue

Service occasioned her intransigence in the instant proceeding,

counsel's statements do not constitute testimony or evidence.

See, e.g., U.S. Holding Co. v. Commissioner,

(1965).

44 T.C.

323,

327

- 22 -

Endowment, 477 U.S. 105 (1986)-, to the effect that petitioners

are not entitled-to any charitable contribution deduction-because

the fair market value of the propertylthey donated did not exceed

the fair market value of the benefit-they received in exchange.

Petitioners contend that the issue was untimely raised and

therefore its consideration would be prejudicial to them.

We have refused to consider an untimely raised issue,when

the opposing party is unfairly surprised and prejudiced because

hi-s defense against the tissue requires the presentation of

evidence different from the evidence, relevant to the identified

issues in the case.

See Leahy v.-Commissioner, 87 T.C. 56, 64-65

(1986) j'Fox -Chevrolet,

Inc. v. Commissioner,

(1981); Estate of Horvath v. Commissioner,

(1973).

76 T.C.

708,

59 T:C..551,

733-736

555±557

However, we are not persuaded.that petitioners were

unfairly surprised or prejudiced by respondent's quid pro quos

argument.

Starting with the petition and continuing through *

their opening brief,' petitioners have cited Scharf v.

Commissioner, T.C. Memo. 1973=265, and contended that a "small"

or "incidental" benefit received by a donor "does-not negate a

finding of.donative intent".

Scharf is quintessentially a quid

pro quo case, involving facts that are similar to those of the

instant case in many respects.

Scharf involved a charitable

"Petitioners raised their'"new matter" objection in their

answering brief, arguing that respondent raised the quid pro.quo

argument for the first time in his opening brief.

- 23 -

contribution deduction claimed for the donation of a building,

partially destroyed by fire, to a volunteer fire department to be

burned down for training purposes.

Recognizing that the

2 -

taxpayer's receipt of a benefit-from the building's demolition

necessitated a quid pro quo analysis, this Court observed that

the circumstances presented "an exceedingly close question" abut

upheld the deduction, reasõning that the public benefit of

firefighter training greatly exceeded the demolition benefit

received by the donor taxpayer.

By virtue of their reliance on Scharf from the outset, it is

petitioners, not respondent, who first raised the quid pro quo-

issue.- - Petitioners cannot claim to have been unfairly surprised

when respondent further developed the quid pro quo theory on

brief, including analyzing post=Scharf developments in the

case-law su'ch as the Supreme Court's decision in United States v.

Am. "Bar Endowment, supra.

Given petitioners' reliance on Scharf,

their contention from the outset -that the benefit they received

was "small" or "incidental", and Scharf's characterization of the

issue as a"olose one, we believe it was incumbent upon

petitioners to proffer whatever-evidence they had bearing upon

the benefit they received from the donation of the lake house;

and we conclude that petitioners were.not unfairly surprised or

24 -

prejudiced by respondent's quid pro,quo argument."

v.

Commissioner,

116 T.C. :450, 456-457

(2001); Ware v.

Commissioner, 92 T.C. -1267,, 1268.(1989), affd.

Pagel,

See Smalley

Inc. v: Commissioner,

906 F.2d 62

Cir.

1990);

91 T.C.

200,

211

affd.

905 -F.2d 1190 (8th Cir. 1990). -- In ,addition, Scharf

(2d

(1988),

sustained a charitable contribution deduction for theodonation of

a building to be ,burned down by a:volunteer fire department,

whereasurespondent argues that such a deduction is precluded.in

petitioners' case under Am. Bar Endowment.

Since petitioners

contend that Scharfesupports a decision in- their favor, it is

appropriate and important to consider the application of atquid

prorquo analysis in this case.

We shall therefore consider the

issue.

2.

Development of the Quid Pro Quo Test

Respondent argues that petitioners are not entitled to a

charitable contribution deduction for their donation of the lake

house because they anticipated and received a substantial benefit

in exchange for:the donation; namely, the demolition of the la.ke

house on a site where they intended to rebuild.

Respondent

contends that the value of the demolition services received

"Petitioners' also contend that if respondent is allowed to

raise the quid pro quo argument, he should bear the burded of

proof on the issue on account of his untimely raising of it.

Because we conclude that petitioners raised the quid pro quo

issue in their petition, there are no grounds to shift the burden

of proof to respondent.

- 25 -

exceeded the value of the property petitioners transferred,

eliminating any charitable intent from the transaction.

As

noted, respondent relies..on United States v. Am. Bar Endowment,

supra, and on section 1.170A-1(h) (1), Income Tax Regs.

In United States 4. Am. aBar Endowment, supra at 116, the

Supreme Court set forth the principle that a payment of money

generally -cannot- constitüte a charitable contribution if the

contributor expects-a substantial benefit in return.

"The sine

qua non of a charitable contribution is a transfer or money or

property without adequate consideration."

Id. at 118.

However,

the Court also 'recognized that a taxpayer's payment to a charitable organization that- is accompanied by his receipt of a

benefit may have a "'duál character' of- a purchase and a

contribution" if the payment exceeds the value of the benefit

received in return.

Id. at 117.

The Court consequently adopted

a two-part test (first articulated in Rev. Rul.-67-246, 1967-2

C.B. 104) for determining when part of a dual payment is

deductible.

"First, the payment is deductible only if and to the

extent it exceeds the market value of the benefit received.

Second, the excess payment must be made with the intention of

making a gift."

Id.

(internal quotations omitted).

The Am. Bar

Endowment test has since been incorporated into the regulations.

- 26 See sec. 1.170A-1(h), Income Tax Regs.;" T.D. 8690,,1997-1 C.B.

68.

The test also applies where payment.is made in property

other ethan money.

See Transam. Corp. v. United States, 902 F.2d

at 1543-1546.

,

,

Petitioner had decided to demolish the lake house and

construct another residence on the site when he contacted the- VFD

about donating the lake house to be burned down for training

purposes.

Consequently, examining the external features of the

transaction, as we must, see Hernandez v. Commissioner, 490 U.S.

at 690-691, we find that petitioner anticipated a benefit in

exchange for the contribution: . demolition,of the lake house.

On

similar facts, this Court decided in a MemorandumsOpinion, Scharf

v. Commissioner, T.C. Memo. 1973-265, that the taxpayer was

entitled to a charitable.contribution deductions for the donation

of a structure, equal to its value for insurance purposes.

We

reasoned in Scharf as follows:

"Sec. 1.170A-1(h) (1)

states:

No part of a payment that a taxpayer makes to or for the use

of an organization described in section 170(c) that is in

consideration for * * * goods or services * * * :Us a

contribution or gift within the meaning of section 170(c)

unless the taxpayer-(i) Intends to make a payment in an amount that exceeds

the fair market value of the goods or services; and

(ii) Makes a payment in an amount that exceeds the fair

market value of the goods and services.

- 27 -

we conclude * * * that theobenefit flowing back to

petitioner, consisting of clearer land, was far less than

the greater benefit flowing ~tx> the volunteer fire

department's training and equipment testing

operàtions. * * ** We think the petitioner benefited only

incidentally from the demolition of the building and that

the community was primarily behefited in its fire controland prevention operations. Consequently, on balance, we

hold that the petitioner is entitled to a charitable

contribution deduction.

The test applied in Scharf, which examines whether the value of

the public benefit of the donation exceeded the value of the

benefit received by the donor, differs from the Supreme Court's

test announced 13 years later in United States v. Am. Bar

Endowment, 477 U.S.

105

(1986).

The Am. Bar Endowment test

examines whether the fair market value of the contributed

property exceeded the fair market value of the benefit received

by the donor.

The test applied in Scharf has no vitality after

Am. Bar Endowment."

Instead, we must consider whether the value

of the lake house as donated exceeded the value of the demolition

services petitioners received."

"We note also that the en~tirely "voluntary nature of

petitioners' decision to demolish the lake house distinguishes

their case from Scharf v. Commissioner, T.C. Memo. 1973-265. Mr.

Scharf's building had been partially destroyed by fire and was

about to be condemned as unsafe when he decided to donate it to

the local fire department for demolition in a training fire.

Consequently, Scharf's use of the "insurance loss" value (less

insurance proceeds received) tx> measure the value of the

structure donated offers no basis for valuing the structure here,

where no precontribution casualty ,was involved.

"Because, as discussed infra, we conclude that the value of

the lake house did not exceed the value of the demolition

(continued...)

- 28 -

3.

Application of the Quid Pro Quo Test

a.

Value of the Benefit Received

Petitioner testified that his investigation revealed that it

would cost approximately $10,000 to $15,000 to have the lake

house demolished and the debris removed.

This estimate is

consistent with those of both of respondent's experts, who put

the figure at approximately $10,000 to $12,000 (Ms. Solko) and

$10 , O O O (Mr . George ) .

Petitioners nonetheless dispute the conclusion that they

saved demolition costs of at least $10,000 by virtue of their

donation of the lake house to the VFD.

Petitioner claimed in his

testimony that the cost of the contract to construct the new

house for Mrs. Gallagher included "$10,000 to $15,000" in

excavation charges for clearing the remnants of the burn and the

concrete foundation of the lake house.

Petitioners argue on

brief that these additional excavation costs demonstrate that

petitioners did not save anything from the demolition resulting

from the burning and therefore received no benefit from their

donation of the lake house to the VFD.

"(...continued)

services, we need not address the second prong of the test set

forth in United States v. Am. Bar Endowment, 477 U.S. 105 (1986):

whether the excess of the value of the donation over the value

of the benefit.received was transferred with the intention of

making a gift.

- 29 We re-ject this contention.

First, the documentary evidencle

tends to undermine t he claim that the construction contract for

the new residence included $10, 000 or more for exclavation charges

associated with clearing the remnants of the burn.

The

construction contract for the new house, as included in the

record, does not contain any allocation of the total contract

price for any specific cost--excavation, debris removal, or

otherwise.

Moreover, a preprinted portion of the contract

covering "Building Site Conditions" has been lined through by the

parties to the - contract, creatingean inference that the contract

price did not cover any significant debris or foundation removal

services.

Second; two experts, plus whomever petitioner

consulted, estimated the cost of "demolition and debris removal

for the lake house.as at least $10,000.

We do not believe-that

debris removal alone accounted for these estimates .

A much. more

plausible inference is that thercost of the labor and equipment

for the demolition constituted a significant portion of the estimate.

On- this record, we are persuaded that petitioners

saved at least $10, 000 in the cost of demolition services as a

result of their arrangements with the VFD for the donation of the

lake house for burning.

They accordingly received a benefit with

a fair market. value in that amount in exchange for the donation.

- 30 -

b.

Value of the Property Donated

Because petitioners received a substantial benefit inexchange for their donation of the lake house, their entitlement

to any.charitable contribution deduction.under the Am. Bar

Endowment.test depends upon whether the value of the lake house

as donated exceeded the value of thesdemolition services.

As

noted,. the lake house's value for-this purpose is its fair market

value at the time of the donation, as -measured by the willing

buyer/willing seller standard in section 1.170A-1-(c) (2), Income

Tax Regs.

Ofsparticular importance here, the fair market value

of contributed--property must take into account any restrictions

or conditions limiting the property's marketabilityion, the date

of the- contribution.

See Cooley v. Commissioner, 33 T.C. at 225

(rejecting retail market value as fair market value-oft

automobiles that could not be sold at.retail); Deukmejian v.

Commissioner, T.C.. Memo. 1981-24 (rejecting real property

valuation premised on- property's development value when

-

property's use restricted to open space);,Dresser v.

Commissioner, T.C. Memo. 1956-54

(rejecting real property

valuation premised on commercial use when property's use

restricted tcr residential).

The; restrictions or conditions that

must be taken-into- account. include those imposed, by the, donor

incident to the contribution of the property.

Commissioner, supra.

See Deukmejian v.

- 31 -

Petitioners contend, and we agree, that their donation of

the lake- house to the VFD, without their conveyance of the

underlying land on which it was -sited, effected a "constructive

severance" of the structure from the land, recognized under

Wisconsin law, even though the structure remained affixed to the

land. . See Fitzgerald v. Anderson,

v. Waqqoner,

6 N.W.

568

51 N.W.

(Wis.-1880);

secs. 623-624 (3d ~ed. 1939)."

554

(Wis.

1892)i Smith

2 Tiffany Real Property,

By transferring the lake house to

the VFD without the underlying land, however, petitioners created

a substantial restrictián or condition on the property's

marketability; namely, the slake house could not remain

indefinitely on the land upon which it was sited.

Petitioners attached two additional restrictions or

I

conditions on the lake -house incident to its donation; namely,

the permissible use of the lake house was restricted to

"Respondent- disputes whether the letters between petitioner

and the VFD memorializing the donation of the lake house were

sufficient to effect a constructive severance of the building

from the underlying land.

To effect a constructive severance of

a building 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). Respondent contends that

the letters between petitioner and the VFD were insufficient

under the Wisconsin statute of frauds, Wis. Stat. Ann. sec.

706.02 (West 2001), to convey such an,interest. We disagree.

Under Wis. Statt. Ann. sec. 706.04, a conveyance that does not

satisfy every requirement of the statute of frauds may

nonetheless be enforced- where there has been detrimental

reliance.

See also Clay v. Bradley, 246 N.W.2d 142 (Wis. 1976).

The VFD demolished the lake house in reliance on petitioner's

Feb. 10, 1998, letter conveying the lake house to the VFD for

that purpose.

- 32 -

firefighter and police training exercises.and there was a

condition that the lake house be.burned-down relatively soon.

after the conveyance.

Petitioner's letter memorializing the

transfer, though informal,' stated that the lake house was to used

by the VFD "for training and eventually demolition", and VFD

I

Chief Wieczorek testified that he understood he could not use the

lake house for any.other purpose and that the burndown was to

take place during the first part of 1998."

Thus, in addition to

being severed from its underlying land, the lake house as donated

could not be used for residential purposes and was subject to a

condition that it be promptly burned down.

- -

Petitioners offered the appraisal of their expert, Mr.

Larkin, in support of.their claim that the lake house had a fair

market value of at least $76,000 when donated.

In his appraisal

Mr. Larkin opin'ed that the lake house had a "contributory value"

of $76,000 on the basis of a "before and after" approach to

value, which treated the value of the donated lake house as equal

"The letter donating the lake house was dated Feb. 10,

1998, and the burndown by the VFD occurred 11 days later,

corroborating Chief Wieczorek's testimony concerning the

expectation of the parties to the transfer. The contract for the

construction of a new house on.the site was signed approximately

5 weeks later.

Petitioners' contentions to the effect that there

was no agreement or understanding that the house would be

promptly burned down are unpersuasive.

- 33 to the difference between the fair market value of the lake property with the lake house and the fair market value of the

lake property without the:lake house:

We find the Larkin appraisal to be unpersuasive evidence

that the lake house had a fair market value of $76,000 as

donated.

Wh'ile the "before -and after" method used by Mr. Larkin

has been accepted as an appropriate measure of the fair market

value of donations of restrictive -covenants on real property such

as -conservation "easements, see, e.g., Symington v. Commissioner,

87 T'.C.-892,

895

(1986); Schwab v: Commissioner, T.C. Memo.

1994-

232; sec. 1.170A-14(h) (3), Income Tax Regs., petitioners cite no

authority for the use of a "before and after" method in valuing a

structure'that has been severed from its underlying land and

encumbered with additional restrictions on use.

The "before and

after" method as used in valuing easements treats the diminution

in the value of the real property that arises from the easement

as the measure of the easement's fair market value.

Symington v. Commissioner, supra at 895.

See

However, we are not

persuaded that any diminution in the value of the lake property

resulting from the removal of therlake house represents an

accurate measure of the value of the lake house as donated to the

VFD.

Petitioners did not donate an easement--i.e., an intangible

property right permanently encuinbering the lake property; they

donated a structure, severed from the lake property, with

- 34 -

substantial restrictions and conditions on its use." "As

described more fully below,« the "before and after" method

employed by Mr. Larkin takes no account of these conditions and

restrictions that would affect the marketability of the severed

structure.

See Cooley v. Commissioner

33 T.C. 223

(1959);

Deukmejian v. Commissioner, T.C. Memo. 1981-24; Dresser v.

Commissioner, T.C. Memo.

1956-54.

- The Larkin.appraisal states that "The interest valued is fee

simple and unencumbered.".

Mr., Larkin contends that the value of

the lake property for the "donation purposes" to which it was put

was its "contributory value" of $76,000.

Mr-. Larkin reaches a

"contributory value" of the lake house- by starting with the fair

market value of the lake property as a whole (land, the lake.

house, and all other improvements)a estimated on the basis of

sales of compar,able residential properties (i.e., $675,000), and

subtracting the fair market value of the land (also estimated on

the basis of sales of comparable vacant sites) plus the

depreciated cost of the improvements other than the lake house

(i.e., $599,000).

However, since the starting point of Mr.

Larkin's calculation was the market value :of the lake property as

a whole, as measured by.sales of comparable properties where the

"It would appear that petitioners also donated a temporary

easement to the VFD granting a right of access to the lake

property to conduct the training exercises and controlled burn.

However, neither petitioners nor their expert addressed this

element of the donation or suggested it had any value.

- 35 houses could remain on their sites indefinitely and were

available for residential use, the "contributory value" for othe

lake house he derived, by subtracting the value of the land and

other improvements, necessarily valued the lake house on the

basis of its being available for residential use and affixed 'to

the site indefinitely.

Thus, the $76,000 "contributory value" ,of

the lake house postulated by Mr. Larkin at best reflects the

* -

value of the 'lake house before taking into account its severande

from the underlying land, the prohibition on residential use; a.nd

the condition that it be burned down promptly.

Consequently,.the

property interest Mr. Larkin appraised is not comparable to the

property interest that petitioners donated to the VFD.

Petitioners alternatively contend that the fair market. value

of the lake house as contributed to the VFD was $235,350, its.

repr'oduction cost as estimated by Mr. Larkin.

Petitioners offer

no expert testimony in support of this proposition.

Mr. Larkin

did not so opine; petitioners merely borrow his estimate of

reproduction cost and assert on brief, relying on Estate of

Palmer v.

Commissioner,

839 F.2d 420

(8th Cir.

1988),

revg.

86

T.C. 66 (1986), and First Wis. Bankshares Corp. v. United States,

369 F. Supp. 1034

(E.D. Wis. 1973), that because the lake house

36 -

was "unique" and was "special use" property in the hands of the

donee, reproduction cost is the appropriate measure of its

value.

Petitioners' reliance on Estate of Palmer and First Wis.

Bankshares.Corp. is misplaced.

There was nothing unique about

the lake house comparable to the unique status of the properties

at issue in those cases--.in Estate of Palmer, a building integral

to a college campus.and its activities; and in First Wisconsin, a

bank structure suitable only to some public use.

According to

the expert testimony in.the record, the lake house-was a typical,

albeit modest, residence for its area; by their own admission,

petitioners contemplated residing in it after remodeling.

In

addition, the structures at issue in both cases petitioners cite

were donated without having been constructively severed from the

land on which they were sited.

Consequently, the circumstances

of this case lend no support to the use of reproduction cost, an

approach that also fails to account for the conditions

petitioners placed on the lake house incident to the donation.

"In their amended petition, petitioner's characterize their

position as a claim that they are entitled to a deduction equal

to the "reproduction" cost of the lake house.

On brief,

petitioners instead refer to "replacement" cost as the

appropriate measure.

Petitioners apparently treat "reproduction"

and "replacement" cost as synonymous terms.

In the

circumstances, we find it unnecessary to consider any differences

in the two concepts.

- 37 Instead, the circumstances of this ease bring it squarely

within the Cooley line of cases which require that restrictions

or conditions affecting the marketability of donated property be

taken into account in determining the value of the donated

property.

See Coolev v. Commissioner, supra; Deukmejian v.

Commissioner, supra; Dresser v.' Commissioner, supra; see also

Rev. Rul. 85-99, sup'ra.

"[P]roperty otherwise intrinsically more

valuable which is encumbered by some restriction or condition

limiting its marketability-must be valued in light of such

limitation."

Cooley v, Commissioner, supra at 225.

We consider first the impact of the severance of the lake

house structure from -the underlying land.

The price at which the

lake house would change hands would undoubtedly be affected.by

the condition that the structure could not remain affixed.to.its

underlying land indefinitely.

Petitioners offered no evidence

concerning the impact-of this condition.

'Respondent offered the

testimony of two experts in the field of house moving regarding

the price at which the lake house would likely sell if required

to be moved from its existing site.

Both house moving experts

conclude-d that the likelihood of a buyer's purchasing the lake

house to move it from the site. was virtually nil, because the

characte$ístics of the la e house and its site rendered a

relocation ~of the structure infeasible.'

We are persuaded that

the expert testimony concerning the market for the lake house as

- 38 -

a,structure to-be moved provides a reasonable basis for

estimating the impact on fair market value of the ,severance :of

the lake house from its underlying land.

We find that the

severance wrendered the lake house virtually worthless.

As for,the impact on the lake house's fair market value of

the remaining conditions petitioners imposed incident, to thesdonation (the restriction of use to firefighter and police

training.exercises and the condition that, the structure be

promptly,burned down), there is insufficient.evidence in the

record to support anything beyond speculation.

We are persuaded,

however, that the impact on fair market value of the foregoing

encumbrances, would be adverse rather than beneficial.

Finally,

as for.the-possibilityythat.the lake house as encumbered by

petitioners:srestrictions had -a fair market value equal to its

salvage value, -respondent's expert Mr. -George provided expert

testimony- to-the effect that the lake-house's -salvage value was

zero.

On ,the basis.of his examination of photographs and a video

of the lake house, and a description of its features, Mr. George

opined.that the value of any.salvageable materials would be

offsetchy the costs of removing them."

As a consequence, we are

"Respondent's other expert, Ms. Solko, speculated on the

lake house's salvage value on the assumption that certain

features might exist,. By contrast, Mr. George examined Mr.

Larkin's appraisal of the'lake house, which included photographs

and a description of its, features, and the VFD's.videotape of its

training e ercises, which depicts the lake house in greater

(continued...)

- 39 -

persuaded by the evidence that the lake house had no salvage

value.

4 .a

Conc lus ion

On the basis of the entire record, we conclude that

respondent prevails on his quid pro quo argument.

We are

persuaded by the evidence that petitioners anticipated a

substantial benefit in exchange-for their donation of the lake

house,

in the form of demolition services worth approximately i

$10,000, and that the fair market value of the lake house as

donated did not exceed that figure.s

Petitioners have failed to

prove the lakerhouse had a fair market value exceeding $10,000,

be'cause the expert -testimony they offered to prove value failed

to account for substantial conditions and restrictions imposed on

the property incident-to its-donation, including in particular,

its severance from the únderlying land.

The remaining evidence

supports a'conclusion that- the fair market value of the lake

house as encumbered at the time of the donation was de minimis.

The -lake house could not remain on the land on which it was

sited, could not be used for residential purposes, yet had no

value as a structure to be moved or any salvage value.

-We

therefore hold that petitioners are not entitled to any

charitable contribution deduction for the donation of the lake

I

a(...continued)

detail than the photographs in the Larkin appraisal.-

- 40 -

house because they have not satisfied the Am. Bar Endowment test:

they have not shown that the market value of the property they

donated exceeded the market value of the benefit they received in

exchange."

, _

B.. Accuracy-Related Penalty

Respondent determined that-petitioners are liable for an

accuracy-related penalty under section-6662(a) and amended his

answer to assert-petitioners' liability for a penalty under

section 6662 (h)'for.a gross valuation misstatement.

Respondent

argues on brief in support of the section 6662(a) penalty that

petitioners have an underpayment that is attributable to

negligence or disregard of rules or regulations under section

6662(b) (1), to a substantial understatement of income tax under

section 6662(b) (2), and/or.to a substantial valuation

misstatement under section 6662(b) (3) that is augmented by

section 6662(h) because it is a gross valuation misstatement.

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

"Given our conclusion that petitioners' charitable

contribution deduction is precluded under United States v. Am.

Bar Endowment,

477 U.S.

105

(1986), we need not decide

respondent's alternate contentions that the deduction~is

disallowed pursuant to sec. 170(f) (3) or on account of the

worthlessness of the lake property at the time of the donation.

- 41 respect to such portion.

This reasonable causë exception

generally does not apply in the case of a substantial or-gross

valuation overstatement with respect to property for which a charitable contribution deduction was claimed under section 170

unless the claimed value of the property was based on a

a

"qualified appraisal" by a "qualified appraiser" and the taxpayer

made a good faith investigation of the value of the contributed

property.

See sec. 6664(c) (2) and (3)."

The determination of whether a taxpayer acted with

reasonable cause and in good faith "is made on a case-by,base

basis, taking ïnto account all'pertinent facts and

circumstances."

Sec. 1.6664-4(b) (1), Income Tax Regs.

Petitioners.complied with all reporting requirements, maintained

adequate books and records, and fully disclosed the nature of-the

charitable contribution deduction in dispute on their return.

The legal issues raised by their deduction claim were not

settled.

a

Importantly, in Scharf v. scommissioner, T.C. Memo 1973-

265, this Court held that a charitable contribution deduction was

available for the donation of a building (albeit partially

destroyed) to a volunteer fire department for demolition in

firefighter training exercises.

While the validity of the test

"Pars. (2) and (3) of sec. 6664(c) as in effect for 1998

were redesignated pars. (3) and (4), respectively, by the Health

Care and Education Reconciliation Act of 2010, Pub. L. 111-152;

sec.

1409(c) (1) (A),

124 Stat.

1069.

- 42 -

applied<in Scharf may have been subject to doubt after the

Supreme Court's refinement and clarification of the quid pro quo

analysis-of charitable;contribution deductions in United States

v. Am. Bar -Endowment, 477 U.S. 105 (1986)., no Federal court had

reconsidered or questioned the Scharf holding since the Supreme

Court's examination of the issue in 1986.

The parties apparently

do not-dispute that the deduction petitioners claimed on their

return was based on a qualified appraisal by a qualified,

appraiser.

While petitioners (like their- appraiser) overlooked

the impaàt on the lake house's value of the restrictions attached

to the property when it was donated, a reasonable argument could

be made that the house had value--which supports a finding that

petitioner's.investigation of the value of the contributed

property was at least in' good faith.

See sec. 6664(c) (2) (B).

On

balance, rgiven'all the facts and circumstances, including the

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

reasonable cause and in good faith.

Accordingly, they are not

liable for any penalty.under-section 6662.

To reflect the foregoing,e

An appropriate decision

will be entered.