Theodore R. Rolfs and Julia A. Gallagher v. Commissioner , 135 T.C. 471 ( 2010 )

THEODORE R. ROLFS AND JULIA A. GALLAGER, PETITIONERS
v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT
Docket No. 9377–04. Filed November 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
471
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472 135 UNITED STATES TAX COURT REPORTS (471)
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 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 con-
tribution within the meaning of sec. 170(c), I.R.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
accuracy-related penalty equal to 20 percent of the under-
payment under section 6662(a). 1 By their amended petition,
petitioners aver that they are entitled to a charitable con-
tribution deduction of $235,350, rather than the $76,000
claimed on their return, as a result of a donation of a house
to a local volunteer fire department, resulting in an overpay-
ment of $39,672 for 1998. By answer to the amended peti-
tion, respondent asserts that petitioners are liable for a pen-
alty under section 6662(h) for a gross valuation
misstatement. The issues for decision are: (1) Whether peti-
tioners are entitled to a deduction for a charitable contribu-
tion under section 170(a) in connection with their donation of
a house to a local volunteer fire department for training exer-
cises 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
1 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.
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(471) ROLFS v. COMMISSIONER 473
by this reference. Theodore R. Rolfs and Julia A. Gallagher
(hereafter, petitioners, and Theodore R. Rolfs alone, peti-
tioner) 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 Oak-
land Road in the Village of Chenequa, Wisconsin (lake prop-
erty). The lake property was on Pine Lake in an area known
locally as ‘‘lake country’’—a desirable residential area where
lakefront houses 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.
At the time of purchase there were several improvements
on the lake property including a house (lake house), a
detached garage, a boathouse, and a well and septic system.
The lake house, originally built in approximately 1900, was
a 11⁄2-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, Wis-
consin, assessed the lake property at $460,100, allocating
$323,000 to the land and $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 her specifications as her resi-
dence 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.
Petitioners had a cordial relationship with Mrs. Gallagher
during the periods relevant to this case.
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474 135 UNITED STATES TAX COURT REPORTS (471)
Demolition of the Lake House
Sometime in the latter part of 1997 petitioner determined
that it would cost $10,000 to $15,000 to demolish the lake
house and remove the debris. Around the same time, peti-
tioner 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. Peti-
tioner 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 5192[2]
Oakland Road in the Village of Chenequa to the Fire and Police depart-
ments of the Village for training and eventually demolition. This 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 fur-
ther 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 that
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 exer-
cise. On February 18, 1998, the VFD conducted an initial
training exercise at the lake house. On February 21, 1998, 11
2 The letter contains a typographical error in that the correct address of the lake property is
5892 Oakland Road.
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(471) ROLFS v. COMMISSIONER 475
days after petitioner’s letter donating the lake house, the VFD
conducted a second training exercise and burned the struc-
ture 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 peti-
tioner which stated:
This letter is in receipt of your donation to the Village of Chenequa and
its Fire Department in the amount of $1,000, check #4820 and the dona-
tion of the use of your home at 5892 Oakland Road for training purposes.
The home at 5892 Oakland Road was used during the month of February
for training by the Critical Incident Team and the Police Department 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 peti-
tioners (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 of the lake house, petitioners entered into a con-
tract to have a new residence constructed on the lake prop-
erty 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’’ signed by Chief Wieczorek. Petitioners
claimed on Schedule A, Itemized Deductions, a deduction of
$12,626 attributable to charitable contributions by cash or
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476 135 UNITED STATES TAX COURT REPORTS (471)
check 3 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 summary
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 docu-
mentation that a taxpayer exercising ordinary care and pru-
dence in claiming a charitable contribution deduction would
normally keep, and they maintained all records required
under the Internal Revenue Code. The parties have stipu-
lated that petitioners cooperated timely with all of respond-
ent’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.
Respondent issued to petitioners a notice of deficiency for
1998 disallowing the charitable contribution deduction of
$76,000 claimed with respect to the donation of the lake
house. The notice of deficiency stated in pertinent part:
On Schedule A, line 18 of your return for the 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 increased by
$76,000.
A schedule of examination adjustments attached to the notice
of deficiency shows that respondent actually determined that
petitioners were entitled to a deduction for charitable con-
tributions totaling $20,258 for 1998 (rather than the $7,632
referred to in the statement quoted above).
3 The record does not include an itemization of this amount, and it is unclear whether peti-
tioners claimed a deduction for the $1,000 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.
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(471) ROLFS v. COMMISSIONER 477
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 the averments summarized above and asserting
that, as an alternative to the determination in the notice of
deficiency, petitioners were liable for a penalty for a gross
valuation misstatement equal to 40 percent of the under-
payment 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 lake property was then owned
by Mrs. Gallagher. That same day, respondent’s counsel con-
tacted 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
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.
4 Rule 72(a)(2) allows any party to serve on any other party a request to permit entry upon
designated land or other property in the possession or control of the other party.
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478 135 UNITED STATES TAX COURT REPORTS (471)
Larkin is a 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 original report Mr. Larkin used the so-called before
and after approach to determine the value of the lake house;
that is, treating the fair 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 house. More specifically,
Mr. Larkin determined the value of the lake property with
all improvements to be $675,000, on the basis of a compari-
son to the direct sales of comparable properties. He then sub-
tracted from this amount: (i) The value of the land (esti-
mated at $550,000 on the basis of direct sales of comparable
vacant land), (ii) the value of the structural 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 sub-
tracting the value of the land and improvements other than
the lake house (totaling $599,000) from the ‘‘direct 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. Mr. Larkin concluded that this
market was not relevant to the valuation exercise he per-
formed 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’’. Mr. George has contracted to move numerous
houses throughout Wisconsin, and he is qualified to give an
5 There apparently is no dispute that this valuation would remain the same if the valuation
date were changed to Feb. 10, 1998—the date that petitioners donated the lake house to the
VFD.
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(471) ROLFS v. COMMISSIONER 479
opinion as to the value of houses that are sold for the pur-
pose 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 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 pur-
chase 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 opinion that any buyer would
pay no more than a nominal ‘‘courtesy’’ amount of $100 to
$1,000 for the structure as of February 10, 1998, essentially
for the purpose of ensuring that there was sufficient consid-
eration to render the purchase contract binding. Mr. George
also opined that any salvage value attributable to the struc-
ture (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 pur-
pose of moving them to other locations.
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 con-
cluded 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.
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480 135 UNITED STATES TAX COURT REPORTS (471)
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 170(c)(1) defines the
term ‘‘charitable contribution’’ to include a contribution or
gift to or for the use of, inter alia, a political subdivision of
a State, but only if the gift is made for exclusively public pur-
poses. 6
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 services. 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.’’ * * * [Her-
nandez v. Commissioner, 490 U.S. 680, 690 (1989).]
Thus, ‘‘A payment of money generally cannot constitute a
charitable contribution if the contributor expects a substan-
tial benefit in return.’’ United States v. Am. Bar Endowment,
477 U.S. 105, 116 (1986); see also Transam. Corp. v. United
States, 902 F.2d 1540, 1543–1546 (Fed. Cir. 1990); Singer Co.
v. United States, 196 Ct. Cl. 90, 449 F.2d 413 (1971).
The Supreme Court has further instructed that in
ascertaining whether a given payment or property transfer
was made with the expectation of any 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 taxpayers. Her-
nandez 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
6 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).
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(471) ROLFS v. COMMISSIONER 481
having reasonable knowledge of the relevant facts.’’ Sec.
1.170A–1(c)(2), Income Tax Regs. Restrictions on the prop-
erty’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, 33 T.C. 223, 225
(1959), affd. 238 F.2d 945 (2d Cir. 1960); Deukmejian v.
Commissioner, T.C. Memo. 1981–24; Dresser v. Commis-
sioner, T.C. Memo. 1956–54; see also Rev. Rul. 85–99, 1985–
2 C.B. 83.
II. 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 v.
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.
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 peti-
tioners received a benefit in exchange for their donation)
because this argument 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 that they donated property
with a fair market value of $76,000 (according to a qualified
appraisal) which they have shown should be valued at its
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482 135 UNITED STATES TAX COURT REPORTS (471)
reproduction cost of $235,350 and that they received only an
‘‘incidental benefit’’ in return. 7 Petitioners contend that sec-
tion 170(f)(3)(A) is inapplicable because in transferring the
lake house to the VFD with the right to demolish it, they
transferred their entire interest in the property.
III. Section 7491(a) Shift in the Burden of Proof
We consider as a preliminary matter petitioners’ conten-
tion that the burden of proof 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. Welch v.
Helvering, 290 U.S. 111, 115 (1933). Rule 142(a)(1) sets forth
the general rule that the burden of proof shall be on the tax-
payer, 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 any fac-
tual 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 require-
ments of section 7491(a) and the burden of proof as to all fac-
tual issues affecting the deficiency in their tax should be
shifted to respondent. Respondent contends that because he
was denied access to the lake property incident to his trial
preparation, petitioners have not satisfied the section
7491(a)(2)(B) requirement that they cooperate with ‘‘reason-
able requests by the Secretary for witnesses, information,
documents, meetings, and interviews’’. Specifically,
respondent argues, petitioners have failed to show that they
took reasonable steps to secure Mrs. Gallagher’s permission
for respondent’s expert witness to view the lake property.
Petitioners contend that they had no control over Mrs. Galla-
gher and that in any event section 7491(a)(2)(B) imposes a
7A $235,350 deduction would give rise to an overpayment for 1998.
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(471) ROLFS v. COMMISSIONER 483
cooperation requirement on taxpayers only during the exam-
ination process.
A taxpayer bears the burden of proving that he or she has
met the requirements of section 7491(a). See Richardson v.
Commissioner, T.C. Memo. 2005–143; H. Conf. Rept. 105–
599, at 239 (1998), 1998–3 C.B. 747, 993. The legislative his-
tory 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, access to and inspection of
witnesses, information, and documents within the control of the taxpayer,
as reasonably requested by the Secretary). Cooperation also includes pro-
viding reasonable assistance to the Secretary in obtaining access to and
inspection of witnesses, information, or documents not within the control
of the taxpayer (including any witnesses, information, or documents
located in foreign countries). * * * [H. Conf. Rept. 105–599, supra at 240,
1998–3 C.B. at 994.]
We first observe that petitioners’ contention that the sec-
tion 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 coopera-
tion 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.
& Engg., Inc. v. Commissioner, T.C. Memo. 2008–217; Krohn
v. Commissioner, T.C. Memo. 2005–145; Lopez v. Commis-
sioner, T.C. Memo. 2003–142, affd. on this issue 116 Fed.
Appx. 546 (5th Cir. 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 respond-
ent’s counsel informed petitioners’ counsel that Mrs. Galla-
gher 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
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484 135 UNITED STATES TAX COURT REPORTS (471)
‘‘providing 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. 8
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) is inapplicable. Since the condition of the lake prop-
erty permeates all factual issues in this 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 Endowment, 477 U.S. 105 (1986), to the effect
that petitioners are not entitled to any charitable contribu-
tion deduction because the fair market value of the property
they donated did not exceed the fair market value of the ben-
efit 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 his defense against the issue requires the presen-
tation 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); Fox Chevrolet, Inc. v. Commissioner,
76 T.C. 708, 733–736 (1981); Estate of Horvath v. Commis-
sioner, 59 T.C. 551, 555–557 (1973). However, we are not per-
suaded that petitioners were unfairly surprised or prejudiced
8 Although petitioners’ counsel suggested to the Court that Mrs. Gallagher’s previous experi-
ence 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. Com-
missioner, 44 T.C. 323, 327 (1965).
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(471) ROLFS v. COMMISSIONER 485
by respondent’s quid pro quo argument. Starting with the
petition and continuing through their opening brief, 9 peti-
tioners 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 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 taxpayer’s
receipt of a benefit from the building’s demolition neces-
sitated a quid pro quo analysis, this Court observed that the
circumstances presented ‘‘an exceedingly close question’’ but
upheld the deduction, reasoning 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 sur-
prised when respondent further developed the quid pro quo
theory on brief, including analyzing post-Scharf develop-
ments in the caselaw such as the Supreme Court’s decision
in United States v. Am. Bar Endowment, supra. Given peti-
tioners’ 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 close 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 prejudiced by
respondent’s quid pro quo argument. 10 See Smalley v.
Commissioner, 116 T.C. 450, 456–457 (2001); Ware v.
Commissioner, 92 T.C. 1267, 1268 (1989), affd. 906 F.2d 62(2d Cir. 1990); Pagel, Inc. v. Commissioner, 91 T.C. 200, 211
(1988), affd. 905 F.2d 1190 (8th Cir. 1990). In addition,
Scharf sustained a charitable contribution deduction for the
9 Petitioners raised their ‘‘new matter’’ objection in their answering brief, arguing that re-
spondent raised the quid pro quo argument for the first time in his opening brief.
10 Petitioners also contend that if respondent is allowed to raise the quid pro quo argument,
he should bear the burden 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.
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486 135 UNITED STATES TAX COURT REPORTS (471)
donation of a building to be burned down by a volunteer fire
department, whereas respondent argues that such a deduc-
tion is precluded in petitioners’ case under Am. Bar Endow-
ment. Since petitioners contend that Scharf supports a deci-
sion in their favor, it is appropriate and important to con-
sider the application of a quid pro quo 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 substan-
tial benefit in exchange for the donation; namely, the demoli-
tion of the lake house on a site where they intended to
rebuild. Respondent contends that the value of the demoli-
tion services received exceeded the value of the property peti-
tioners 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 v. Am. Bar Endowment, supra at 116, the
Supreme Court set forth the principle that a payment of
money generally cannot constitute a charitable contribution
if the contributor expects a substantial benefit in return.
‘‘The sine qua non of a charitable contribution is a transfer
of 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 ‘‘ ‘dual character’ of a pur-
chase and a contribution’’ if the payment exceeds the value
of the benefit received in return. Id. at 117. The Court con-
sequently 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 deduct-
ible 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. See sec. 1.170A–1(h),
Income Tax Regs.; 11 T.D. 8690, 1997–1 C.B. 68. The test also
11 Sec. 1.170A–1(h)(1), Income Tax Regs., states:
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(471) ROLFS v. COMMISSIONER 487
applies where payment is made in property other than
money. See Transam. Corp. v. United States, 902 F.2d at
1543–1546.
Petitioner had decided to demolish the lake house and con-
struct 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 fea-
tures 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: demo-
lition of the lake house. On similar facts, this Court decided
in a Memorandum Opinion, Scharf v. Commissioner, T.C.
Memo. 1973–265, that the taxpayer was entitled to a chari-
table contribution deduction for the donation of a structure,
equal to its value for insurance purposes. We reasoned in
Scharf as follows:
we conclude * * * that the benefit flowing back to petitioner, consisting
of clearer land, was far less than the greater benefit flowing to the volun-
teer fire department’s training and equipment testing operations. * * *
We think the petitioner benefited only incidentally from the demolition of
the building and that the community was primarily benefited in its fire
control and 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. 12 Instead, we
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 * * * is 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 serv-
ices.
12 We note also that the entirely 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. Con-
Continued
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488 135 UNITED STATES TAX COURT REPORTS (471)
must consider whether the value of the lake house as
donated exceeded the value of the demolition services peti-
tioners received. 13
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 $10,000 (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 dem-
onstrate 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.
We reject this contention. First, the documentary evidence
tends to undermine the claim that the construction contract
for the new residence included $10,000 or more for exca-
vation 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, creating an inference
that the contract price did not cover any significant debris or
foundation removal services. Second, two experts, plus
sequently, Scharf ’s use of the ‘‘insurance loss’’ value (less insurance proceeds received) to meas-
ure the value of the structure donated offers no basis for valuing the structure here, where no
precontribution casualty was involved.
13 Because, as discussed infra, we conclude that the value of the lake house did not exceed
the value of the demolition 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 mak-
ing a gift.
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(471) ROLFS v. COMMISSIONER 489
whomever petitioner consulted, estimated the cost of demoli-
tion 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 the cost 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 dona-
tion.
b. Value of the Property Donated
Because petitioners received a substantial benefit in
exchange for their donation of the lake house, their entitle-
ment 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 the demolition
services. As noted, the lake house’s value for this purpose is
its fair market value at the time of the donation, as meas-
ured by the willing buyer/willing seller standard in section
1.170A–1(c)(2), Income Tax Regs. Of particular importance
here, the fair market value of contributed property must take
into account any restrictions or conditions limiting the prop-
erty’s marketability on the date of the contribution. See
Cooley v. Commissioner, 33 T.C. at 225 (rejecting retail
market value as fair market value of 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 to residen-
tial). The restrictions or conditions that must be taken into
account include those imposed by the donor incident to the
contribution of the property. See Deukmejian v. Commis-
sioner, supra.
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 ‘‘construc-
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490 135 UNITED STATES TAX COURT REPORTS (471)
tive severance’’ of the structure from the land, recognized
under Wisconsin law, even though the structure remained
affixed to the land. See Fitzgerald v. Anderson, 51 N.W. 554(Wis. 1892); Smith v. Waggoner, 6 N.W. 568 (Wis. 1880); 2
Tiffany Real Property, secs. 623–624 (3d ed. 1939). 14 By
transferring the lake house to the VFD without the under-
lying land, however, petitioners created a substantial restric-
tion or condition on the property’s marketability; namely, the
lake house could not remain indefinitely on the land upon
which it was sited.
Petitioners attached two additional restrictions or condi-
tions on the lake house incident to its donation; namely, the
permissible use of the lake house was restricted to 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 be used
by the VFD ‘‘for training and eventually demolition’’, and VFD
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. 15 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 opined that the lake house had a
‘‘contributory value’’ of $76,000 on the basis of a ‘‘before and
14 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 ordi-
narily must be in a writing in a form sufficient for a conveyance of land. 2 Tiffany Real Prop-
erty, 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. Stat. 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 con-
veying the lake house to the VFD for that purpose.
15 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.
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(471) ROLFS v. COMMISSIONER 491
after’’ approach to value, which treated the value of the
donated lake house as equal 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. While 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. See
Symington v. Commissioner, supra at 895. However, we are
not persuaded that any diminution in the value of the lake
property resulting from the removal of the lake house rep-
resents an accurate measure of the value of the lake house
as donated to the VFD. Petitioners did not donate an ease-
ment—i.e., an intangible property right permanently encum-
bering the lake property; they donated a structure, severed
from the lake property, with substantial restrictions and
conditions on its use. 16 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. Commis-
sioner, 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
16 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. How-
ever, neither petitioners nor their expert addressed this element of the donation or suggested
it had any value.
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492 135 UNITED STATES TAX COURT REPORTS (471)
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),
estimated on the basis of sales of comparable residential
properties (i.e., $675,000), and subtracting the fair market
value of the land (also estimated on the basis of sales of com-
parable 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 houses
could remain on their sites indefinitely and were available for
residential use, the ‘‘contributory value’’ for the 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 sever-
ance from the underlying land, the prohibition on residential
use, and the condition that it be burned down promptly. Con-
sequently, 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 reproduction cost as estimated by Mr. Larkin.
Petitioners offer no expert testimony in support of this propo-
sition. 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 was ‘‘unique’’ and was ‘‘special
use’’ property in the hands of the donee, reproduction cost is
the appropriate measure of its value. 17
17 In their amended petition, petitioners 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 ‘‘re-
production’’ and ‘‘replacement’’ cost as synonymous terms. In the circumstances, we find it un-
necessary to consider any differences in the two concepts.
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(471) ROLFS v. COMMISSIONER 493
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 Wis. Bankshares Corp., 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, resi-
dence for its area; by their own admission, petitioners con-
templated 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 cir-
cumstances of this case lend no support to the use of repro-
duction cost, an approach that also fails to account for the
conditions petitioners placed on the lake house incident to
the donation.
Instead, the circumstances of this case 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 Cooley v. Commissioner, supra;
Deukmejian v. Commissioner, supra; Dresser v. Commis-
sioner, supra; see also Rev. Rul. 85–99, supra. ‘‘[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 concluded that the likelihood
of a buyer’s purchasing the lake house to move it from the
site was virtually nil, because the characteristics of the lake
house and its site rendered a relocation of the structure
infeasible. We are persuaded that the expert testimony con-
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494 135 UNITED STATES TAX COURT REPORTS (471)
cerning the market for the lake house as 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 rendered 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 the
donation (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 per-
suaded, however, that the impact on fair market value of the
foregoing encumbrances would be adverse rather than bene-
ficial. Finally, as for the possibility that the lake house as
encumbered by petitioners’ restrictions 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 examina-
tion 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 offset by the costs of
removing them. 18 As a consequence, we are persuaded by
the evidence that the lake house had no salvage value.
4. Conclusion
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 approxi-
mately $10,000, and that the fair market value of the lake
house as donated did not exceed that figure. Petitioners have
failed to prove the lake house had a fair market value
exceeding $10,000, because the expert testimony they offered
to prove value failed to account for substantial conditions
and restrictions imposed on the property incident to its dona-
tion, including in particular its severance from the under-
18 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 exercises, which depicts the lake house in greater detail than
the photographs in the Larkin appraisal.
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(471) ROLFS v. COMMISSIONER 495
lying 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 struc-
ture to be moved or any salvage value. We therefore hold
that petitioners are not entitled to any charitable contribu-
tion deduction for the donation of the lake house because
they have not satisfied the Am. Bar Endowment test:
they have not shown that the market value of the prop-
erty they donated exceeded the market value of the benefit
they received in exchange. 19
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 aug-
mented 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 respect to such portion. This reasonable cause 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 ‘‘qualified appraisal’’ by a ‘‘qualified appraiser’’ and the tax-
19 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 al-
ternate 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.
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496 135 UNITED STATES TAX COURT REPORTS (471)
payer made a good faith investigation of the value of the
contributed property. See sec. 6664(c)(2) and (3). 20
The determination of whether a taxpayer acted with
reasonable cause and in good faith ‘‘is made on a case-by-case
basis, taking into account all pertinent facts and cir-
cumstances.’’ Sec. 1.6664–4(b)(1), Income Tax Regs. Peti-
tioners 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. Importantly, in Scharf v. Commissioner, T.C.
Memo. 1973–265, this Court held that a charitable contribu-
tion 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 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 peti-
tioners (like their appraiser) overlooked the impact 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 prop-
erty was at least in good faith. See sec. 6664(c)(2)(B). On bal-
ance, 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. Accordingly, they
are not liable for any penalty under section 6662.
20 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.
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(471) ROLFS v. COMMISSIONER 497
To reflect the foregoing,
An appropriate decision will be entered.
f
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