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

UPEN G. PATEL AND AVANTI D. PATEL, PETITIONERS
v. COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT
Docket No. 11694–09. Filed June 27, 2012.
At the end of May 2006, Ps purchased property in Vienna,
Virginia (Vienna property), with the intention to demolish the
house situated thereon (house) and construct a new one on
the site. Their realtor told them about the Fairfax County
Fire and Rescue Department (FCFRD) Acquired Structures
Program, where a property owner allows FCFRD to conduct
live fire training exercises on his or her property. As part of
the exercises, FCFRD destroys, by burning, the designated
building on the owner’s property. Within a few weeks of pur-
chasing the Vienna property, Ps contacted FCFRD and
obtained information about the requirements for participating
in the program. After Ps obtained a demolition permit and
completed all of the other requirements, they executed docu-
ments granting FCFRD the right to conduct training exercises
on the Vienna property and to destroy the house by burning
during the exercises. During October 2006, FCFRD, along
with six other fire departments, used the Vienna property to
conduct live fire training exercises, during which the house
was destroyed. On their 2006 Federal income tax return, Ps
reported a noncash charitable contribution of $339,504 on
Schedule A, Itemized Deductions, for the donation of the
house to FCFRD. R disallowed the deduction Ps claimed for
2006 and asserts that Ps’ donation to FCFRD was a contribu-
tion of a partial interest in property, a deduction for which is
denied by I.R.C. sec. 170(f)(3). Held: A landowner’s grant to
a fire department of the right to conduct training exercises on
his property and destroy a building thereon during the exer-
cises is a mere license that permits the fire department to do
an act which without such a grant would be illegal and which
conveys no interest in the property to the fire department.
Held, further, taxpayers who grant a fire department the right
to conduct training exercises on their property and destroy a
building thereon during the exercises do not donate any
ownership interest in property to the fire department, and
I.R.C. sec. 170(f)(3) denies them a charitable contribution
deduction for the donation of the use of their property regard-
less of the value of that use. Held, further, Ps donated only
395
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396 138 UNITED STATES TAX COURT REPORTS (395)
the use of the Vienna property and the house to FCFRD, a
partial interest in the property, and pursuant to I.R.C. sec.
170(f)(3) are not entitled to the $92,865 noncash charitable
contribution deduction claimed on their 2006 income tax
return under I.R.C. sec. 170(a). Held, further, Ps acted with
reasonable cause and in good faith and are accordingly not
liable for any accuracy-related penalty under I.R.C. sec.
6662(a) or (h).
Upen G. Patel and Avanti D. Patel, pro sese.
Erin R. Hines, for respondent.
OPINION
DAWSON, Judge: Petitioners petitioned the Court for
redetermination of a deficiency of $32,672 in their Federal
income tax for 2006 and an accuracy-related penalty of
$6,534.40 under section 6662. 1 This case is before us on
respondent’s motion for partial summary judgment pursuant
to Rule 121 filed on July 19, 2011. Petitioners object to the
motion and filed a response. Summary judgment may be
granted with respect to all or any part of the legal issues in
controversy ‘‘if the pleadings, answers to interrogatories,
depositions, admissions, and any other acceptable materials,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that a decision may
be rendered as a matter of law.’’ Rule 121(b); Sundstrand
Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff ’d, 17
F.3d 965 (7th Cir. 1994); Zaentz v. Commissioner, 90 T.C.
753, 754 (1988). The moving party bears the burden of
proving that there is no genuine issue of material fact, and
factual inferences will be read in a manner most favorable to
the party opposing summary judgment. Dahlstrom v.
Commissioner, 85 T.C. 812, 821 (1985); Jacklin v. Commis-
sioner, 79 T.C. 340, 344 (1982).
Although the parties have not stipulated any of the facts
in this case, they agree there are no disputes as to genuine
issues of material facts. On the basis of our review of the
record, we are satisfied that there is no genuine issue as to
any material fact and that judgment may be rendered as a
matter of law.
1 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect
for the year in issue as amended, and all Rule references are to the Tax Court Rules of Practice
and Procedure.
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(395) PATEL v. COMMISSIONER 397
After concessions by respondent, 2 the issues for decision
are (1) whether petitioners are entitled to the noncash chari-
table contribution deduction under section 170(a) in connec-
tion with their granting the Fairfax County Fire and Rescue
Department (FCFRD) the right to conduct training exercises
on their property and demolish the house thereon during the
exercises, and (2) whether petitioners are liable for the
accuracy-related penalty under section 6662.
Background
Petitioners resided in Virginia when their petition was
filed. In 2006 petitioners resided in Haymarket, Virginia. On
May 31, 2006, they purchased property in Vienna, Virginia
(Vienna property), for $625,000 and acquired the fee simple
interest therein. The Vienna property consisted of a 1,221-
square-foot brick house (house) situated on a 22,786-square-
foot lot. Petitioners purchased the Vienna property with the
intent to demolish the house, which had been built in 1960,
and build a new one to their specifications. Petitioners never
resided in the house, nor did they reside on any part of the
Vienna property during 2006. In May 2006, before closing on
the Vienna property, petitioners engaged Atlantic Coast
Inspection Services, LLC, to complete a home inspection of
the house that included an asbestos report. They also
obtained an appraisal dated May 14, 2006, from William
Fluharty of Reliable Appraisal Service. Mr. Fluharty valued
the entire property (including the house and land) at
$625,000. Petitioners subsequently obtained a second
appraisal from Mr. Fluharty, dated September 1, 2006, that
valued the entire property at $660,000.
Petitioners learned of the FCFRD Acquired Structures Pro-
gram from the realtor who represented them in their pur-
chase of the Vienna property. The program was designed to
provide ‘‘real life’’ training for emergency personnel by using
structures for training exercises. Under the program the
property owner allows the FCFRD to conduct live fire training
exercises on his or her property. As part of the exercises,
FCFRD destroys, by burning, the designated building on the
2 Respondent has conceded that petitioners are entitled to deductions claimed on Schedule A,
Itemized Deductions, for taxes of $18,074 and mortgage interest of $37,428 for 2006. These
amounts will be allowed and reflected in the Rule 155 computations.
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398 138 UNITED STATES TAX COURT REPORTS (395)
owner’s property. In June 2006, petitioners contacted the
FCFRD about its program. On June 12, 2006, FCFRD acknowl-
edged petitioners’ interest in participating in the program
and sent them a Standard Property Owner Package.
In order to participate in the program, petitioners were
required to (1) permit FCFRD to inspect the house to deter-
mine its training value; (2) have the house inspected and
remove any asbestos found as a result of such inspection; (3)
obtain a demolition permit; (4) sign certificates of authoriza-
tion and temporary release forms; (5) disconnect and/or
remove any utilities from the house; and (6) provide all
required documentation to FCFRD at least two weeks before
the planned demolition.
Petitioners hired MW Construction in Alexandria, Virginia,
to construct a new house on the Vienna property after the
old house was demolished. As part of the contract, MW
Construction was to remove the debris from the burning of
the house after the fire training exercises were completed.
On or about July 20, 2006, petitioners requested a demoli-
tion permit for the Vienna property from Fairfax County.
The application for the permit required petitioners to provide
the name, address, telephone number, State contractor’s
license number, and Fairfax County business license number
of the licensed contractor that would perform the work. 3 On
September 28, 2006, Fairfax County issued a demolition
permit to ‘‘Demolish Entire Structure’’ (permit No. 62010212)
to Upen Patel showing MW Construction as the contractor.
Because the May 2006 home inspection report indicated
that asbestos was present in the house in the basement floor
tile and baseboard, petitioners hired Young Environmental to
remove the asbestos. Young Environmental removed the
materials containing asbestos on or about July 24, 2006, and
sent a letter of completion to petitioners, along with an
invoice for its services.
On August 25, 2006, petitioners obtained a construction
mortgage loan of $943,575 from Suntrust Mortgage, Inc.
They used a portion of the loan to pay off a mortgage from
3 Under Virginia law contracting without the proper license or certificate to remove improve-
ments on real property owned, controlled, or leased by another person is a class 1 misdemeanor
and a violation of the Virginia Consumer Protection Act. Va. Code Ann. sec. 54.1–1115(A)(1),
(B) (2009); see Tuggle Masonry, Inc. v. Dailey, 2010 WL 7372379, at *1 (Va. Cir. Ct. 2010).
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(395) PATEL v. COMMISSIONER 399
Wells Fargo Bank, N.A., and a home equity loan from
National City.
On September 14, 2006, petitioners executed two forms
required by FCFRD for participation in the program: (1) the
Live Fire Training Exercise Certificate of Authorization Form
(authorization form), and (2) the Certificate of Authorization/
Temporary Liability Release Form (release form). On the
authorization form petitioners certified that they were the
true owners of the Vienna property and granted FCFRD
permission to use the Vienna property as follows:
This is to certify that: UPEN PATEL & AVANTI PATEL * * * is the true
owner or authorized agent of the property located at (address): * * * [the
Vienna property address] * * *.
Permission is herby [sic] granted to the Fairfax County Fire and Rescue
Department to utilize for training such building(s) designated on the above
describe property. In return, Fairfax County agrees not to bring suit to
exercise its right of subrogation under Virginia Code 65.1–41 (Repl. Vol.
1980) against the property owner and/or his/her representative for any per-
sonal injury to a Fairfax County Career or Volunteer Firefighter during
the training period. Fairfax County further agrees not to bring suit for
damage to any self-insured equipment during the training session.
Signed: Upen Patel and Avanti Patel Date: 9/14/06
Property Owner or Authorized Representative
Signed: llllllllllllllllllllll Date: llll
Fairfax County Representative
On the release form petitioners certified that they were the
owners of the Vienna property and that they had obtained a
permit to demolish the house on the Vienna property and
granted FCFRD permission to use the house for training as
follows:
This is to certify that I, UPEN PATEL & AVANTI PATEL * * * am the
true owner or authorized agent of the owner of the property located at
(address): * * * [the Vienna property address] * * *.
I further certify that a Demolition Permit has been secured from the
Department of Environmental Management, Permit Branch, and is
described as Permit # 62010212 issued on (date) 9/2/2006, and that all
public utilities have been removed or disconnected from the above
described property.
I herby [sic] grant permission to the Fairfax County Fire and Rescue
Department to conduct a training exercise on the above premises and to
destroy, by burning, such building(s) as designed on the above described
property. I agree to remove any remaining hazardous conditions including
but not limited to open pits, basements and wells, standing walls and
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400 138 UNITED STATES TAX COURT REPORTS (395)
chimney, and burned and unburned debris after the completion of the
training exercise. I understand that the designated building(s) may not be
destroyed or may only be partially destroyed by the Fairfax County Fire
and Rescue Department if circumstances beyond the control of the Fairfax
County Fire and Rescue Department should arise.
It is agreed that I will not hold Fairfax County or the Fairfax County
Fire and Rescue Department or any of its officers, agents, or employees
liable for any damage to the above described property. In return, Fairfax
County agrees not to bring suit to exercise its right or subrogation under
Virginia Code 65.1–41 (1987) against me and/or my representative for any
personal injury to a Fairfax County Career or Volunteer Firefighter
incurred during the training exercise on the site. Fairfax County further
agrees not to bring suit for damage to any self-insured equipment incurred
during the training exercise on the site.
Signed: Upen Patel and Avanti Patel Date: 9/14/06
Property Owner or Authorized Representative
Signed: llllllllllllllllllllll Date: llll
Fairfax County Representative
On September 29, 2006, petitioners sent to FCFRD all of the
documents necessary to participate in the program. None of
the documents purport to transfer title to the house or the
Vienna property or any ownership interest therein to Fairfax
County or FCFRD.
During October 2006, FCFRD, along with six other fire
departments, used the Vienna property to conduct live fire
training exercises. The house was demolished by fire during
the training exercises. On October 23, 2006, FCFRD sent peti-
tioners an acknowledgment letter thanking them for their
donation and expressing their appreciation for petitioners’
allowing them to use the Vienna property for the training
exercises.
On October 23, 2006, MW Construction was given access
to the Vienna property to remove the debris and begin
construction of the new house. The construction was com-
pleted in July 2007. Petitioners subsequently obtained a resi-
dential use permit and moved into the new house, where
they currently reside.
On their 2006 Federal income tax return, petitioners
reported a noncash charitable contribution of $339,504 on
Schedule A. The contribution of $339,504 consisted of only
the claimed donation of the house on the Vienna property. In
accordance with the limitations of section 170(b) and the
regulations thereunder, petitioners deducted $92,865 as a
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(395) PATEL v. COMMISSIONER 401
noncash charitable contribution for 2006. 4 Petitioners filed
their 2006 tax return electronically. They submitted Form
8283, Noncash Charitable Contributions, with the return;
however, Form 8283 was not signed by the appraiser or the
donee because of the electronic submission. Petitioners
retained a fully signed copy of Form 8283 which they later
submitted to respondent upon request.
On February 17, 2009, respondent sent petitioners a notice
of deficiency for their 2006 tax year disallowing their claimed
noncash charitable contribution deduction of $92,865 and
determined an income tax deficiency of $32,672 and an
accuracy-related penalty of $6,534 under section 6662.
Discussion
I. Charitable Contribution Deduction
A. Noncash Charitable Contribution Deduction Under
Section 170
Section 170(a)(1) provides in relevant part that a deduction
is allowed for any charitable contribution, payment of which
is made within the taxable year. Section 170(c)(1) defines the
term ‘‘charitable contribution’’ to include a contribution or
gift to or for the use of, inter alia, a political subdivision of
a State, but only if the gift is made for exclusively public pur-
poses. Contributions or gifts to nonprofit volunteer fire
companies are deemed to be for the use of a political subdivi-
sion of a State for exclusively public purposes and are
deductible under section 170(c)(1). Rev. Rul. 71–47, 1971–1
C.B. 92; see also Rev. Rul. 74–361, 1974–2 C.B. 159.
Before 1969 a taxpayer could deduct contributions to chari-
table organizations of partial interests in the taxpayer’s prop-
erty, including income and remainder interests and the right
to use the property. See, e.g., Thriftimart, Inc. v. Commis-
sioner, 59 T.C. 598 (1973). The only limitation placed on con-
tributions of partial interests, found in what was then section
170(f), delayed the deduction for contributions of future
interests in tangible personal property until all intervening
interests in the property had expired. For purposes of that
4 The remaining $246,639 of the reported contribution for 2006 has been carried forward by
petitioners under sec. 170(d) and the regulations thereunder. The full amount of the contribu-
tion, which includes the amount deducted for 2006 and the carryover amounts, is at issue in
this case.
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402 138 UNITED STATES TAX COURT REPORTS (395)
limitation, a fixture that was intended to be severed from
real property was treated as a future interest in tangible per-
sonal property and not as real property.
Congress became concerned that the amount of a chari-
table contribution deduction for a partial interest in property
might not correspond to the value of the benefit ultimately
received by the charity and that taxpayers were receiving a
double benefit from donations of the use of property for a
period of time. See S. Rept. No. 91–552, at 83–87 (1969),
1969–3 C.B. 423, 477–479; see also H.R. Rept. No. 91–413, at
57 (1969), 1969–3 C.B. 200, 237–239. In the Tax Reform Act
of 1969, Pub. L. No. 91–172, sec. 201(a), 83 Stat. at 549, Con-
gress amended section 170 to address those concerns by,
inter alia, moving the limitation previously provided in sec-
tion 170(f) to new section 170(a)(3) and adding a new section
170(f). Section 170(f)(2) denies a charitable contribution
deduction for certain contributions of interests in property
placed in trust: Section 170(f)(2)(A) disallows a deduction for
contributions of remainder interests in property placed in
trust unless the trust is a charitable remainder annuity trust
or a charitable remainder unitrust or a pooled income fund,
and section 170(f)(2)(B) disallows a deduction for the value of
any other interest in property placed in trust, unless the
interest is a guaranteed annuity or fixed percentage of the
trust property distributed annually. Section 170(f)(3) denies
a charitable contribution deduction for certain contributions
of partial interests in property and provides as follows:
(3) DENIAL OF DEDUCTION IN CASE OF CERTAIN CONTRIBUTIONS OF PAR-
TIAL INTERESTS IN PROPERTY.—
(A) IN GENERAL.—In the case of a contribution (not made by a transfer
in trust) of an interest in property which consists of less than the tax-
payer’s entire interest in such property, a deduction shall be allowed
under this section only to the extent that the value of the interest
contributed would be allowable as a deduction under this section if such
interest had been transferred in trust. For purposes of this subpara-
graph, a contribution by a taxpayer of the right to use property shall be
treated as a contribution of less than the taxpayer’s entire interest in
such property.
(B) EXCEPTIONS.—Subparagraph (A) shall not apply to—
(i) a contribution of a remainder interest in a personal residence or
farm,
(ii) a contribution of an undivided portion of the taxpayer’s entire
interest in property, and
(iii) a qualified conservation contribution.
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(395) PATEL v. COMMISSIONER 403
Congress described the purpose of section 170(f)(3) as follows:
General reasons for change.—An individual receives what may be
described as a double benefit by giving a charity the right to use property
which he owns for a given period of time. For example, if the individual
owns an office building, he may donate the use of 10 percent of its rental
space to a charity for 1 year. As a result, he may report for tax purposes
90 percent of the income which he otherwise would have had if the
building was fully rented, and may claim a charitable deduction
(amounting to 10 percent of the rental value of the building) which offsets
his reduced rental income. [H.R. Rept. No. 91–413, supra at 57, 1969–3
C.B. at 237.]
Accord S. Rept. No. 91–552, supra at 83, 1969–3 C.B. at 477.
Section 170(f)(3) is considerably broader in scope than that
articulated purpose, Stark v. Commissioner, 86 T.C. 243, 250
(1986), and it reflects Congress’ concern that the amount of
a charitable contribution deduction might not correspond to
the value of the benefit ultimately received by the charity.
Respondent contends that petitioners donated to FCFRD
merely the right to use the Vienna property. Respondent
argues alternatively that if petitioners transferred an owner-
ship interest in the house to FCFRD, they nonetheless
retained substantial interest in the Vienna property and the
house. Respondent concludes therefore that petitioners
contributed a partial interest in the property, a deduction for
which is prohibited under section 170(f)(3)(A).
Petitioners assert that their granting FCFRD the right to
destroy the house by burning conveyed to FCFRD all of their
rights, title, and interest in the house and not merely the use
of the Vienna property. 5 They assert that there is no require-
ment that the land be transferred with the house and, there-
fore, they are entitled to a charitable contribution deduction
for the value of the house.
Whether petitioners’ contribution to the FCFRD constitutes
a transfer of a partial interest in property for the purposes
of section 170(f) is ultimately a question of Federal law. See
United States v. Craft, 535 U.S. 274, 278 (2002). The answer
5 Petitioners assert that had they given FCFRD only the use of the house, they would have
expected FCFRD to return it in essentially the same state as it was before the use. We do not
think that such an expectation is particularly relevant where a donor intends to make improve-
ments to his real property that require the destruction of the existing building situated on the
land. Allowing FCFRD to burn the house during its training exercises so that petitioners might
construct a new house on the site is consistent with and necessary for petitioners’ intended use
of the Vienna property.
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404 138 UNITED STATES TAX COURT REPORTS (395)
to this Federal question, however, depends in part upon
State law, which creates and governs the nature of interests
in property. United States v. Nat’l Bank of Commerce, 472
U.S. 713, 722 (1985); United States v. Mitchell, 403 U.S. 190,
197 (1971); Commissioner v. Estate of Bosch, 387 U.S. 456,
465 (1967).
‘‘A common idiom describes property as a ‘bundle of
sticks’—a collection of individual rights which, in certain
combinations, constitute property.’’ Craft, 535 U.S. at 278–
279. ‘‘Likewise, ownership of property is not a single indivis-
ible concept but rather an aggregate or bundle of rights per-
taining to the property involved.’’ Molbreak v. Commissioner,
61 T.C. 382, 390 (1974), aff ’d, 509 F.2d 616 (7th Cir. 1975).
‘‘State law determines only which sticks are in a person’s
bundle.’’ Craft, 535 U.S. at 279. Once property rights are
determined under State law, as announced by the highest
court of the State, the tax consequences are decided under
Federal law. Commissioner v. Estate of Bosch, 387 U.S. 456;
Aquilino v. United States, 363 U.S. 509, 512–513 (1960);
Morgan v. Commissioner, 309 U.S. 78 (1940).
Accordingly, we first look to Virginia law to determine
what property rights petitioners had in the house and what
property rights in the house were given to FCFRD. In looking
to State law, we consider the substance of the property rights
State law provides, including the benefits and burdens of
such rights, not merely the labels the State gives these rights
or the conclusions it draws from them. Craft, 535 U.S. at
279.
B. Virginia Real Property Law: House Is Part of the Land
In Virginia the common law continues in full force except
as altered by the General Assembly of Virginia. 6 Va. Code
Ann. sec. 1–200 (2011); Brown v. Brown, 32 S.E.2d 79, 80
(Va. 1944). By the original rule of common law everything
that was affixed to land held in fee simple was considered to
be a part of it. Marraro v. State, 189 N.E.2d 606, 610 (N.Y.
1963). Under Virginia statutory law the terms ‘‘land’’,
‘‘lands’’, and ‘‘real estate’’ are synonymous and include
6 Va. Code Ann. sec. 1–200 (2011) provides: ‘‘The common law of England, insofar as it is not
repugnant to the principles of the Bill of Rights and Constitution of this Commonwealth, shall
continue in full force within the same, and be the rule of decision, except as altered by the Gen-
eral Assembly.’’
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(395) PATEL v. COMMISSIONER 405
‘‘lands, tenements[7] and hereditaments,[8] and all rights and
appurtenances thereto and interests therein, other than a
chattel interest’’. 9 Va. Code Ann. sec. 1–219 (2011) (formerly
sec. 1–13.12). In Stuart v. Pennis, 22 S.E. 509, 510 (Va.
1895), the Supreme Court of Appeals of Virginia held:
Land includes everything belonging or attached to it, above and below the
surface. It includes the minerals buried in its depths, or which crop out
of its surface. It equally includes the woods and trees growing upon it.
Rooted and standing in the soil, and drawing their support from it, they
are regarded as an integral part of the land, just as the coal, the iron, the
gypsum, and the building stone which enter so largely into the business
of commerce. Attached to the soil, they pass with the land, as a part of
it. * * *
The definition of land under Virginia law, as interpreted
by the Virginia Court, is the widely recognized ordinary legal
definition of land that derives from the common law. See 1
Tiffany Real Prop., secs. 3, 10 (2011); Webster’s Third New
International Dictionary 1268 (2002); Black’s Law Dictionary
954 (9th ed. 2009). Under the common law, a fixture 10
attached to the land, 11 including a structure erected on the
land, is regarded as part of the land and remains so unless
and until it is severed from the land. 12 Myers v. Hancock, 39
S.E.2d 246, 248 (Va. 1946); Stuart, 22 S.E. at 510; Baker v.
Jim Walter Homes, Inc., 438 F. Supp. 2d 649 (W.D. Va.
2006).
7 ‘‘The word ‘tenement’ means either an estate or holding of land, or a house or other building
used as a residence.’’ Pardoe & Graham Real Estate, Inc. v. Schulz Homes Corp., 525 S.E.2d
284, 286 (Va. 2000) (citing Black’s Law Dictionary 1480 (7th ed. 1999), and 1 Raleigh Colston
Minor & Frederick Deane Goodwin Ribble, The Law of Real Property sec. 17 (2d ed. 1928)).
8 ‘‘The term ‘hereditament,’ in general, signifies any interest in real property that may be in-
herited by an owner’s heirs.’’ Pardoe, 525 S.E.2d at 286 (citing 1 Minor & Ribble, supra sec.
17, and Caroline N. Brown, 4 Corbin on Contracts sec. 17.1 (rev. ed. 1997)).
9 A chattel interest is an interest that is less than a freehold such as a lease for a year or
term of years. Hannan v. Dusch, 153 S.E. 824, 827 (Va. 1930).
10 A fixture is an article of personal property that ‘‘by being affixed to the realty, became ac-
cessory to it and parcel of it.’’ Green v. Phillips, 67 Va. [26 Gratt. 752] 250, 252, 1875 WL 5726(1875). ‘‘A thing is deemed to be affixed to land when it is attached to it by roots, imbedded
in it, permanently resting upon it, or permanently attached to what is thus permanent, as by
means of cement, plaster, nails, bolts, or screws’’. Dowdy v. Silverstein, 1981 WL 180584, 2 (Va.
Cir. Ct. 1981) (citing Black’s Law Dictionary 574 (5th Ed. 1979)).
11 Movable buildings and fixtures that have never been attached to the land never become a
part of the land and remain personal property. Pardoe, 525 S.E.2d at 286; Commonwealth v.
Pembroke Limestone Works, 134 S.E. 717, 720 (Va. 1926). However, once a structure is erected
and attached to the land, it becomes real property and part of the land. Pardoe, 525 S.E.2d at
286.
12 The common law definition of land is recognized in all 50 States. See, e.g., cases listed infra
app. A wherein the courts apply the law of fixtures to determine whether an item is sufficiently
‘‘attached’’ to the land that it is considered part of the real property.
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406 138 UNITED STATES TAX COURT REPORTS (395)
Where a taxpayer contributes to a charity an interest in a
building that is part of the land under State law but retains
all title to and interest in the remaining land, the taxpayer
has donated less than his entire interest in the land. The
taxpayer will not be allowed a charitable contribution deduc-
tion unless the donated interest falls within the exceptions of
section 170(f)(3)(B).
In the case at hand, the house was attached to the land
and was conveyed to petitioners along with the land when
they purchased the Vienna property. Under the common law
and the laws of Virginia, the house was part of the land that
is the real estate we refer to as the Vienna property. Peti-
tioners’ purported contribution of the house to FCFRD was a
contribution of less than their entire interest in the Vienna
property.
C. Permissible Partial Interests: Section 170(f)(3)(B)
Pursuant to section 170(f)(3), where a taxpayer contributes
to a charitable organization an interest in a house considered
part of the land under State law but retains a substantial
interest in the remaining land the taxpayer will not be
allowed a charitable contribution deduction unless the
donated interest is (i) an undivided portion of the taxpayer’s
entire interest in property, (ii) a remainder interest in a per-
sonal residence, or (iii) a qualified conservation contribution.
1. Undivided Portion of Property
Pursuant to section 170(f)(3)(B)(ii) a taxpayer is allowed a
deduction for a contribution of ‘‘an undivided portion of the
taxpayer’s entire interest in property’’. Section 1.170A–
7(b)(1)(i), Income Tax Regs., provides in relevant part:
(1) Undivided portion of donor’s entire interest. (i) An undivided portion
of a donor’s entire interest in property must consist of a fraction or
percentage of each and every substantial interest or right owned by the
donor in such property and must extend over the entire term of the donor’s
interest in such property and in other property into which such property
is converted. For example * * * . * * * If a taxpayer owns 100 acres of
land and makes a contribution of 50 acres to a charitable organization, the
charitable contribution is allowed as a deduction under section 170.
If a donor contributes some of the rights in the property
and retains other substantial rights, the donated rights in
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(395) PATEL v. COMMISSIONER 407
the property are not an undivided portion of the entire
interest. The substantiality of the donor’s interest in the
retained property is determinative. Stark v. Commissioner,
86 T.C. 243 (Tax Court held mineral interest retained by tax-
payer was insubstantial).
In Walshire v. United States, 288 F.3d 342 (8th Cir. 2002),
the Court of Appeals for the Eighth Circuit upheld the
validity of section 25.2518–3(b), Gift Tax Regs., which pro-
vides the same definition for an undivided portion of a
disclaimant’s entire interest in property for purposes of sec-
tion 2518. 13 In discerning the meaning of ‘‘undivided
interest’’, the Court of Appeals stated:
The term ‘‘undivided’’ in its common usage means ‘‘not separated out into
parts or shares.’’ Webster’s Third New International Dictionary 2492
(1986). We are most familiar with the concept of undivided interests in the
context of a tenancy in common, which is ‘‘[a] tenancy by two or more per-
sons, in equal or unequal undivided shares, each person having an equal
right to possess the whole property.’’ Black’s Law Dictionary 1478 (17th
[sic] ed. 1999). ‘‘ ‘The central characteristic of a tenancy in common is
simply that each tenant is deemed to own by himself, with most of the
attributes of independent ownership, a physically undivided part of the
entire parcel.’ ’’ Id. (quoting Thomas F. Bergin & Paul G. Haskell, Preface
to Estates in Land and Future Interests 54 (2d ed. 1984)). From these uses
of the term ‘‘undivided,’’ we discern that an undivided portion of an
interest is a portion that does not separate out the bundle of rights associ-
ated with the interest being apportioned. Thus, * * * an undivided portion
of that [fee simple] interest would have to include all of the rights associ-
ated with the fee. * * * [Walshire, 288 F.3d at 347–348. 14]
The ‘‘bundle of sticks’’ that constitutes land situated in Vir-
ginia includes the rights with respect to the surface of the
land, the minerals in the land, the timber growing on the
land, structures attached to the land, and the air space over
the land. An undivided portion of a donor’s entire interest in
the land must consist of a fraction or percentage of each and
13 Sec. 2518 allows the donee of an interest in property to disclaim an undivided portion of
a transferred interest, and that portion of the interest is treated as having never been trans-
ferred to him for gift or estate tax purposes.
14 If a landowner who owns a 100-acre parcel of land conveys 50 acres to a charitable organi-
zation, the conveyance severs the 50 acres from 50 acres retained by the landowner and creates
two separate lots. The example provided in the regulations treats the 50 acres as an undivided
interest in the 100 acres. Sec. 1.170A–7(b)(1)(i), Income Tax Regs. This is consistent with and
reflects the cotenants’ right to have the land partitioned. Under the regulations the transfer of
the 50-acre lot to the charitable organization is a contribution of a partial interest in the original
100-acre parcel—an undivided interest in the 100 acres for which a charitable contribution de-
duction is permitted.
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408 138 UNITED STATES TAX COURT REPORTS (395)
every one of those ‘‘sticks’’ and must extend over the entire
term of the donor’s interest in such property. Thus, a chari-
table contribution of an interest in the land does not con-
stitute a contribution of an undivided portion of the donor’s
entire interest if the donor transfers some sticks and retains
substantial rights in others. Stark v. Commissioner, 86 T.C.
243.
We observe that while some of the sticks, e.g., minerals
buried in the land and soil covering the surface of the land,
extend over the entire property, others such as fixtures
attach to one specific location; e.g., a building occupies only
the land immediately under its footprint. A landowner can
convey by metes and bounds any part of the land or convey
all or a portion of his interest in the minerals, the timber,
or the structures, severing the transferred interest in the
land from the interest retained, creating separate estates in
the land. 15 See, e.g., United Masonry, Inc. v. Jefferson Mews,
Inc., 237 S.E.2d 171, 181–182 (Va. 1977) (area above the land
may be subdivided into a number of three-dimensional air
spaces, each susceptible of being separately conveyed; sever-
ance of condominium units from the soil is ‘‘an estate in the
subdivided cubes in the sky’’ analogous to the accepted rule
that minerals below the topsoil may be severed from the sur-
face lot); Morison v. Am. Ass’n, 65 S.E. 469 (Va. 1909) (land
was divided into a surface estate and a mineral estate); Blue-
field Timber, LLC v. Harlan Lee Land, LLC, 2006 WL
6185856, at *1 (Va. Cir. Ct. 2006) (the interests in the parcel
consisted of three separate and distinct estates: an undivided
interest in 60% of the timber; a 60% undivided interest in
the surface; and a 40% interest in the fee simple).
When a taxpayer transfers a fee interest in land to a chari-
table organization while retaining substantial mineral rights,
he does not transfer an undivided interest in the land. See
Stark v. Commissioner, 86 T.C. at 254. Similarly, the
transfer of mineral rights would constitute an undivided
interest in the land only if the taxpayers’ retained interest
15 In Virginia, an interest in land must be conveyed by deed or will. Va. Code Ann. sec. 55–
2 (2007); FDIC v. Hish, 76 F.3d 620, 623 (4th Cir. 1996). ‘‘The requirements for a deed are ‘com-
petent parties, a lawful subject matter, a valuable consideration, apt words of conveyance, and
proper execution.’ ’’ Lim v. Choi, 501 S.E.2d 141, 143 (Va. 1998) (quoting Morison v. Am. Ass’n,
65 S.E. 469, 470 (1909)). Use of technical words or strict compliance with the Virginia statute
regarding form of deed is not necessary to effect a transfer if the language used plainly shows
on the face of the document a clear intent to convey title. Id. at 144.
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(395) PATEL v. COMMISSIONER 409
in the land is insubstantial; i.e., the value of the retained
interest in the land (the surface estate) is de minimis in
comparison to the mineral estate. See id. at 247–248, 255.
Hypothetically, because the regulations treat a division of
land into separate lots as an undivided interest, a taxpayer
could donate just the land under the building’s footprint,
including the building, to a charitable organization. If local
law permitted a landowner to divide his land into two such
separate lots, the donation of an interest in the building
alone would be an undivided interest in the land if the
retained rights in the building and the land immediately
under its footprint were insubstantial.
Under the common law, a fixture that is attached to the
land, including a building, is regarded as part of the land
unless and until it is severed from the land. Baker, 438 F.
Supp. 2d 649; Myers, 39 S.E.2d at 248; Stuart, 22 S.E. at
510. When a landowner conveys the building and retains the
land, unless the building is to be moved from the land, the
building remains real property 16 and certain easements by
necessity are implicitly granted to the building. An easement
by necessity arising from an implied grant or implied res-
ervation stems from the principle that whenever a party con-
veys property, he conveys whatever is necessary for the bene-
ficial use of that property and retains whatever is necessary
for the beneficial use of land he still possesses. Middleton v.
Johnston, 273 S.E.2d 800, 803 (Va. 1981); Jennings v.
Lineberry, 21 S.E.2d 769, 771 (Va. 1942); see also Powell v.
Magee, 60 S.E.2d 897, 899 (Va. 1950) (if a landowner conveys
the land but retains a building surrounded by the land con-
veyed, it will be assumed that the parties intended that the
grantor has reserved a right of way (easement) over the land
conveyed). Thus, if a landowner conveys the building and
retains the land, it will be assumed that the parties intended
that the grantor has granted the right to have the building
supported by the land (the right of subjacent support),
Tunstall v. Christian, 80 Va. 1, 1885 WL 4179 (1885); 17 see
16 ‘‘ ‘ ‘‘A man may have an inheritance in an upper chamber, though the lower buildings and
soile be in another, and seeing it is an inheritance corporeall it shall passe by livery.’’ ’ ’’ United
Masonry, Inc. v. Jefferson Mews, Inc., 237 S.E.2d 171, 181 (Va. 1977) (quoting commentator
quoting Lord Coke).
17 In Tunstall v. Christian, 80 Va. 1, 1885 WL 4179, at *1–*3 (1885), the Supreme Court of
Virginia held:
Continued
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410 138 UNITED STATES TAX COURT REPORTS (395)
also Large v. Clinchfield Coal Co., 387 S.E.2d 783, 786 (Va.
1990), and a right of way over the lands has been retained
by the grantor, Powell, 60 S.E.2d at 899 (citing 1 Minor on
Real Property (2d ed.), 1 Ribble, at 140, sec. 101); Jennings,
21 S.E.2d 769. 18 These easements by necessity pass to the
successors in title of the building, and they will not be extin-
guished by the destruction of the building but will survive
and adhere to the new building the owner of the destroyed
building erects on its ruins. Stevenson v. Wallace, 68 Va. 77(1876).
Granting a fire department the right to destroy the
building while conducting training exercises on the property
does not transfer to the fire department all the benefits and
burdens of ownership and title to the building. The fire
department does not have the right to keep and use the
building in its current condition with ingress and egress over
the land retained by the landowner, to sell the building with
all the rights attached thereto, or to construct a new building
on the site of the destroyed building. The landowner retains
those substantial rights. Indeed, petitioners granted FCFRD
the right to burn the house so that they could exercise those
rights. Nor does the contribution transfer the burdens of
ownership of the building. The landowner must make the
building suitable for use in the training exercises; e.g., by
removing any asbestos present in the building, obtaining any
permits required by local government, and disconnecting
It is well settled that the right to support for land from the adjacent and subjacent soil is
a natural right, analogous to the flow of a natural river or of air. It stands on natural justice,
and is not dependant upon grant; * * *. But the right is confined to the soil in its natural condi-
tion. It does not extend to buildings or other artificial burdens thereon, increasing the downward
and lateral pressure. * * *
The right to support for artificial burdens on land is an easement, and can be acquired only
by grant, express or implied. * * *
* * * * * * *
* * * The right [to subjacent support] is also implied where property, consisting of a house
and unimproved land, is severed by sale. And the right to support, thus granted and reserved,
is transmitted to the successors in title of the parties respectively. * * *
18 An easement is the privilege to use the land of another in a particular manner and for a
particular purpose. Russakoff v. Scruggs, 400 S.E.2d 529, 531–532 (Va. 1991) (citing Brown v.
Haley, 355 S.E.2d 563, 567–568 (Va. 1987)). If one part of the land is used for the benefit of
another part (the dominant tract), a ‘‘quasi-easement’’ exists over the ‘‘quasi-servient’’ portion
of the land. Id. at 532. That easement is conveyed by implication when the dominant tract is
severed from the servient tract. The existence of the easement is established on a showing that
(1) the dominant and servient tracts originated from a common grantor, (2) the use was in exist-
ence at the time of the severance, and that (3) the use is apparent, continuous, and reasonably
necessary for the enjoyment of the dominant tract. Id. (citing Brown, 355 S.E.2d at 569, and
Fones v. Fagan, 196 S.E.2d 916, 919 (1973)).
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(395) PATEL v. COMMISSIONER 411
utilities. The landowner is also responsible for safeguarding
the public from hazardous conditions remaining after the
training exercises are completed, such as open pits, base-
ments and wells, standing walls and chimney, and burned
and unburned debris.
If the landowner conveys the building and retains the land
with the intent that the building be detached and removed
from the land, the easements by necessity are not granted to
the building. Severance of the building from the land may be
actual, by detachment of the building from the land, or it
may be constructive, by express or implied agreement that it
will be detached. Myers, 39 S.E.2d at 248. Constructive
severance of a fixture that is to be detached from the land
‘‘makes the fixture an entity distinct from the land, so that
it will not pass with the land upon a conveyance of the latter,
if the purchaser of the land have notice of such agreement.’’
Id. However, since the fixture is real property until sever-
ance, a transfer of the fixture is a transfer of real property.
Id.
To effect a constructive severance of a building from land,
the transfer ordinarily must be in a writing in a form suffi-
cient for a conveyance of land, 2 Tiffany Real Property, sec.
624 (3d ed. 1939); i.e., to effect a constructive severance, the
writing must convey ownership and title to the building. The
grant of an easement, a lease, or a license will not construc-
tively sever the building from the land.
Granting a fire department the right to destroy the
building while conducting training exercises on the property
is not a conveyance of ownership, title, or possession of the
building or any other property interest in the building or the
Vienna property. Rather it is a mere license to use the prop-
erty.
A license is a right, given by some competent authority, to
do an act which without such authority would be illegal, a
tort, or a trespass. Bunn v. Offutt, 222 S.E.2d 522 (Va. 1976).
A license is a mere unassignable privilege that is personal
between the licensor and the licensee and passes no interest
in any portion of the land to the licensee. Peabody v. United
States, 175 U.S. 546, 550 (1899) (citing De Haro v. United
States, 72 U.S. 599, 627 (1866)); Bunn v. Offutt, 222 S.E.2d
522. The stated definition, scope, and effect of a license is the
widely recognized ordinary legal definition of license that
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412 138 UNITED STATES TAX COURT REPORTS (395)
derives from the common law. 19 See 3 Tiffany Real Prop.,
supra, secs. 829, 831; Webster’s Third New International Dic-
tionary 1304; Black’s Law Dictionary 1002–1003.
The Supreme Court of Appeals of Virginia has established
a well-marked dividing line between the class of agreements
that constitute revocable licenses and those that grant either
an estate or easement in land. Church v. Goshen Iron Co., 72
S.E. 685, 686 (Va. 1911). In order to ascertain whether an
instrument must be construed as more than a mere license,
it is only necessary to determine whether the grantee has
acquired by it any estate in the land in respect of which he
might bring an action of ejectment. Id. For an instrument to
constitute more than a mere license, there must be an exclu-
sive right of possession vested in the grantee. If the land is
still to be considered in the possession of the grantor, the
instrument will only amount to a license. Id.
In Bostic v. Bostic, 99 S.E.2d 591, 594 (Va. 1957), the
Supreme Court of Appeals of Virginia held that a grant
merely of the right to enter and take minerals from the land
is not an absolute grant of the minerals in place as real
estate. Such a grant creates a mere incorporeal right, privi-
lege, or license in the grantee that carries with it no interest
in the land. Id. at 594–595. The grantee of the license will
be entitled to do the permitted acts according to the terms
of his grant and appropriate the minerals to his own use, but
he will acquire no interest in the minerals until they are
actually separated from the land and have become recover-
able in an action of trover. Id. at 595; Church, 72 S.E. at 686.
In Young v. Young, 63 S.E. 748, 749 (Va. 1909), the Vir-
ginia Supreme Court held that a license to cut and sell
timber on the land created no estate or property in the
timber itself until it was actually severed from the land. In
reaching that conclusion the court pointed out that a license
to cut and sell timber does not vest title to the timber in the
licensee before the actual severance of such timber. See also
Bostic, 99 S.E.2d 591.
Granting a fire department the right to conduct training
exercises on one’s property and destroy a building thereon by
fire grants the fire department the right ‘‘to do an act which
19 Cases cited infra app. B indicate that license has the same definition and scope in 47 States
and the District of Columbia. Our limited search on Westlaw did not identify any opinions on
the issue issued by the courts of Alaska, Louisiana, or Nevada.
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(395) PATEL v. COMMISSIONER 413
without such authority would be illegal, a tort, or a tres-
pass’’. The fire department does not acquire the right to eject
the landowner from the building and cannot force the land-
owner to allow the destruction of the building should he
change his mind before the house has been destroyed. The
fire department has acquired a mere revocable license that
does not vest any property interest in the fire department. 20
Because the grant does not convey an interest in any prop-
erty, it does not constructively sever the building from the
land.
Moreover, when a taxpayer grants a fire department the
right to destroy a building while conducting training exer-
cises on his property, it is the destruction of the building that
actually severs it from the land. Since the landowner retains
rights and responsibility for the debris (everything that has
not disintegrated), at the time of severance, there is no prop-
erty to which title could vest in the fire department.
Although the value of the remnants of the building may be
de minimis after the training exercises, property rights
include not only the benefits of ownership but also its bur-
dens. At all times, petitioners retained all the burdens of
ownership of the house, except for liability for any injury to
a fireman incurred during the training exercises. Petitioners
as owners of the house obtained the demolition permit from
the county. They were responsible for safeguarding the public
from hazardous conditions created by the destruction of the
house including any open pits, standing walls and chimneys,
and debris remaining after the training exercises were com-
pleted. They retained a substantial ownership interest in the
house in the form of their liability for any injury that might
be caused by the hazardous conditions of the remnants of the
building remaining after FCFRD completed its exercises.
Petitioners assert that under the holding of Scharf v.
Commissioner, T.C. Memo. 1973–265, allowing FCFRD to
destroy the house was a conveyance of the house. In Scharf
the taxpayer owned a building that had been partially
destroyed by fire, and he allowed a volunteer fire department
to destroy it by fire for training purposes. Although the facts
20 In Virginia, land must be conveyed by deed or will. Va. Code Ann. sec. 55–2; FDIC v. Hish,
76 F.3d at 623. Use of technical words or strict compliance with the Virginia statute regarding
form of deed is not necessary to effect a transfer if the language used plainly shows on the face
of the document a clear intent to convey title. Lim, 501 S.E.2d at 144.
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414 138 UNITED STATES TAX COURT REPORTS (395)
in Scharf are nearly indistinguishable from the facts in this
case, petitioners’ reliance on Scharf is unfounded for multiple
reasons. First, in deciding the amount of the deduction in
Scharf, the Court held that it was not necessary to choose
between the fair market value of the building in its damaged
condition and the value of the donated use of the building
because the values were the same. Thus, the Court did not
decide in Scharf whether the taxpayer had donated the
building or just the use of the building. Second, the Court
allowed a charitable contribution deduction for the donation
in Scharf because it held that the public benefit of firefighter
training greatly exceeded the demolition benefit received by
the donor taxpayer. In Rolfs v. Commissioner, 135 T.C. 471,
487 (2010), aff ’d, 668 F.3d 888 (7th Cir. 2012), we held that
the public benefit standard applied in Scharf has been super-
seded by the quid pro quo standard established by the
Supreme Court in United States v. Am. Bar Endowment, 477
U.S. 105, 118 (1986). Third, one significant and distinguish-
able fact in Scharf makes the opinion inapplicable here;
namely, the taxpayer in Scharf made the contribution in
1967, before Congress amended section 170 to disallow a
deduction for contributions of partial interests in property.
The amendment to section 170 makes Scharf inapplicable to
contributions made after 1969.
We hold that petitioners did not contribute the house or an
undivided interest in the Vienna property to the FCFRD.
2. Remainder Interest in a Personal Residence
A remainder is a future interest in property ‘‘limited in
favor of a transferee in such manner that it can become a
present interest upon the expiration of all prior interests
simultaneously created’’. 2 Restatement, Property, sec. 156
(1936). A vested remainder ripens into title in fee upon the
death of the life tenant. See, e.g., Miller v. Citizens Nat’l
Bank, 60 S.E.2d 868, 870 (Va. 1950). When a taxpayer grants
a fire department a license to conduct training exercises on
his land and destroy the house situated thereon during the
exercise, the fire department does not receive a remainder
interest, or any other interest, in the house.
Additionally, in the case at hand, petitioners never used
the house as their personal residence before FCFRD destroyed
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(395) PATEL v. COMMISSIONER 415
it while conducting its training exercises. See sec. 1.170A–
7(b)(3), Income Tax Regs.; see also Estate of Brock v.
Commissioner, 71 T.C. 901, 906–907 (1979), aff ’d, 630 F.2d
368 (5th Cir. 1980).
We hold that petitioners did not contribute a remainder
interest in a personal residence to FCFRD.
3. Qualified Conservation Contribution
A qualified conservation contribution is a contribution of a
qualified real property interest to a qualified organization
exclusively for conservation purposes. Sec. 170(h)(1). Section
170(h)(4)(A) generally provides that a contribution is for a
conservation purpose if it: (1) preserves land for outdoor
recreation by, or the education of, the general public, (2) pro-
tects a relatively natural habitat of fish, wildlife, or plants,
or similar ecosystem, (3) preserves open space for the scenic
enjoyment of the general public or pursuant to a Federal,
State, or local governmental conservation policy, and this
preservation will yield a significant public benefit, or (4) pre-
serves a historically important land area or a certified his-
toric structure. See also sec. 1.170A–14(d)(1), Income Tax
Regs. A contribution of a qualified real property interest may
be exclusively for conservation purposes only if it is protected
in perpetuity. Sec. 170(h)(5)(A). We recognize that contribu-
tion of a taxpayer’s house to a volunteer fire department for
destruction by burning during training exercises provides
valuable training experience for the volunteer firefighters
that serves to further the protection of property. However,
that is not a conservation purpose for purposes of section
170.
We hold that petitioners did not make a qualified conserva-
tion contribution to FCFRD.
D. Conclusion
As with this case, taxpayers usually grant a fire depart-
ment license to destroy a building on their land because they
wish to have it removed from the land, either to increase the
value of the land (Scharf) or so that they may construct a
new building on the land (Rolfs). The Court of Appeals for
the Seventh Circuit accurately described such donations as
follows: ‘‘The taxpayers here gave away only the right to
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416 138 UNITED STATES TAX COURT REPORTS (395)
come onto their property and demolish their house, a service
for which they otherwise would have paid a substantial
sum.’’ Rolfs v. Commissioner, 668 F.3d at 895. The taxpayers
retain all property rights appertaining to the building. See
id. (‘‘None of the value of the house, as a house, was actually
given away.’’). Such taxpayers, including petitioners, give
only the use of their property to the fire department. 21 Sec-
tion 170(f) denies them a charitable contribution deduction
for the contribution of the use of their property regardless of
the value of that use or the fact that the value of the debris
remaining after the training exercises was de minimis. 22 Cf.
Logan v. Commissioner, T.C. Memo. 1994–445. We hold that
petitioners are not entitled to any deduction for their
granting FCFRD the right to conduct training exercises on the
Vienna property and to destroy the house by burning during
those exercises.
II. Accuracy-Related Penalties
Respondent determined that petitioners are liable for an
accuracy-related penalty under section 6662(a) and (b)(1) and
(2) for negligence and substantial understatement of income
tax. Under section 6664(c), however, generally no penalty is
imposed under section 6662 with respect to any portion of an
underpayment if it is shown that there was reasonable cause
for such portion and that the taxpayer acted in good faith
21 This is consistent with the following explanation in Fairfax County Fire and Rescue Ac-
quired Structure Powerpoint published on the Internet at www.fairfaxcounty.gov/fr/academy/Ac-
quiredlStructurelPowerpoint.pdf, of which we take judicial notice:
When a property owner loans their property to the program for training, they are performing
a valuable service to their community. * * *
Each property that is offered to the program must meet extensive requirements prior to ac-
ceptance and utilization (e.g. acquiring the appropriate permits, the structural stability assess-
ment, asbestos free inspection, and confirmation that utilities have been disconnected).
For live burn training, the structures are not completely burned to the ground and remain the
responsibility of the property owner for demolition and removal.
[Emphasis added.]
22 In Rolfs v. Commissioner, 135 T.C. 471 (2010), aff ’d, 668 F.3d 888 (7th Cir. 2012), we held
that the taxpayers did not make a charitable contribution because they did not prove that the
value of the house (taking into account the requirement that it be destroyed) exceeded the sub-
stantial benefit they received in the form of demolition services. In affirming this Court, the
Court of Appeals opined: ‘‘Perhaps the best ‘comparable sales’ comparison might have been the
price paid by the fire department to rent a burn tower for the length of time the department
conducted exercises in and around the lake house, but there is no such evidence here.’’ Rolfs
v. Commissioner, 668 F.3d at 895. However, the Court of Appeals held that the taxpayers gave
away only the right to come onto their property and demolish their house. Id. Where only the
use of the taxpayers’ property is donated, a charitable contribution deduction is denied by sec.
170(f)(3) and the value of the contribution is irrelevant.
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(395) PATEL v. COMMISSIONER 417
with respect to such portion. The determination of whether
a taxpayer acted with reasonable cause and in good faith ‘‘is
made on a case-by-base basis, taking into account all perti-
nent facts and circumstances.’’ Sec. 1.6664–4(b)(1), Income
Tax Regs.
When petitioners filed their return, the legal issues raised
by their charitable contribution deduction claim were not set-
tled. Importantly, in Scharf v. Commissioner, T.C. Memo.
1973–265, this Court held that a charitable contribution
deduction was available for the donation of a building to a
volunteer fire department for demolition in firefighter
training exercises. The donation in Scharf was made in 1967
before Congress amended section 170 to disallow a charitable
contribution deduction for the contribution of a partial
interest in property, and the standard applied in Scharf was
subsequently superseded by the quid pro quo standard for
charitable contribution deductions established by the
Supreme Court in Am. Bar Endowment, 477 U.S. 105. No
Federal court had reconsidered or questioned Scharf until
2010 when this Court issued Rolfs v. Commissioner, 135 T.C.
471, wherein we applied the quid pro quo standard. 23 In
Rolfs we held the taxpayers had not made a charitable con-
tribution because they received a substantial benefit in the
form of demolition services, the value of which exceeded the
value of the interest in the house donated. We did not decide
whether section 170(f)(3) applied.
Given all the facts and circumstances, including the uncer-
tain state of the law, we find that petitioners acted with
reasonable cause and in good faith. Therefore, we hold that
they are not liable for any penalty under section 6662.
Respondent is entitled to summary judgment only on the
charitable contribution issue. We have ruled in petitioners’
favor on the penalty issue, and there are no other issues to
be decided in this case.
23 We have found only two other cases involving the contribution of a building to a fire depart-
ment for training purposes made after the amendment to sec. 170. In each case the taxpayers
were not entitled to a deduction for the contribution regardless of whether the building was part
of the land. In the first case, Lawver v. Commissioner, T.C. Memo. 1981–192, this Court held
that the taxpayer was allowed a deduction for the loss on the building which precluded an addi-
tional deduction for the donation to the fire department. In Hendrix v. United States, 106
A.F.T.R.2d (RIA) 2010–5373, 2010–2 U.S. Tax Cas. (CCH) para. 50,541, 2010 WL 2900391 (S.D.
Ohio 2010), the U.S. District Court for the Southern District of Ohio held that the taxpayers
were not entitled to the deduction because they did not obtain a qualified appraisal and attach
it to their tax return as required by sec. 170(f)(11)(C).
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418 138 UNITED STATES TAX COURT REPORTS (395)
Accordingly,
An appropriate order will be issued, and
decision will be entered under Rule 155.
Reviewed by the Court.
COLVIN, COHEN, VASQUEZ, THORNTON, MARVEL, GUSTAF-
SON, and MORRISON, JJ., agree with this opinion of the
Court.
PARIS, J., concurs in the result only.
KERRIGAN, J., dissents.
APPENDIX A
The following cases show that fixtures are considered part
of the land under the common law in all 50 States: Sycamore
Mgmt. Grp., LLC v. Coosa Cable Co., Inc., 42 So. 3d 90, 93
(Ala. 2010); K & L Distribs., Inc. v. Kelly Elec., Inc., 908 P.2d
429, 432 (Alaska 1995); Fish v. Valley Nat’l Bank of Phoenix,
167 P.2d 107, 111 (Ariz. 1946); Ozark v. Adams, 83 S.W. 920,
921 (Ark. 1904); R. Barcroft & Sons Co. v. Cullen, 20 P.2d
665 (Cal. 1933); Rare Metals Min. & Mill. Co. v. W. Colo.
Power Co., 213 P. 124 (Colo. 1923); Merritt-Chapman & Scott
Corp. v. Mauro, 368 A.2d 44, 47 (Conn. 1976); Della Corp. v.
Diamond, 210 A.2d 847, 850 (Del. 1965); Burbridge v.
Therrell, 148 So. 204, 206 (Fla. 1933); Nat’l Cmty. Builders,
Inc. v. Citizens & So. Nat’l Bank, 207 S.E.2d 510, 512 (Ga.
1974); Ahoi v. Pacheco, 1914 WL 1743, at *1 (Haw. Terr.
1914); Beeler v. C.C. Mercantile Co., 70 P. 943 (Idaho 1902);
White Way Elec. Sign & Maint. Co. v. Chi. Title & Trust Co.,
14 N.E.2d 839, 841 (Ill. 1938); State ex. rel. Green v. Gibson
Circuit Court, 206 N.E.2d 135, 138 (Ind. 1965); Ford v.
Venard, 340 N.W.2d 270 (Iowa 1983); Blankenship v. School
Dist. No. 28 of Wyandotte Cnty., 15 P.2d 438, 439 (Kan.
1932); Tarter v. Turpin, 291 S.W.2d 547 (Ky. 1956); Prevot v.
Courtney, 129 So. 2d 1, 3 (La. 1961); Searle v. Town of
Bucksport, 3 A.3d 390, 396 (Me. 2010); Supervisor of Assess-
ments of Anne Arundel Cnty. v. Hartge Yacht Yard, Inc., 842
A.2d 732, 738 (Md. 2004); Meeker v. Oszust, 30 N.E.2d 246(Mass. 1940); Sequist v. Fabiano, 265 N.W. 488 (Mich. 1936);
Merch. Nat’l Bank of Crookston v. Stanton, 56 N.W. 821, 822
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(395) PATEL v. COMMISSIONER 419
(Minn. 1893); Connolly v. McLeod, 52 So. 2d 473, 476 (Miss.
1951); Marsh v. Spradling, 537 S.W.2d 402, 404 (Mo. 1976);
Grinde v. Tindall, 562 P.2d 818 (Mont. 1977); Fuel Explo-
ration, Inc. v. Novotny, 374 N.W.2d 838, 842 (Neb. 1985);
Flyge v. Flynn, 166 P.2d 539, 552 (Nev. 1946); New England
Tel. & Tel. Co. v. City of Franklin, 685 A.2d 913 (N.H. 1996);
Gen. Motors Corp. v. City of Linden, 696 A.2d 683 (N.J.
1997); Garrison Gen. Tire Serv., Inc. v. Montgomery, 404 P.2d
143 (N.M. 1965); Marraro v. State, 189 N.E.2d 606, 610 (N.Y.
1963); Lee-Moore Oil Co. v. Cleary, 245 S.E.2d 720, 722 (N.C.
1978); Strobel v. Northwest G. F. Mut. Ins. Co., 152 N.W.2d
794, 796 (N.D. 1967); Masheter v. Boehm, 307 N.E.2d 533(Ohio 1974); Akers v. Hintergardt, 203 P.2d 883, 884 (Okla.
1949); First State & Sav. Bank v. Oliver, 198 P. 920 (Or.
1921); First Nat’l Bank of Mount Carmel v. Reichneder, 91
A.2d 277, 280 (Pa. 1952); Butler v. Butler’s Diner, Inc., 98
A.2d 875, 876 (R.I. 1953); Carroll v. Britt, 86 S.E.2d 612 (S.C.
1955); Killian v. Hubbard, 9 N.W.2d 700 (S.D. 1943); Knox-
ville Gas Co. v. W. I. Kirby & Sons, 32 S.W.2d 1054 (Tenn.
1930); O’Neil v. Quilter, 234 S.W. 528 (Tex. 1921); Couch v.
Welsh, 66 P. 600 (Utah 1901); Sherburne Corp. v. Town of
Sherburne, 207 A.2d 125, 127 (Vt. 1965); Island Cnty. v.
Dillingham Dev. Co., 662 P.2d 32 (Wash. 1983); Ohio Cel-
lular RSA Ltd. P’ship v. Bd. of Pub. Works of State of W. Va.,
481 S.E.2d 722, 727 (W. Va. 1996); Milburn By-Prod. Coal
Co. v. Eagle Land Co., 93 S.E.2d 231 (W. Va. 1956);
Premonstratensian Fathers v. Badger Mut. Ins. Co., 175
N.W.2d 237 (Wis. 1970); Wyo. State Farm Loan Board v.
FCSCC, 759 P.2d 1230 (Wyo. 1988).
APPENDIX B
The following cases indicate that, consistent with the
common law in Virginia as set forth in Bunn v. Offutt, 222
S.E.2d 522 (Va. 1976), a license does not convey an interest
in the property under the common law in the 49 remaining
States (listed alphabetically) and the District of Columbia:
Davis v. Miller Brent Lumber Co., 44 So. 639 (Ala. 1907);
Laverty v. Alaska R.R. Corp. 13 P.3d 725, 735 (Alaska 2000);
Charlebois v. Renaud, 300 P. 190 (Ariz. 1931); Harbottle v.
Cent. Coal & Coke Co., 203 S.W. 1044 (Ark. 1918); Beckett v.
City of Paris Dry Goods Co., 96 P.2d 122 (Cal. 1939); Radke
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420 138 UNITED STATES TAX COURT REPORTS (395)
v. Union Pac. R. Co., 334 P.2d 1077 (Colo. 1959); Bland v.
Bregman, 192 A. 703, 705 (Conn. 1937); Timmons v. Cropper,
172 A.2d 757 (Del. Ch. 1961); Burdine v. Sewell, 109 So. 648(Fla. 1926); Henson v. Airways Serv., Inc., 136 S.E.2d 747(Ga. 1964); Kiehm v. Adams, 126 P.3d 339 (Haw. 2005);
Shultz v. Atkins, 554 P.2d 948 (Idaho 1976); Cook v. Univ.
Plaza, 427 N.E.2d 405 (Ill. App. Ct. 1981) (citing Holladay v.
Chi. Arc Light & Power Co., 55 Ill. App. 463 (1st Dist. 1894));
One Dupont Centre, LLC v. Dupont Auburn, LLC, 819 N.E.2d
507, 513–514 (Ind. Ct. App. 2004); Baker v. Kenney, 124 N.W.
901 (Iowa 1910); Denver Nat’l Bank of Denver, Colo. v. State
Comm’n of Revenue, 272 P.2d 1070 (Kan. 1954); Polley v.
Ford, 227 S.W. 1007 (Ky. 1921); Blackshear v. Hood, 45 So.
957 (La. 1908); Benham v. Morton & Furbish Agency, 929
A.2d 471, 475 (Me. 2007); Condry v. Laurie, 41 A.2d 66 (Md.
1945); Baseball Publ’g Co. v. Bruton, 18 N.E.2d 362 (Mass.
1938); Kitchen v. Kitchen, 641 N.W.2d 245, 249 (Mich. 2002);
Hotel Markham v. Patterson, 32 So. 2d 255 (Miss. 1947);
Kuhlman v. Stewart, 221 S.W. 31 (Mo. 1920); Johnson v.
Skillman, 12 N.W. 149 (Minn. 1882); Herigstad v. Hardrock
Oil Co., 52 P.2d 171 (Mont. 1935); Brown Cnty. Agric. Soc’y,
Inc. v. Brown Cnty. Bd. of Equalization, 660 N.W.2d 518(Neb. App. Ct. 2003); Paul v. Cragna, 59 P. 857 (Nev. 1900);
Houston v. Laffee, 46 N.H. 505, 1866 WL 1951 (1866);
Mandia v. Applegate, 708 A.2d 1211 (N.J. Super. Ct. App.
Div. 1998); Bd. of Cnty. Comm’rs of Dona Ana Cnty. v. Sykes,
394 P.2d 278 (N.M. 1964); Cahoon v. Bayard, 25 N.E. 376(N.Y. 1890); Moon v. Central Builders, Inc., 310 S.E.2d 390(N.C. Ct. App. 1984); Lee v. N.D. Park Serv., 262 N.W.2d 467(N.D. 1977); Rodefer v. Pittsburg, O. V. & C. R.R. Co., 74
N.E. 183, 185–186 (Ohio 1905); McKenna v. Williams, 167
P.2d 368, 370 (Okla. 1946); McCarthy v. Kiernan, 245 P. 727(Or. 1926); Baldwin v. Taylor, 31 A. 250 (Pa. 1895); Fish v.
Capwell, 29 A. 840 (R.I. 1894); Briarcliffe Acres v. Briarcliffe
Realty Co., 206 S.E.2d 886 (S.C. 1974); Polk v. Carney, 112
N.W. 147 (S.D. 1907); Harris v. Miller, 19 Tenn. 158, 1838
WL 1108 (Tenn. 1838); Settegast v. Foley Bros. Dry Goods
Co., 270 S.W. 1014, 1016 (Tex. 1925); Kennedy v. Combined
Metals Reduction Co., 51 P.2d 1064 (Utah 1935); Price v.
Rowell, 159 A.2d 622 (Vt. 1960); Bakke v. Columbia Valley
Lumber Co., 298 P.2d 849 (Wash. 1956); Campbell Brown &
Co. v. Elkins, 93 S.E.2d 248 (W. Va. 1956); French v. Owen,
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(395) PATEL v. COMMISSIONER 421
2 Wis. 250, 1853 WL 1760 (Wis. 1853); Seven Lakes Dev. Co.,
L.L.C. v. Maxson, 144 P.3d 1239 (Wyo. 2006); Jackson v.
Emmons, 19 App. D.C. 250, 254, 1902 WL 19620 (D.C. 1902).
GALE, J., dissenting: The opinion of the Court holds that
petitioners’ grant of permission to the local fire department
to destroy the house on their property merely granted a
license to use the house, making it a contribution of less than
their entire interest in the house, disallowed under section
170(f)(3) because it did not constitute a contribution of an
undivided portion of their entire interest in the property as
provided in section 170(f)(3)(B)(ii). I disagree. Petitioners’
grant of permission to destroy conveyed more than a license
to use the house. When an owner of property grants a license
for its use, that grant necessarily includes the premise that
the property will be returned to the owner when the licensed
use terminates, subject to ordinary wear and tear. Permis-
sion to destroy eliminates that premise, and upon destruction
the property interests formerly held by the owner are trans-
ferred to the licensee with such permission.
Here, the fire department’s destruction of the house sev-
ered it from the land (as the opinion of the Court concedes,
see op. Ct. p. 413) pursuant to petitioners’ written permission
and thus rendered the structure personal property. See 2 Tif-
fany Real Property sec. 623 (3d ed. 1939) (actual severance
of a fixture from land converts it to personal property if the
owner intends the severance to be permanent). Petitioners
ceded every substantial interest they held in that personal
property and at best retained only insubstantial interests
(such as ownership of the postburn debris). They did not
expect the structure to be returned to them, and it was not.
As it was tangible personal property, all of petitioners’
substantial property interests in the structure were con-
sumed by the fire department when it destroyed the struc-
ture in furtherance of its training objectives.
An exception to disallowance under section 170(f)(3) is
made where the taxpayer makes a contribution of an undi-
vided portion of his entire interest in property. The regula-
tions interpret an undivided portion of a donor’s entire
interest as follows:
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422 138 UNITED STATES TAX COURT REPORTS (395)
An undivided portion of a donor’s entire interest in property must consist
of a fraction or percentage of each and every substantial interest or right
owned by the donor in such property and must extend over the entire term
of the donor’s interest in such property and in other property into which
such property is converted. * * * [Sec. 1.170A–7(b)(1)(i), Income Tax Regs.;
emphasis added.]
We have interpreted this ‘‘insubstantiality rule’’ in the regu-
lations as permitting the retention by the donor of insubstan-
tial interests in the donated property without triggering a
disallowance of his deduction under section 170(f)(3). Stark v.
Commissioner, 86 T.C. 243, 252 (1986). In Stark we held that
section 170(f)(3) was not triggered even though the donor of
land retained the interest in all minerals and the right to
mine for them, subject to certain U.S. Forest Service regula-
tions. We reasoned that the mineral interest as so restricted
was so insubstantial that the donor had ‘‘in substance’’ trans-
ferred his entire interest in the land for purposes of section
170(f)(3). Id. at 252–253. The mineral interest retained by
the donor was not a ‘‘ ‘substantial interest or right’ ’’ within
the meaning of section 1.170A–7(b)(1)(i), Income Tax Regs.,
we concluded. Id. at 255; see also Rev. Rul. 75–66, 1975–1
C.B. 85, 86 (retention of right to train hunting dogs and
maintain trails for that purpose on donated land ‘‘not
substantial enough to affect the deductibility of the property
contributed’’).
Once the fire department destroyed the structure as con-
templated, petitioners retained no substantial interest in it
that would trigger the section 170(f)(3) limitation on their
charitable contribution deduction. 1 Under Virginia property
law (as discussed more fully below), petitioners’ written
permission to enter their land and destroy the house con-
veyed to the fire department a property interest in the struc-
ture, effective upon its severance via demolition. The opinion
of the Court contends that petitioners nonetheless retained a
substantial property interest in the house after its destruc-
tion, arguing that a property interest includes not only the
1 The opinion of the Court appears to suggest that petitioners’ donation to the fire department
was of a partial interest in property for purposes of sec. 170(f)(3) because the fire department
did not receive the right ‘‘to sell the building with all the rights attached thereto’’. See op. Ct.
p. 410. However the mere fact that a donee does not receive the donor’s unrestricted fee simple
interest in the donated property but instead receives it encumbered with restrictions does not
trigger sec. 170(f)(3). See, e.g., Rev. Rul. 85–99, 1985–2 C.B. 83; G.C.M. 39380 (July 9, 1985)
(sec. 170(f)(3) not triggered where donor with fee simple interest in land donates it with condi-
tion that it be used only for agricultural purposes).
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(395) PATEL v. COMMISSIONER 423
benefits of ownership but also its burdens. The opinion of the
Court reasons that the structure’s postdemolition remnants
imposed significant burdens on petitioners, such as responsi-
bility for clearing debris and liability for injury from haz-
ardous conditions created by the remnants. Petitioners
shoulder the liability for such hazardous conditions, however,
as owners of the land from which the house was severed. All
substantial property interests of an owner in his structure
are eliminated when the structure is demolished.
The contention of the opinion of the Court that petitioners
merely gave a license also does not account fully for
applicable Virginia property law. The opinion of the Court
contends that petitioners never transferred any property
interest in the house to the fire department but instead
granted only a revocable license to use it. The opinion of the
Court cites Bostic v. Bostic, 99 S.E.2d 591 (Va. 1957), and
Young v. Young, 63 S.E. 748 (Va. 1909), in an effort to show
that under Virginia property law petitioners’ grant of permis-
sion to destroy the house would be construed as a mere
license to use that did not convey any property interest in
the house. In Bostic, the Virginia Supreme Court of Appeals
held that a grant of the right to enter and take minerals is
a mere license that creates no property interest in the min-
erals until they are separated from the land. Bostic, 99 S.E.2d
at 594–595. Young cites a similar principle with respect to
timber; namely, a license to cut and sell timber conveys no
property interest in the timber until it is cut, i.e., severed
from the land. Young, 63 S.E. at 749; see also Minor on Real
Property, 2d ed., sec. 51 (‘‘the grant of * * * [a] license * * *
under which the grantee is entitled to mine the ore, stone,
etc., and remove it * * * [gives the grantee] no interest in
the land or in any ore save that actually mined’’), cited with
approval in Bostic, 99 S.E.2d at 594.
Virginia has by statute modified the common law of prop-
erty with respect to structures to be removed from realty,
adopting the Uniform Commercial Code provision that deems
a contract for the sale of such a structure to be one for the
sale of goods where the structure is to be severed by the
seller. See Va. Code Ann. sec. 8.2–107(1) (2001). (If the buyer
is to sever, the contract remains one for the sale of land. See
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424 138 UNITED STATES TAX COURT REPORTS (395)
U.C.C. sec. 2–107(1) cmt. 1. 2) Notably, however, the Virginia
statute (consistent with the Uniform Commercial Code) pro-
vides that while a contract for the sale of a structure to be
severed by the seller is one for goods, ‘‘until severance a pur-
ported present sale * * * [of the structure] which is not
effective as a transfer of an interest in land is effective only
as a contract to sell.’’ Va. Code Ann. sec. 8.2–107(1). Con-
versely, once severance has occurred, the structure con-
stitutes goods, the sale of which is governed by statute and
need not be effective as a transfer of an interest in land. In
short, actual severance converts the structure from an
interest in land to personal property.
On the basis of Bostic and Young the opinion of the Court
concludes that petitioners’ grant to the fire department of the
right to destroy the house conveys no property interest but
only a license. Because such a license did not convey a prop-
erty interest, the opinion of the Court argues, it did not
constructively sever the house from the land. But the opinion
of the Court ignores the second prong of the principle in
Bostic and Young and the Virginia statute governing struc-
tures to be severed from land: severance effects a change in
property interests. While the grant of permission to mine or
cut conveys no property interest, such an interest does
transfer to the licensee when he mines the ore or cuts the
timber—that is, when severance occurs—according to both
cases. The same is true under Virginia statutory law for a
structure that is to be severed from land. Once severed, the
structure constitutes goods that need not be conveyed as an
interest in land.
While the opinion of the Court concedes that the destruc-
tion of the house severed it from the land (which rendered
it personalty), the opinion of the Court does not consider
whether this severance itself effected a transfer of property
interests analogous to the transfer of an interest in ore or
timber that occurs when the licensee severs either pursuant
to his license. However, by virtue of the fire department’s
severance and destruction of the house, petitioners in sub-
stance ceded all substantial property interests they held in
the structure to the department. Once severed, the structure
2 The Virginia Supreme Court of Appeals has noted that the Official Comments concerning
the Uniform Commercial Code ‘‘are frequently helpful in discerning legislative intent’’. Leake v.
Meredith, 267 S.E.2d 93, 95 (Va. 1980).
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(395) PATEL v. COMMISSIONER 425
was personal property. Petitioners retained no substantial
interest in that personal property; they were left only with
the debris into which it was converted.
Petitioners gave more than the use of their house and
retained no substantial interest therein by virtue of their
grant of permission to destroy. ‘‘Where the interest retained
by the taxpayer is so insubstantial that he has, in substance,
transferred his entire interest in the property, the tax treat-
ment should so reflect. Such a taxpayer satisfies the original
congressional purpose behind section 170(f)(3)’’. Stark v.
Commissioner, 86 T.C. at 252. As in Stark, petitioners’ reten-
tion of an interest in the charred debris into which the struc-
ture was converted was not a ‘‘substantial interest or right’’
within the meaning of section 1.170A–7(b)(1)(i), Income Tax
Regs. Because petitioners in substance transferred their
entire interest in the house, section 170(f)(3) does not limit
their deduction and provides no basis for an award of sum-
mary judgment to respondent in this case.
While section 170(f)(3) does not bar petitioners’ charitable
contribution deduction, it must still satisfy the ‘‘sine qua non
of a charitable contribution’’; namely, a transfer of money or
property without adequate consideration in return. United
States v. Am. Bar Endowment, 477 U.S. 105, 118 (1986);
Rolfs v. Commissioner, 668 F.3d 888 (7th Cir. 2012), aff ’g
135 T.C. 471 (2010). Petitioners must show that the value of
the house, taking into account the conditions on its donation,
exceeded the value of the benefit they received from the fire
department in the form of demolition services. See Rolfs v.
Commissioner, 668 F.3d at 892. I would deny the motion for
summary judgment and, if petitioners wished, proceed to
trial on that question of fact.
HALPERN, FOLEY, GOEKE, WHERRY, KROUPA, and HOLMES,
JJ., agree with this dissent.
f
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