                                           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




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897    PO 20009   Frm 00001   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00002   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00003   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00004   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (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




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00005   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00006   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00007   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00008   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00009   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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).




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00010   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (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




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00011   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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.




VerDate 0ct 09 2002   14:02 May 29, 2013    Jkt 372897   PO 20009   Frm 00012   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (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




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00013   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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).




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00014   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00015   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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:




VerDate 0ct 09 2002   14:02 May 29, 2013     Jkt 372897    PO 20009   Frm 00016   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (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




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00017   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00018   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (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-




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00019   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00020   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00021   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00022   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (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-




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00023   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00024   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00025   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      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.




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00026   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
                                      (471)                           ROLFS v. COMMISSIONER                                         497


                                           To reflect the foregoing,
                                                                          An appropriate decision will be entered.
                                                                               f




VerDate 0ct 09 2002   14:02 May 29, 2013   Jkt 372897   PO 20009   Frm 00027   Fmt 2847   Sfmt 2847   V:\FILES\ROLFS.135   SHEILA
