PER CURIAM:[fn*] [fn*] Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
Yuxi Chen, a native and citizen of China, petitions this court for review of a Board of Immigration Appeals (BIA) decision dismissing her appeal from an immigration judge's order that denied her request for asylum, withholding of removal, and protection under the Convention Against Torture (CAT). For the reasons described below, we DENY her petition.
Chen sought relief based on her religious beliefs and political opinions. The BIA and immigration judge (IJ) found that Chen's asylum application was untimely because she failed to prove by clear and convincing evidence that it had been filed within one year of her last arrival into the United States. The BIA and the IJ also found that Chen's testimony was not credible. As a result, the BIA determined that she could not establish her eligibility for withholding of removal. As to her claim for protection under the CAT, the BIA determined that Chen had not presented any persuasive arguments supporting a reversal of the I J's denial.
I.
Chen challenges the BIA's and I J's determinations that her asylum application was untimely. However, she has not attempted to identify a constitutional or legal issue with regard to the timeliness of her application. Her only claims are based on the IJ's assessment of facts and circumstances. Accordingly, we lack jurisdiction to consider this issue.
Nakimbugwe v. Gonzales, 475 F.3d 281, 284 (5th Cir. 2007); see also Zhu v. Gonzales, 493 F.3d 588, 594-95 (5th Cir. 2007).
II.
Chen next challenges the adverse credibility determinations. She argues that the inconsistencies found by the BIA and the IJ do not go to the heart of her claims for relief and either do not exist or were reasonably explained. Chen also argues that the IJ relied on speculation in making the adverse credibility determinations.
We review an immigration court's findings of fact for substantial evidence in the record, and we will only reverse those findings if the evidence compels it. Among those factual findings subject to review for substantial evidence is an immigration court's conclusion that an alien is not credible. We also use substantial evidence review for the decision to deny withholding of removal and protection under the CAT.
8 U.S.C. § 1252(b)(4)(B); Zhu, 493 F.3d at 594.
See Chun v. INS, 40 F.3d 76, 78-79 (5th Cir. 1994).
See Zhang v. Gonzales, 432 F.3d 339, 344 (5th Cir. 2005).
Pursuant to the REAL ID Act of 2005,"an IJ may rely on any inconsistency or omission in making an adverse credibility determination as long as the totality of the circumstances establishes that an asylum applicant is not credible." We will "defer therefore to an IJ's credibility determination unless, from the totality of the circumstances, it is plain that no reasonable factfinder could make such an adverse credibility ruling."
Wang v. Holder, 569 F.3d 531, 538 (5th Cir. 2009) (internal quotation marks and citation omitted); see also 8 U.S.C. § 1158(b)(1)(B)(iii).
Wang, 569 F.3d at 538 (internal quotation marks and citation omitted).
The BIA's and IJ's adverse credibility determinations meet this highly deferential standard. Several inconsistencies exist in Chen's testimony. Regarding her Chinese identification card, Chen first testified that the card was issued to her before she left China in December 2003. However, when confronted with evidence that the card was issued in August 2004, Chen changed her story and asserted that she had lost the identification card and family members obtained a replacement card for her while she was overseas. The BIA and the IJ reasonably determined that Chen's changing testimony was unsatisfactory.
The adverse credibility determinations are further supported by the discrepancies in Chen's testimony describing where she resided prior to filing for asylum. During cross-examination, Chen testified that she had only lived in Los Angeles and New Orleans while in the United States. Counsel asked Chen why her work authorization applications listed addresses in two other cities. Chen had no explanation for the differences. On appeal, Chen argues that her immigration consultants placed their own addresses on the applications and she never lived in those locations. Yet nothing in the record compels belief in her explanation, and we cannot rely on post hoc explanations alone.
See id. at 539; I.N.S. v. Phinpathya, 464 U.S. 183, 188 n. 6, 104 S.Ct. 584, 78 L.Ed.2d 401 (noting that "[c]ounsel's unsupported assertions in respondent's brief do not establish" a factual basis in the record).
Additionally, Chen failed to offer plausible explanations for discrepancies between her immigration hearing testimony and her asylum interview. She offered conflicting stories regarding when she arrived in Mexico before coming to the United States, what type of documents she used to travel from Thailand to Holland, and how much money she paid her smuggler. Chen testified she may have "mishear[d]" the asylum officer, but during the interview Chen had not indicated any problem understanding the questions posed to her via an interpreter. The BIA and the IJ reasonably determined that Chen's explanation, that she misunderstood the question, was not convincing. Chen points to no evidence that compels a contrary conclusion. Instead, Chen argues that the BIA relied on minor inconsistencies that are irrelevant to her claims. This argument is not compelling because the REAL ID Act allows for the consideration of " any inconsistency," including those that do not lie at the heart of the applicant's claim.
See Wang, 569 F.3d at 539-40.
Id. at 538.
In light of the inconsistencies found by the BIA and the IJ, we are unable to conclude that "no reasonable fact-finder could make such an adverse credibility ruling." Because the credibility determinations of the BIA and the IJ withstand review, the decision to deny Chen withholding of removal relief is supported by substantial evidence.
Id. at 538 (internal quotation marks and citation omitted).
See Chun, 40 F.3d at 79.
III.
Finally, Chen contends that the decision to deny her relief under the CAT should be reversed because the decision was improperly based on adverse credibility findings. We agree with the IJ and BIA that Chen is not credible, and therefore her CAT claim was properly denied. Moreover, the IJ addressed the merits of the CAT claim and concluded that Chen had not described abuse that rose to the level of torture. Further, she failed to meet her burden of proving that it was more likely than not that she would be tortured if returned to China. The BIA found that Chen presented no persuasive arguments to reverse the IJ's finding. We agree, finding no evidence to the contrary.
Petition for review of denial of asylum is DISMISSED for lack of jurisdiction; Petition for review of denial of withholding of removal and protection under CAT is DENIED.
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), aff'd.
238 F.2d 945 (2d Cir. 1960);
Deukmejian v. Commissioner, T.C. Memo. 1981-24;
Dresser v. Commissioner, 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 petitioners 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 reproduction cost of $235,350 and that they received only an "incidental benefit" in return. Petitioners contend that section 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.
A $235,350 deduction would give rise to an overpayment for 1998.
III. Section 7491(a) Shift in the Burden of Proof
We consider as a preliminary matter petitioners' contention 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. Ill, 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 factual issue relevant to a taxpayer's liability for tax if (1) the taxpayer introduces credible evidence with respect to such issue, sec. 7491(a)(1); and (2) the taxpayer satisfies certain other conditions, including substantiation of any item and cooperation with the Government's requests for witnesses and information, sec. 7491(a)(2); see also Rule 142(a)(2).
Petitioners contend that they have satisfied the requirements of section 7491(a) and the burden of proof as to all factual issues affecting the deficiency in their tax should be shifted to respondent. Respondent contends that because he was 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 "reasonable 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. Gallagher and that in any event section 7491(a)(2)(B) imposes a cooperation requirement on taxpayers only during the examination 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 history underlying section 7491(a) states in pertinent part:
the taxpayer must cooperate with reasonable requests by the Secretary for meetings, interviews, witnesses, information, and documents (including providing, within a reasonable period of time, access to and inspection of witnesses, information, and documents within the control of the taxpayer, as reasonably requested by the Secretary). Cooperation also includes providing reasonable assistance to the Secretary in obtaining access to and inspection 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 section 7491(a)(2)(B) requirement of cooperation extends only through the examination of their return is meritless. For purposes of section 7491(a)(2)(B), the requirement of cooperation continues through the pretrial proceedings in the Tax Court. See, e.g., Connors v. Commissioner, 277 Fed.Appx. 122 (2d Cir. 2008), affg. T.C. Memo. 2006-239; Yearout Mech. Engg., Inc. v. Commissioner, T.C. Memo. 2008-217; Krohn v. Commissioner, T.C. Memo. 2005-145; Lopez v. Commissioner, T.C. Memo. 2003-142, aff'd. 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 respondent's counsel informed petitioners' counsel that Mrs. Gallagher had denied respondent's request for access to the lake property, "Petitioners' counsel subsequently advised Respondent's counsel that no arrangements could be made by the Petitioners to have Respondent's expert witness see the Property." What is lacking in this record is any evidence of what effort, if any, petitioners undertook to assist in securing Mrs. Gallagher's cooperation to permit respondent's expert to visit the lake property. As reflected in the legislative history, Congress intended that the duty of cooperation extend to "providing 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.
Although petitioners' counsel suggested to the Court that Mrs. Gallagher's previous experience with the Internal Revenue Service occasioned her intransigence in the instant proceeding, counsel's statements do not constitute testimony or evidence. See, e.g., U.S. Holding Co. v. Commissioner, 44 T.C. 323, 327 (1965).
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 property 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 contribution deduction because the fair market value of the property they donated did not exceed the fair market value of the benefit they received in exchange. Petitioners contend that the issue was untimely raised and therefore its consideration would be prejudicial to them.
We have refused to consider an untimely raised issue when the opposing party is unfairly surprised and prejudiced because his defense against the issue requires the presentation of evidence different from the evidence relevant to the identified issues in the case. See Leahy v. Commissioner, 87 T.C. 56, 64-65 (1986); Fox Chevrolet, Inc. v. Commissioner, 76 T.C. 708, 733-736 (1981); Estate of Horvath v. Commissioner, 59 T.C. 551, 555-557 (1973). However, we are not persuaded that petitioners were unfairly surprised or prejudiced by respondent's quid pro quo argument. Starting with the petition and continuing through their opening brief, petitioners have cited Scharf v. Commissioner, T.C. Memo. 1973-265, and contended that a "small" or "incidental" benefit received by a donor "does not negate a finding of donative intent". Scharf is quintessentially a quid pro quo case, involving facts that are similar to those of the instant case in many respects. Scharf involved a charitable 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 necessitated 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.
Petitioners raised their "new matter" objection in their answering brief, arguing that respondent raised the quid pro quo argument for the first time in his opening brief.
By virtue of their reliance on Scharf from the outset, it is petitioners, not respondent, who first raised the quid pro quo issue. Petitioners cannot claim to have been unfairly surprised when respondent further developed the quid pro quo theory on brief, including analyzing post-Scharf developments in the caselaw such as the Supreme Court's decision in United States v. Am. Bar Endowment, supra. Given petitioners' reliance on Scharf, their contention from the outset that the benefit they received was "small" or "incidental", and Scharf's characterization of the issue as a 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. See Smalley v. Commissioner, 116 T.C. 450, 456-457 (2001); Ware v. Commissioner, 92 T.C. 1267, 1268 (1989), aff'd. 906 F.2d 62 (2d Cir. 1990); Pagel, Inc. v. Commissioner, 91 T.C. 200, 211 (1988), aff'd. 905 F.2d 1190 (8th Cir. 1990). In addition, Scharf sustained a charitable contribution deduction for the donation of a building to be burned down by a volunteer fire department, whereas respondent argues that such a deduction is precluded in petitioners' case under Am. Bar Endowment. Since petitioners contend that Scharf supports a decision in their favor, it is appropriate and important to consider the application of a quid pro quo analysis in this case. We shall therefore consider the issue.
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.
2. Development of the Quid Pro Quo Test
Respondent argues that petitioners are not entitled to a charitable contribution deduction for their donation of the lake house because they anticipated and received a substantial benefit in exchange for the donation; namely, the demolition of the lake house on a site where they intended to rebuild. Respondent contends that the value of the demolition services received exceeded the value of the property petitioners transferred, eliminating any charitable intent from the transaction. As noted, respondent relies on United States v. Am. Bar Endowment, supra, and on section 1.170A-1(h)(1), Income Tax Regs.
In United States 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 purchase and a contribution" if the payment exceeds the value of the benefit received in return. Id. at 117. The Court consequently adopted a two-part test (first articulated in Rev. Rul. 67-246, 1967-2 C.B. 104) for determining when part of a dual payment is deductible. "First, the payment is deductible only if and to the extent it exceeds the market value of the benefit received. Second, the excess payment must be made with the intention of making a gift." Id. (internal quotations omitted). The Am. Bar Endowment test has since been incorporated into the regulations. See sec. 1.170A-l(h), Income Tax Regs.; T.D. 8690, 1997-1 C.B. 68. The test also applies where payment is made in property other than money. See Transam. Corp. v. United States, 902 F.2d at 1543-1546.
"Sec. 1.170A-l(h)(1), Income Tax Regs., states:
No part of a payment that a taxpayer makes to or for the use of an organization described in section 170(c) that is in consideration for * * * goods or services * * * 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 services.
Petitioner had decided to demolish the lake house and construct another residence on the site when he contacted the VFD about donating the lake house to be burned down for training purposes. Consequently, examining the external features of the transaction, as we must, see Hernandez v. Commissioner, 490 U.S. at 690-691, we find that petitioner anticipated a benefit in exchange for the contribution: demolition of the lake house. On similar facts, this Court decided in a Memorandum Opinion, Scharf v. Commissioner, T.C. Memo. 1973-265, that the taxpayer was entitled to a charitable 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 volunteer 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. Instead, we must consider whether the value of the lake house as donated exceeded the value of the demolition services petitioners received.
We note also that the 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. Consequently, Scharf's use of the "insurance loss" value (less insurance proceeds received) to measure the value of the structure donated offers no basis for valuing the structure here, where no precontribution casualty was involved.
Because, as discussed infra, we conclude that the value of the lake house did not exceed the value of the demolition services, we need not address the second prong of the test set forth in United States v. Am. Bar Endowment, 477 U.S. 105 (1986):whether the excess of the value of the donation over the value of the benefit received was transferred with the intention of making a gift.
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 demonstrate that petitioners did not save anything from the demolition resulting from the burning and therefore received no benefit from their donation of the lake house to the VFD.
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 excavation 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 whomever petitioner consulted, estimated the cost of demolition and debris removal for the lake house as at least $10,000. We do not believe that debris removal alone accounted for these estimates. A much more plausible inference is that 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 donation.
b. Value of the Property Donated
Because petitioners received a substantial benefit in exchange for their donation of the lake house, their entitlement to any charitable contribution deduction under the Am. Bar Endowment test depends upon whether the value of the lake house as donated exceeded the value of 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 measured by the willing buyer/willing seller standard in section 1.170A-l(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 property'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 residential). 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. Commissioner, 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 "constructive severance" of the structure from the land, recognized under Wisconsin law, even though the structure remained affixed to the land. See Fitzgerald v. Anderson, 51 N.W. 554 (Wis. 1892); Smith v. Waggoner, 6 N.W. 568 (Wis. 1880); 2 Tiffany Real Property, sees. 623-624 (3d ed. 1939). By transferring the lake house to the VFD without the underlying land, however, petitioners created a substantial restriction or condition on the property's marketability; namely, the lake house could not remain indefinitely on the land upon which it was sited.
Respondent disputes whether the letters between petitioner and the VFD memorializing the donation of the lake house were sufficient to effect a constructive severance of the building from the underlying land. To effect a constructive severance of a building from land, the transfer ordinarily must be in a writing in a form sufficient for a conveyance of land. 2 Tiffany Real Property, sec. 624 (3d ed. 1939). Respondent contends that the letters between petitioner and the VFD were insufficient under the Wisconsin statute of frauds, Wis. Stat. Ann. sec. 706.02 (West 2001), to convey such an interest. We disagree. Under Wis. 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 conveying the lake house to the VFD for that purpose.
Petitioners attached two additional restrictions or conditions 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. 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.
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.
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 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 represents an accurate measure of the value of the lake house as donated to the VFD. Petitioners did not donate an easement — i.e., an intangible property right permanently encumbering the lake property; they donated a structure, severed from the lake property, with substantial restrictions and conditions on its use. As described more fully below, the "before and after" method employed by Mr. Larkin takes no account of these conditions and restrictions that would affect the marketability of the severed structure. See Cooley v. Commissioner, 33 T.C. 223 (1959); Deukmejian v. Commissioner, T.C. Memo. 1981-24; Dresser v. Commissioner, T.C. Memo. 1956-54.
It would appear that petitioners also donated a temporary easement to the VFD granting a right of access to the lake property to conduct the training exercises and controlled burn. However, neither petitioners nor their expert addressed this element of the donation or suggested it had any value.
The Larkin appraisal states that "The interest valued is fee simple and unencumbered." Mr. Larkin contends that the value of the lake property for the "donation purposes" to which it was put was its "contributory value" of $76,000. Mr. Larkin reaches a "contributory value" of the lake house by starting with the fair market value of the lake property as a whole (land, the lake house, and all other improvements), 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 comparable vacant sites) plus the depreciated cost of the improvements other than the lake house (i.e., $599,000). However, since the starting point of Mr. Larkin's calculation was the market value of the lake property as a whole, as measured by sales of comparable properties where the 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 severance from the underlying land, the prohibition on residential use, and the condition that it be burned down promptly. Consequently, the property interest Mr. Larkin appraised is not comparable to the property interest that petitioners donated to the VFD.
Petitioners alternatively contend that the fair market value of the lake house as contributed to the VFD was $235,350, its reproduction cost as estimated by Mr. Larkin. Petitioners offer no expert testimony in support of this proposition. Mr. Larkin did not so opine; petitioners merely borrow his estimate of reproduction cost and assert on brief, relying on Estate of Palmer v. Commissioner, 839 F.2d 420 (8th Cir. 1988), revg. 86 T.C. 66 (1986), and First Wis. Bankshares Corp. v. United States, 369 F. Supp. 1034 (E.D. Wis. 1973), that because the lake house was "unique" and was "special use" property in the hands of the donee, reproduction cost is the appropriate measure of its value.
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 "reproduction" and "replacement" cost as synonymous terms. In the circumstances, we find it unnecessary to consider any differences in the two concepts.
Petitioners' reliance on Estate of Palmer and First Wis. Bankshares Corp. is misplaced. There was nothing unique about the lake house comparable to the unique status of the properties at issue in those cases — in Estate of Palmer, a building integral to a college campus and its activities; and in First Wisconsin, a bank structure suitable only to some public use. According to the expert testimony in the record, the lake house was a typical, albeit modest, residence for its area; by their own admission, petitioners contemplated residing in it after remodeling. In addition, the structures at issue in both cases petitioners cite were donated without having been constructively severed from the land on which they were sited. Consequently, the circumstances of this case lend no support to the use of reproduction cost, an approach that also fails to account for the conditions petitioners placed on the lake house incident to the donation.
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. Commissioner, supra; see also Rev. Rul. 85-99, supra. "[Property 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 concerning 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 persuaded, however, that the impact on fair market value of the foregoing encumbrances would be adverse rather than beneficial. 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 examination of photographs and a video of the lake house, and a description of its features, Mr. George opined that the value of any salvageable materials would be offset by the costs of removing them. As a consequence, we are persuaded by the evidence that the lake house had no salvage value.
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.
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 approximately $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 donation, including in particular its severance from the underlying land. The remaining evidence supports a conclusion that the fair market value of the lake house as encumbered at the time of the donation was de minimis. The lake house could not remain on the land on which it was sited, could not be used for residential purposes, yet had no value as a structure to be moved or any salvage value. We therefore hold that petitioners are not entitled to any charitable contribution deduction for the donation of the lake house because they have not satisfied the Am. Bar Endowment test: they have not shown that the market value of the property they donated exceeded the market value of the benefit they received in exchange.
Given our conclusion that petitioners' charitable contribution deduction is precluded under United States v. Am. Bar Endowment, 477 U.S. 105 (1986), we need not decide respondent's alternate contentions that the deduction is disallowed pursuant to sec. 170(f)(3) or on account of the worthlessness of the lake property at the time of the donation.
B. Accuracy-Related Penalty
Respondent determined that petitioners are liable for an accuracy-related penalty under section 6662(a) and amended his answer to assert petitioners' liability for a penalty under section 6662(h) for a gross valuation misstatement. Respondent argues on brief in support of the section 6662(a) penalty that petitioners have an underpayment that is attributable to negligence or disregard of rules or regulations under section 6662(b)(1), to a substantial understatement of income tax under section 6662(b)(2), and/or to a substantial valuation misstatement under section 6662(b)(3) that is augmented by section 6662(h) because it is a gross valuation misstatement.
Under section 6664(c), however, generally no penalty is imposed under section 6662 with respect to any portion of an underpayment if it is shown that there was reasonable cause for such portion and that the taxpayer acted in good faith with 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 payer made a good faith investigation of the value of the contributed property. See sec. 6664(c)(2) and (3).
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.
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 circumstances." Sec. 1.6664-4(b)(1), Income Tax Regs. Petitioners complied with all reporting requirements, maintained adequate books and records, and fully disclosed the nature of the charitable contribution deduction in dispute on their return. The legal issues raised by their deduction claim were not settled. Importantly, in Scharf v. Commissioner, T.C. Memo. 1973-265, this Court held that a charitable contribution deduction was available for the donation of a building (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 petitioners (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 property was at least in good faith. See sec. 6664(c)(2)(B). On balance, 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.
To reflect the foregoing,
An appropriate decision will be entered.