The Honor abl e Sue E. M ye rs c ough ofthe Ce nt ra l Dis t ri c tof  I l l i noi s , s i t t i ng by des i gna t i on.



## In the 

# U n ited S ta tes Co urt o f Ap p ea ls

F o rth eS e v e n th C ir cu it

N o. 11

- 2078 T HEODO RE R. R OLFS, etal. , P et it ioners-A ppell ants , v. C OM MIS S IONEROF I NTERNAL R EV EN UE ,R espo nd ent-A pp ellee.

Appeal from the United States Tax Court. No . 9377- 04

—Jo sep h H . G ale, Judg e.

A RG UE D O CT OB ER 25, 2011

— D ECI DE D F EB RU AR Y 8, 2012

Befo re E A S T E RB R OO K, Chie f Judg e, H A MI L T ON, C ir cuit J udg e, a nd M Y ER S COUGH, D i s t r i ctJudg e .  H A MI L T ON, C ircu it Judge. T a x p a y e rs Th eod ore R. Rolf s and hi s w i f e J uli a Gall agher ( col l ecti vel y, the Rol f s) pu rchas ed a thre e-acre l ake f ro nt pro pertyi n the Vil l age ofC henequa, W i sco nsi n. N ot sat i sfi ed w i th the house2 N o. 11

- 2078 th at st oo d on th e p ro p er ty , t h e y d ec id ed to d em olis h it an d bui l d an o th er . To ac co m pl i sh th e demol i ti o n, the Rol f s donat ed t h e house to the l oca l fi re departm ent t o be b ur ne d do wn i n a fi r efi g ht ert raininge xe r ci se . The R olfs cla i m e d a $7 6,0 00 ch ar ita b le d ed u c tio n on th eir 1998 ta x re turn f orthe v alu e o fthei r donated and dest r o y ed ho us e. The I RS di sa l l o wed the de duct i o n, a nd that deci si on was upheld by the U ni ted S tat es T ax Court. R o l f s v. Com m ’ rof

Int e r nal Re ve nue, 1 35 T. C. 4 71 ( 2010 ). T he Rolfs app eal. To s u p p ort the d ed uc tion, th e Rolfs n ee d ed to sho w a val ue f orthei r donati on that e xceeded th e s ubstanti albene fi t they r ecei ved i n re turn. The Tax C o u r t f o u n d t h a t th e y h a d n o t d o n e s o . We a g r ee a nd t h e r e f o r e a f fi r m. Cha r i tabl e deduc ti o ns f o r b ur ni ngdo wn a ho us e ina t r a i ni nge xe r c i s e a r e u nu s ua l b utn ot unp r e c e de nt e d. By val uing t hei r gi fts as i fthe houses w er e g i ven a w ay intac t and w ithou t c ond iti ons , taxp ayers li ke th e Rolfs h av e c laim ed su b st an tia l d ed u c tio n s fro m th eir ta x ab le i ncom e. But thi s i s no t a co m ple te orco rr ect w ay to val ue such a gi ft. W h en a gi ft i s m ade with c ondit i ons, th e c o n d i t i o n s mu s tb e t a k e n i n t o a c c o u n ti n d e t e r mi ni ng th e f a i r ma r k e tv a l u e o fth e d o n a t e d p r o p e r t y . As we ex p lain be low , pr op er co n sid er at ion o f th e e c on om ic eff ect ofth e c ond i ti on that the house be destr oye d re du ces th e fair m ar ketval ue o fthe gi ft s o m uch that no net va l ue i s ev erl i k el y t o b e av ai l ab l e f o r a de duct i o n, and cer tai nl y no t her e. W hat i s the fair m ar ketval ue o fa house, se ver ed f ro m the l and, and donated on the co nd itio n that i t s oo n beN o. 11

- 2078 3 bu rned dow n? Th ere is no e v id en ce of a fun ctiona l m ark e to fwi l l i n gs e l l e r s a n d b u y e r s o fh o u s e s t o b ur n. A ny va l uati on m ust r ely o n anal ogy . The Rol f s r el i ed pr i m ar i l y o n a n a ppr ai se r ’ s be f o r e- an d- afte r a ppr o ac h, val uing thei r enti re proper ty both bef or e and a fter d est r uct i o n o fthe hous e. The di ff er en ce s ho wed the v al ue o fthe ho us e as a ho us e availabl e f o r unl i m i te d us e. The I RS, o n t he o t he r h a nd , p r e s e nt e d e xp e r t s wh o a t t e mp ted to val ue the hou se in light o fthe condi ti on that i t be bur ne d. The c l o se sta na l o g i es wer e th e hou se ’ s va l ue f orsa l vage o r re m ova l fro m the si te i ntact. Th e T a x Co ur tf i rs t fo un d tha tthe R o l f s r e c e i v e d a substa nti albene fi t fro m thei r donati on: d em ol i ti on se rv ice s v alu ed by ex p er ts an d th e c ou rtatap p ro x im at ely $ 1 0 , 0 0 0

. T he c o ur tthe n f o un d tha tthe R o l f s ’ b e f o r e - a nd

aft er va lu at ion m et h od failed to ac c ou n t fo r th e c on d iti o n pl a c e d o n t he g i ftr e qu i r i ngtha tthe h o us e b e destr oye d. The cour t a l so f ound that a ny va lu at ion that d id acc ou nt f or the d estru ction req uirem en t w ou ld certai nl y be l ess than the val ue of the re turn ed benefi t. W e fi nd no er ror i n the cour t’ s f actualo r l ega l anal ysi s. Th e I RS a na l o g i e s p r o v i de r e a s o nab l e me tho ds f o r a pproxi m at i ngthe f ai r mar k etv al ue o fthe g i ft he r e. The bef or e- and-afterm etho d does no t.

I. L ega l B a ckgro un d C o nc ernin g C ha rita ble D o na tio ns U nd er Se ct i on 170(a) T he l egal princ iples govern in g our d ecision are w el l es tabl i shed, and the parti es f ocus thei r dispute on com peti ng va l uatio n m etho dol ogi es. W e br i efl y r evi ew4 N o. 11

- 2078 the r el evantl aw , address i ng s om e f actualpre re quis i tes al ong the way. The re quir em ents f or a chari tabl e deducti on a re go ver n ed by st at u te . Ta x p ay er s m ay d e d u c t fro m th eir r etur n th e ve r i fi ab l e amoun t o f ch ar i tabl e cont r ibut i o ns m ad e to q u a lifi ed organization s. 26 U

. S. C

. § 170(a)( 1). Eve r y o ne a g r ee s th at t he Vi l l ag e o fChenequa and i ts vo l unteerfi re departm ent a re val i d rec i pie nts ofchar i tabl e c on tr ibuti ons as defi ned und erse cti on 170(c )

. To qual i fy f ordeductio n, co ntributi ons m ust a l so be u nr e qu i t e d — th at i s, m ade wi th “n o ex pec ta ti on of a fi na nc i alr etur n c o m m en su r at e wi ththe am o unto fthe gi ft. ” H e r nan dez v. C om m ’ rof Int e r nal Re ve nue, 490 U

. S. 68 0, 690 ( 1989 )

. The I RS and the co u rt s loo k t o the obj ecti ve f eatur e s o f t he t r a ns a c t i o n, no t the s ubj e c t i v e mot i v e s o f the dono r, to deter m i ne w h ethera gi ft was i ntended orwh ethera com m ensura te re turn c oul d be e xp ecte d as p ar t o f a q u id p ro qu o e x c h an ge . Id. at69 0- 91. The Trea sury r egulat i ons i m ple m ent the detai l s o f sect i on 1 70, ins tr u cti ng ta xpayers how to prove a ded ucti o n t o the I RS a nd h ow to v al ue do na te d pr o per tyus i ng i ts f ai r mar k etv al ue . Unders ec ti o n 1.170A

- 1( c) o fthe re gul ati ons, f ai r m ar ketval ue i s t o be det er m i ned as o f the t i m e o fthe contrib uti on a nd under the hypotheti cal w i l l i ng buye r/w i l l i ng se l l err ule , wh erein both part i es to the im agi ned tr ansact i on a re as sum ed to be aw ar e o f r el ev an t f ac ts a nd fr ee fr o m e xt erna l c o m pul si o n t o b uy orse l l

. 26 C. F. R. § 1. 170A-1( c)

. A s wit h the questi on o f th e pur po se o f th e cl ai m ed g i ft, f ai r m ar k etval ue re quir es an o b j ecti ve, eco nom i c i nquir y a nd i s a questi on off act.N o. 11

- 2078 5

The fi re c hiefas ked the Ro lf s f or $1, 000 i n c a sh f or the fir e 1 departm en tt o h el p defra y c os t s ofthe t ra i ni ng e xe rc i s e. The Tax Cour tdi d notm ake ane xpl i c i tfi ndi ng a s t o whe t he r t he $1, 000 cas h do nati on w as an es se nti al conditi on f or the fir e de pa r t m e nt ’ s a c c e pt a nc e o fthe do na t e d h ou s e . I fi twa s an es s en t i al c ondi t i on, the n i n l i ghtofthe Tax Cour t ’ s fi ndi ng tha t the R olfs receiv ed b en efits of up to $1 0,000 in d em oliti on ser vices i n return, one m ight eas il y view the ent ir e t ransac tion ob jectiv ely as m er e l y a con tract for d iscou nte d d em olit i o n s e r v i c e s a n d n o ta s a c h a r i t a b l e d o n a t i o n a t al l

. T he I RS di d notar gue thi s the or y, s o we e xpr es s no op inio n o n its po ssible m erit. W e can assu m e, as th e re c o r d sugg ests, that the R olf s we r e s u b j e c t i v e l y mo t i v a t e d a t l e a s t i n p a r t b y th e h o pe ofde du c t i ngthe v a l ue o fthe de mol i s he d h o us e o n th eir tax return
. A p p lyi ng the objective test, how ever, w e t r ea t th ei r do na ti o n th e sa m e as we woul d i f i t w ere m o ti va ted en ti r el y b y the de si r e to fur th erthe t r ai ni ng ofl oca l fi re figh ters. Obj ecti vel y, the pu rpos e o fthe tr ansac ti o n was to m ake a c ha r i tabl e co nt r ibut i o n t o the fi r e depa r tment fo r a s pec i fi c us e. The Ro l f s do cu- 1 m ented thei r donati on a nd subst anti ate d the ba si s o f thei r val uati on f or t h e I RS as r equi re d by the r egul ati ons. The Tax Court did not hol d that th e t ra n sact i on wa s c a t e g o r i c a l l y i n v a l i d u n d e r s e c t i o n 1 7 0 ( a ) , a n d we ag r ee tha t no th i ngi n the s tr uctur e o r t ec hni ca l e xe cut i o n o fthe R o l f s ’ do na t i o n pr e c l ud e d i t s p o t enti al val i dity a s a qu ali fyi ng char i tabl e co ntributi on under sect i on 1 70( a)

. The T ax C ourtf ound ins tea d that when th e trans action w as p ro p erly evalu ated , the R olf s ( a) r ec ei ve d a s ubs ta nt i al b en efi t i n e xc ha ng e f o r the6 N o. 11

- 2078 do na te d pr o per tya nd ( b) d id nots ho w tha t th e va l ue o fthe do na te d pro per tye xc ee ded th e va l ue o fthe b e ne fi tthe y r e cei ved

. We a l s o a g r e e wi th the s e fi nd

i ngs. There was no netdeductib l e v al ue i n thi s donat i on i n l i ght o fthe re turn b enefi t t o the Ro l f s. A char i tabl e co ntributi on i s a “t ra nsf erof m on ey or proper ty w i thout adequate co nsi derat i on .” U nited Sta tes v. Am e r i can B a rEndowm e nt, 477 U .S. 10 5, 11 8 (1 98 6). A c h ar ita b le d ed u c t ion is n ot au to m at ica lly d isa llow ed if t he do no r r e c e i v e d a nyc o ns i de r a t i o n i n r e t ur n. I ns t e a d, as the S upr eme Co ur t o bs er ve d i n Ame r i c an Ba rEn do wm e nt, so m e donation s m ay have a dual purpose, as wh en a d onor overp ays for ad m issi on to a fun d -rai sing d inn er, but does i n f act expect t o enj oy t h e prove rbi alr ubber ch icken d inn er a n d accom p an ying en tertainm en t. W he re “the si ze of the paym ent i s cl ear l y o ut o fpro port i on t o the b en efit re cei ved, ” t axpayer s ca n dedu ct the exce ss, p ro vid ed th at th e y ob j ec tiv ely int en d ed it as a gift

. Id. at1 16

- 18 ( “T he t ax pay er, the r ef o r e, musta t a m i ni m um dem onst ra te that he purpose l y c ontr ibuted m oney o r proper ty i n exces s o fthe va l ue o fany benefi t he re cei ved i n re tu rn .”). I n pract i ce then, the f ai r m ar ketval ue o f any s ubstanti alr etur ned benefi t m ust be subtr acte d f r o m the f ai r mar k etv al ue o fthe do na ti o n. T h is a p p ro ac h d iff e r s from th at of th e T ax C ou rtin Sc har f v. Com m ’ ro

f Int e r nal Re ve nue, T. C.M

. 19 73- 265, an e a r l i e r c a s e tha ta l l o we d a c ha r i t a b l e d e du c t i o n f o r p r o per tydo na te d t o a fi r e depa r tmentt o b e bur ne d. I n Sc ha rf , a bui l ding had been par ti al l y b urned and w as about to be c o nde m ne d. The o wnerdo na te d the b ui l di ngt o theN o. 11

- 2078 7 fi re departm ent s o i t co uld bur n i t down the re st of th e way . The Ta x Co ur t co m pared the v al ue o fthe benefi t o btain ed by the donor ( l and cl ear ed ofa rui ned bu il d ing) to the value of th e p u b lic b en efi t in the form o ft r ai ni ngf o r the fire fi g ht er s, a nd f o und tha t th e p ub li c b e n e fi t sub stan tiall y exc eed ed the p rivate return benefi t. Thus, the donati on was deem ed al l owable as a l egi ti m ate char i tabl e deducti on, and the c ou rtpro ceeded to val ue the donati on usi ng the es tabl i shed i nsu ra nce los s fi gure f orthe bui l ding. The Sc ha rf co urt did not actual l y c al cul ate a dollar v alue f orthe pu bl i c be nefi t, an d i fi t ha d tried, i t pr o babl y woul d ha ve f o und the ta ske xc ee di ng l y di ff i cul t. Al th o ug h Scharf su ppo r ts the ta x p ay er s’ c laim ed d ed u c tio n h er e , its foc u s o n p u b lic be ne fi t m ea sured a g ai ns t th e be ne fi t r ea l i ze d b y the donor i s no t co nsi ste nt with the S up re m e Cour t’ s l ate r reas o ni ngi n Am e r i ca n BarEndowm e nt
. T h e S u p r e me C ou rtd id n ot rely on am or p h o u s co n c ep ts of p u b lic benefi t a t a l l, but f ocuse d i ns te ad o n the f ai r m ar ket va lu e o f th e d on at ed p ro p er ty rela ti v e t o t h e fa ir m arket valu e of th e b en efi t return ed to the d onor. 477 U

. S. at 116- 18. The Tax Court rul ed cor re ctl y i n t h is case that the Scharf test “h as no vital ity” after Ame r i c an Ba rEn do wm e nt
. 13 5 T. C at 4 87. W i t h t hi s b a c k g r o un d, the de c i s i v e l e g a l pr i nc i pl e f or the Tax Cour t a nd f orus i s the co m m on- sense r equi re m ent that the f ai r m ar ketval uatio n ofdonate d proper ty m u st ta ke i nto acco unt condi ti ons on the donati on that aff ect the m ar ketval ue o fthe do n ated property. This has lo ng been the l aw . S ee Cooley v . Com m ’ rof Int e r nal Rev e nue, 33 T. C. 223, 22 5 ( 1959 ) ( “p ro p erty othe rwis e8 N o. 11

- 2078 i ntri nsi cal l y m or e v al uabl e w h ich i s e ncum ber ed by so me r e s t r i c t i o n o r c o nd i t i o n l i mi t i ngi t s ma r k e t a b i l i ty m us t be v al ue d in li g hto fs uchl i m i ta ti o n” )

. I n C o o ley, th e d onor cou ld n ot us e the reta ilprice of don ated cars as thei r f ai r m ar ketval ue bec ause a co ntra ctualco n d iti o n prev en te d the m fr o m e ve r b eings o l d a t r et ai l i n the U ni ted S tat es. The car s had be en bo ught wh ol es ale at a speci aldi sco unt pri ce o n the condi ti on that th ey be don at ed ov er se as . Id. S ee al so Van Zelst v . Com m ’ rof Int e r nal Rev e nue, T. C.M

. 19 95- 396 ( re quir i ng co nsid er ati on o fan i nj unction a gai nst m i ni ng i n deter m i ni ng va l ue o f d on at ed lan d ); Thor nt on v. Com m ’ rof Int e r nal Revenu e, T. C.M

. 19 88- 479 (ac c ounti ng f orco st ofm ovi ng and r ei nter ri ng r em ai ns wh en donati ng a cem ete ryf oro ther u se s); D e ukmej i an v. Com m ’ rof Int e r nal Re ve nue, T

. C

. M. 1981 -24 (refus ing to value p rop erty in fee sim p le w h ere th e do na ti o n c o ntained a co ndi ti o n, r eque st ed bythe d one e city, that the p rop erty be p ut only to pu bli c us e).

II. Valu at i on M e t hods As thi s case de m o ns tr at es , ho wev er, k no wi ngtha t o ne mus ta c c o un tf o r a c o nd i t i o n i n a val ua t i o n o pe ns u p a se co nd t i er of que st i o ns abo ute xa ct l y ho w to do s o . The Tax Court wei ghed confl i cti ng ev i dence on valuati on an d r ej ec te d the t ax pay er s’ e vi den ce c l ai m in gtha t th e d ona ted hou se ha d a value of $76,000. T he T ax C o u rt f ound ins tea d that the cond i ti on r equi ri ng dest ructi on o fthe house m eant that the donat ed proper ty h ad essen tiall y no valu e. 135 T

. C

. at 494. The Tax Cou rt d id n ot err.N o. 11

- 2078 9 I n thi s ca se ther e i s no e vid ence ofan a ctualm ar ket fo r, an d th us no r ea l o r hy po th et i ca l wi l l i ng buy er s of, doom ed houses as fi re fi ghtertr ai ni ng si tes
. Fi re departm ents typi cal l y c onduct thei r tr ain in g i n burn t owers, w hi ch ar e d es i gned to withst and repeat ed exer ci ses so th at fi r e de p artm en ts p ay only a renta l fee f or use of a tower. A pp ar entl y the Vil l age of Ch enequa fire departm en t h as so m et im es u se d a b u rn to w er ata n ea rb y t ec h n ical coll ege for training p urp oses, but th ere is no reco rd evi dence ofhow m uch t h e d epart m ent pay s f orthat use. S om eti m es fi re d ep ar tm ents al so conduct exer ci ses usi ng donate d oraba nd oned pro perty, but ther e i s a l so no r eco rd ev i dence ofany fi re dep ar tm ents payi ng f or such p roperty. W i thout com parat or s fro m any est abl i shed m ar ket s, the part i es prese nted com peti ng exper ts who adv o ca te d di ff er entv al ua ti o n metho ds. The t ax payer s r el i ed on the co nven tio nal r eales tat e m ar ket, as i fth ey had gi ven the fi re departm ent fee own er shi p of th e h ou se . The I RS r el i ed o n the s al va g e m ar k eta nd th e m ar k etf o r r el o ca te d ho us es , a tt empti ngt o a cc o unt f orthe condi ti ons propos ed i n the gi ft. T he ta xp ayers’ e xp ert w itness is a residen tial ap p raiser. H i s s ug g e s t e d v a l ua t i o n metho ds t r e a t e d the do na t i on as one ofr eal es ta te . Th i s was notan o rdi naryr eales tat e tr ansact i on, however, and the apprai serneeded to acc o un tf o r the f a c ttha to nl y the h o us e wa s b e i ngdo na t e d, w hile al l rights to th e t h r e e acres on w hich i t sat w ere b e i ngr e t a i ne d. ( Th e do na t i o n ne c e s s a r i l y g r a nt e d a tem pora ryea sem en t to perm i t the fi re departm ent t o co m e o nt o the pr o p ertyt o c o nduc t i ts e xe r ci se s, b ut ne i th erpa r tyde emed thi s o fs i g ni fi ca ntv al ue . ) The10 N o. 11

- 2078 taxpayer s a rg ued that the “be f or e- and-after ” m etho d sh oul d be a pp l i ed. Thei r apprai serst ar ted with an es tim ate d val ue o f$6 75, 000 f orthe l and an d h ouse together, bas ed on co m pari sons to re cent sal es ofsi m i l ar p ropert i es i n the ar ea. U si ng the sam e m etho d, he es tim at ed a va l ue o f$ 59 9, 00 0 f o r the l an d a l o ne , wi th o ut any ho use o n i t. H e subtra cted the l att erfro m the f or m er to est i m ate $7 6, 000 as the v al ue o fthe house al one. The bef or e- and-afterapproa ch i s used m osto ften t o va l ue c o ns er va tio n e as ement s, wher e i t i s ha r d t o put a va l ue o n th e d onate d conser vati on use . Exp er ts can est i m ate bo th t he va l ue o fl and w i thout the e ncum bra nce and the va lu e of the l and i fso l d w i th the speci fi ed use l i m i tat i ons, usi ng the di ff er ence to estim ate the val ue o f th e l i m i tat i ons i m posed by the dono r. A s we ex p lain be l o w, the r e ar e si g ni fi ca ntdi ff eren ce s be twe enthe R olfs ’ d on at ion an d a c on se rv at ion ea se m en t. W h ile th is a p p ro ac h m igh t s u p er ficia lly se em l i k e a rea so n ab le way t o b ac ki nt o a n a ns wer f o r the ho us e’ s va l ue apartfro m the und er l yi ng l an d , the be f or e- and-after m etho d c an no t pr o perly ac co untf o r the c o ndi ti o ns pla ced on th e reci pie nt with a g i ft o fthi s type. The Tax Court p roperly r ej ecte d use o fthe bef or e- and-after m et h od for v alu in g a d on at ion of p ro p er ty on th e c on d it i o n t ha tthe p r o pe r t y b e de s t r o y e d. The I RS p re se nted two expert s, bo th o fwh om used a “ com parabl e s al es” m etho d ofva lu at i on. The I RS as

ser ted thata com parabl e m ar ketco uld be s ale s o f ho us es , pe r ha ps hi st o r i ca l l y o r a r ch i te ctur al l y i m p or ta nt str uc t ur e s , whe r e the b uy e r i nt e nd s t o ha v e the houseN o. 11

- 2078 11

m ove d to her own l and. W i tness Robert G eorge i s a pr o f es si o na l ho us e m o ve r who ha s ex per i en ce thr oug ho utW i sc o ns i n l i ftingho us es fr o m the i r f o unda ti o ns and tra nsport i ng the m to new lo cati ons. H e co n c luded that i t would co st at l eas t $ 100, 000 to m ove the R olfs’ ho us e o f fo fthe i r pr o per ty
. Ev enmor e i m po rt an t, he op in e d t ha t no on e w ou ld h ave p aid th e ow ne rs m ore than nom i nal co nsi derat i on t o have m ove d t hi s ho use. I n hi s e xpert op ini on, the l and i n the surr ounding ar ea w as to o val uabl e t o w ar ra nt m ovi ng such a m odest house to a l ot i n th e nei ghbor hood. Geor ge al so opi ned th atth e s a l v a g e v a l u e o fth e c o mpo n e n tma t e r i a l s o ft he house w as m i ni m aland w oul d be off setby the l abor c o s to fh a ul i ngthe m a wa y . These c o nc l us i o ns we r e s up po r t e d b y wi t ne s s M a r c i a S o l k o , who wo r k s f o r the W i sc on sin D ep ar tm en t o f T ra n sp or ta tio n an d is re sp on sib le f or c leari ng o r m ovi ng house s o ffo fpro pertypurchase d bythe sta te f o r hi g hway c o ns tr uct i o n. S o l k o a l so c o ncl ude d tha t th e co sto fmovingthe Ro l f s’ h ou se o ffthe pr o per tywoul d m ak e i t ve r y unl i k el y tha t an y one w ou ld p ay m on e y t o h av e itm ov ed . B as ed on th is t es tim ony, the I RS ar gued that si nce the house would have h ad n eg ligib le v a l u e i fs old u n d er th e c on d itio n th at it be s epara ted fro m the l and and m ove d aw ay, the house m u st als o h av e n eg ligib le v alu e if so ld u n d er th e c on d iti o n tha t i t be b ur ne d do wn. The Tax Court found that the par ti es to the donati on und er sto od that the house m ust be prom pt ly b u rned d ow n , a nd the cour t cr edi ted te sti m ony by the fi re chi ef that he kne w the house coul d be put to no othe r use by the depar tm ent. The co urt rej ec ted the ta xpayers ’ bef or e-12 N o. 11

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an d- afte r meth o d a s ani na cc ur at e m ea su r e o fthe v al ue o fthe ho us e “a s do na te d” to the de par tment
. The ta xpayer s’ m etho d m easured the val ue o fa house that re m ai ned a house , o n the l and, and avai l abl e f or reside nt ialuse. Th e con d iti ons of th e d ona tion , how ever, r equi r ed th atthe ho us e be s ev er ed f r o m the lan d a nd des tr o y ed. The Ta x Co ur t, a cc ept i ngthe t es ti m o ny o fthe I RS e xpe r ts , c o nc l ude d tha t a ho us e se ve r ed f r o m the l and had no substa nti al val ue, ei ther f or m ovi ng off-s ite o r f o r s al va g e. M o vi ng a nd s al va g e wer e an al o g o us sit u at ion s t h at th e c o u r t f ou n d to be rea so n ab le a p p ro x im at i o n s o fth e a c t u a l s c e n a r i o . We a g r e e wi th th e s e c o ncl usi ons, wh i ch f ol l ow the C o o leypri nc i pl e byt ak i ng i nto acco unt the eco nom i c eff ec t ofthe m ai n condi ti on that the t axpayer s put o n their d on ati on. The Tax Cou r t co r r ec tl y r eq uired, a s a m at te r o fl aw, tha t th e val uati on m ust i ncor pora te any r educti on i n m arket val ue r esul ti ng from a re str i cti on o n the gi ft. W e r evi ew the Tax Cour t’ s fi nd i ngs o ff act f orcl earer ro r and i ts c on c lu sio n s o f law d e n ov o. Fre da v

. Com m ’ rof Int e r nal Rev e nue, 6 56 F

. 3d 57 0, 5 73 ( 7th Ci r . 2 01 1)

. W e fi nd no cl eare rro r i n the f actualfi nd i ngs a nd co ncl ud e further that i t would have bee n a n e rro r ofl aw to as cribe any wei ght t o the t axpayer s’ befor e- and-afterval uati on evi dence. Th e t a xp a yer s a r g ue o n a pp e a l tha tthe b e f o r e - a nd

afte r meth o d a ctua l l y do es t ake the r el ev an t co ndi ti o ns i nt o a c c o un t
. T he i r a r g ume ntb o i l s do wn t o a n a sse rt i on that the “ after ” va l ue ta kes the d estructi on r equi re m ent i nto acco unt beca use the “a fter ” va l ue apprai sesN o. 11

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W e ascri b e n o sinister m otiv es to the R olfs in seek ing this 2 deduc t i on, who c oul d re as ona bl y r el y on S cha rf t o c on c l ude thatthe ir prop osed v aluati on m ight be all ow ed. A brie fl ook at Googl e unc overs ne ws s t or i es abo uts i m i l ar dona t i ons an d attem pted d edu ct ions by an E SPN com m entat or, a f orm er Oreg on gube rn at or i al c andi dat e, and a N ew York i nve s t m en t bank er. Itw ould se em that an applic ati on of the befor e- and

- after m ethod to the N ew Y ork do nati on m ight have p rodu ced a valuatio n o f u p to $1. 2 m il li on d oll ars . See Sarah Jo rd a n , They spen t $4 .2M on this hou se . . . t hen l etf i ref igh te rs b u r n i td o wn , N .Y . P o st , A p r . 1 8 , 20 1 0 , av a ila b le ath tt p :// w w w .nyp ost.com /p/ne ws/ l oc al / t he y_sp en t_d ow n_ this_ house_then_ z4BQ w 7J N Q gN m f 0e12ev3V L (l astvis it ed Feb

. 3, 2 0 1 2 ). th e l an d a fte r the ho use w as de st r o y ed. Thi s ar g um en t b e g s the que s t i o n i n c l a s s i c f a s hi o n. No o ne di sputes that $76, 000 w or th o f hom e v al ue was l osti n the fi re . T h e d isa gr ee m en t c on c er n s t h e p o r tio n of th at va lu e, if an y , th at was ac tu al l y tr an sfer r ed to th e fi r e d ep artment by gi ft. By deci ding to d est ro y the house and then m aking th atde m o l i ti o n a c o ndi ti o n o fthe i r g i ft, the taxpayer s them sel ves becam e r esponsib l e f orthat decrea se i n val u e, eve n i fthe fi re departm ent pr ovi ded the m echani sm to acc om pli sh i t. N one oft h e value of the ho use, as a house, was actual l y g i ven a w ay. 2 The gi ft was n ot a t i m eshar e i nter est, f orwh i ch a prora te d befo re - and-afterval uati on m i ght b e a pp ro pri ate , nor was i t a gi ft t o a char i ty prov id i ng housi ng f or ne edyf ami l i es . The t ax p ayers h er e g av e awayo nl y the rig h t t o c om e o n to th eir p ro p er t y an d d em olis h th eir14 N o. 11

- 2078 house, a ser vi ce forwh ich t h ey othe rwis e would have pai d a s ubs ta nt i als um . ( Te st i m o ny indi ca te d tha t th e taxpayer s a ctu ally pai d $1, 000 ofthe departm ent’ s co sts as part ofthei r donati on. ) The dem ol i ti on co n d iti on p lac ed on th e d on at i o n o f th e h ou se red u c ed th e fa ir m ar ke t v alu e o f th e h o u s e t o a n eg ligib le a m ou n t, w ell enough a pp ro xi m ate d by i ts negl i gibl e s al vage val ue. The author i ti es the t axpayer s ci te to supp or t the be f or eand-afterval uati on m etho d rel ate to co nser vati on e ase m ents and otherr est ri cti ve cov en ants, but the features of t hi s do na t i o n a r e qu i t e di ff e r e nt f r o m s uc h a n eas emen t
. Whe n a n e a s e men ti s g r a nt e d, parto fthe l a nd

o wner s’ ri gh ts ar e ca r ve d o uta nd t r an sfer r ed to the re ci pie nt. Fo r exam ple , the For estS er vi ce m i ght b e given th e ri gh t to m an age u nd evelop ed l an d , o r a conse rva tio n tru st m igh t b e g ive n th e r i g h t t o c on tr ol d isp os ition of p rop erty. B ec a u s e i t can be d iffi cu lt to m easu re the v al ue o fthi s s or t o fr i ght in i sol at i on, exper ts i nstea d e sti m ate the diff er ence i n sal e pri ce for p ro perty w ith an d w ith ou t s im ilar en c u m b ra n c es . H er e, in contr ast, the i ni ti alval ue o fthe h om e ca n be est i m ate d w i th the bef or e- and-afterm etho d, but t h e d onati on destr oye d that re si denti alval ue r atherthan tr ansfer re d i t. That’ s why conse rv ati on e ase m ents provi de a poo r m odel f orthe si tuati on her e, and other possibl e v al uatio n m odel s s ufferfro m a l ack ofsupporting ev i dence. The val ue o fthe tr aini ng exe rci ses to the fi re departm en t i s no t i n e vi den ce . The fi r e ch ie ft es ti fi ed i n the Tax Court th at h e co uld notas si gn a speci fi c va l ue to the s i gni fi cant publ i c be nefi t o fthe tr ai ni ng — buti n a nyN o. 11

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e v e n t, we kn o w f r o m Am e r i ca n BarEndowm e ntthat tr y i n g t o me a s u r e th e b e n e fi t t o th e c h a r i t y i s n o t th e ap p ro p ria te ap p ro ac h

. P er h ap s th e be st “ c o m p ar ab le sal es” c om pari son m i ght ha ve been the pr i ce pai d by the fi r e de pa r t men tt o r e nta b ur n t o we r f o r the l e ngth o f ti m e th e depa r tment co nduc te d ex er ci se s i n and ar ound the l ake house , but ther e i s no s uch evi dence her e. The Tax Court al so und er too k a f ai r m ar ket va lu atio n ofthe benefi t r ecei ved by the t axpayer s. Th e ex p er t wit

n e ss es for t h e IR S b ot h ag re ed w ith M r. R olfs ’ ow n te st im ony ( base d o n hi s i nvest i gat i on) that th e house w ou ld cost up w ard s of $10, 000 to d em oli sh

. Rolfs cl ai m ed th at he a ctua l l y r ec ei ve d no r ea l v al ue fr o m the bu rn bec au se, even after the training ex ercises w ere c om p let e, h e s till h ad to p ay $1 0,0 0 0 to $1 5,0 00 for d eb ris cl ear i ng and fou n d at i on r em ova l

. The Tax Court did not cre di tthi s l a t t e r t e s t i mon y , fi nd i ngn o s ub s t a nt i a t i o n f or thi s cl ai m i n the docum entar y e vi dence, wh ich di d not bre ak out cons tr ucti on e xpenses byty pe orpurpose. Com m on s ense tel l s us that w h at ev er destr ucti on was caused by the fi re would have cos t m oney i fper f or m ed b y w o rk er s w ith sle d ge h am m er s o r a w re c kin g b all, ev eni faddi ti o na l c l ea n- up was r equi r ed. W e se e no er ro r i n the Tax Court’ s f actua l d et er m i nati on, bas ed on th e available evid en ce an d testim ony , that the R olf s re cei ved a benefi t worth at l eas t $ 10, 000. W hen proper ty i s donat ed to a char i ty on the co nd i ti on that i t be destr oye d, that condi ti on m u st be tak en i nto a c c o u n twh e n v a l u i n gth e g i ft
. I n l i g h to fth a tc o n d i t i o n, th e va l ue of t he g i ft di d no t ex ce ed th e f ai r mar k etv al ue16 N o. 11

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T he IR S o ffered an altern ate th eo r y f o r d en y ing the R olfs’ 3 d ed u ction : tha t the g ifttran sferred on ly a l im ited righ t to u se ( i

. e. , bur n down) a house and th er ef or e was no ta qua l i fyi ng contribu ti on und er 26 U

. S. C. § 170( f ) ( 3) , w hich d en ie s ded ucti ons f or gifts ofm ostparti al int eres ts i n prop erty. Un der s ec t i on 17 0( f ) ( 3) , d onat i ons f or m er e us e do no tqua l i fy f or ded uc t i on i f t he do no r r e t a i ns a s ub s t a nt i a l i nt e r e s t t ha tm ay int erfere w ith the d o n a ted use. See Sta rkv. C omm ’ r of Inte rnal Rev e nue, 86 T. C. 243, 252- 53 ( 1986)

. The Tax Co urt did not re ach this qu estion , an d w e affi rm w itho u t reach ing it.

2- 8- 12 of t h e b en efit th at th e d o n at in g t ax p ay er s re c eiv ed in retu rn. A ccord ingly, the j ud gm en t of th e Ta x C ou rt i s A FFI RMED
. 3