The Tax Court held that taxpayers who gave a local fire department the right to burn down a house on property they had recently purchased were not entitled to a charitable deduction donation for the value of the house.
At the end of May 2006, Upen and Avanti Patel purchased property in Vienna, Va., with the intention of demolishing the house on the property and constructing a new house on the site. Their real estate agent told them about the Fairfax County Fire and Rescue Department (FCFRD) Acquired Structures Program, under which a property owner allows the fire department to conduct fire training exercises on his or her property. As part of the exercises, the fire department destroys, by burning, the designated building on the owner’s property.
Within a few weeks of purchasing the Vienna property, the Patels contacted FCFRD and obtained information about the requirements for participating in the program. After the Patels obtained a demolition permit and completed all the other requirements, they executed documents granting the fire department the right to conduct training exercises on the Vienna property and to burn the house during the exercises. During October 2006, FCFRD, along with six other fire departments, used the Vienna property to conduct fire training exercises, during which fire destroyed the house.
On their 2006 federal income tax return, the Patels reported a noncash charitable contribution of $339,504 on Schedule A, Itemized Deductions, for the donation of the house to FCFRD. The IRS disallowed the deduction, asserting that the Patels’ donation to FCFRD was a contribution of a partial interest in property, which was nondeductible under Sec. 170(f)(3). The Patels challenged the IRS’s determination in the Tax Court.
The Tax Court’s Decision
The Tax Court held that the Patels were not entitled to take a noncash charitable contribution deduction for granting FCFRD the right to conduct training exercises on their property and burn down the house as part of the exercises because they donated only the right to use the Vienna property and the house, which was a nondeductible partial interest in property under Sec. 170(f)(3)(A).
The court first looked to Virginia law to determine what property rights the Patels had in the house and what property rights they gave to FCFRD. The court found that under Virginia law, land includes everything belonging or attached to it, above and below the surface. In the Patels’ case, the house was attached to the land and was conveyed to them along with the land when they purchased the Vienna property. Thus, under Virginia law, the Patels purchased a parcel of land, of which the house was part. Consequently, the Tax Court concluded that the Patels’ purported contribution of the house to FCFRD was a contribution of a partial interest in the Vienna property.
Having found that the Patels had transferred a partial interest in the Vienna property, the Tax Court then considered whether the exceptions in Sec. 170(f)(3)(B) to the rule against deductions for contributions of partial interests applied. Under Sec. 170(f)(3)(B), a deduction will be allowed for a donated partial interest if the interest is (1) an undivided portion of the taxpayer’s entire interest in property, (2) a remainder interest in a personal residence, or (3) a qualified conservation contribution.
For the transfer of the house to be a transfer of an undivided portion of the taxpayer’s entire interest in the property, the Tax Court concluded that the house must be actually or constructively severed from the land. Before the house was destroyed in the training exercise, it had not been actually severed from the land, so the severance had to be constructive.
According to the Tax Court, to effect a constructive severance, ownership and title to the building must be conveyed in writing, and the grant of an easement, lease, or license will not constructively sever a building from land. After surveying Virginia case law, the Tax Court determined that the Patels’ granting FCFRD the right to destroy the house while conducting training exercises was a mere license to use the property that did not vest any property interest in FCFRD. Therefore, the granting of the license did not constructively sever the house from the land, and the Patels did not give FCFRD an undivided portion of their entire interest in the Vienna property.
With respect to the other exceptions, the Tax Court found that the Patels had not transferred a remainder interest in a personal residence because the license they granted to FCFRD did not create a remainder or any other interest in the house and the Patels had never used the house as a personal residence. It also concluded that the Patels had not made a qualified conservation contribution because the donation of a house for burning in training exercises by a fire department is not for conservation purposes.
In a dissenting opinion, seven Tax Court judges disagreed with the majority’s conclusion that the house had not been severed from the land. The dissenters believed that FCFRD’s destruction of the house severed it from the land, making it personal property. They also argued that the Patels transferred their entire interest in the house to FCFRD since one premise of a license to use property is that the property will be returned to the owner when the license terminates, subject to normal wear and tear. Permission to destroy removes that premise and results in the transfer of the owner’s property interests to the licensee.
However, the dissenting judges further stated that they would allow a charitable contribution deduction for the donation only if the Patels were able to prove at trial that the value of the house exceeded the benefit they received from the fire department in the form of demolition services.
Patel, 138 T.C. No. 23 (2012)