In the
United States Court of Appeals
For the Seventh Circuit
No. 11-2078
T HEODORE R. R OLFS, et al.,
Petitioners-Appellants,
v.
C OMMISSIONER OF INTERNAL R EVENUE,
Respondent-Appellee.
Appeal from the United States Tax Court.
No. 9377-04—Joseph H. Gale, Judge.
A RGUED O CTOBER 25, 2011—D ECIDED F EBRUARY 8, 2012
Before E ASTERBROOK, Chief Judge, H AMILTON, Circuit
Judge, and M YERSCOUGH, District Judge.
H AMILTON, Circuit Judge. Taxpayers Theodore R. Rolfs
and his wife Julia Gallagher (collectively, the Rolfs)
purchased a three-acre lakefront property in the Village
of Chenequa, Wisconsin. Not satisfied with the house
The Honorable Sue E. Myerscough of the Central District of
Illinois, sitting by designation.
2 No. 11-2078
that stood on the property, they decided to demolish it
and build another. To accomplish the demolition, the
Rolfs donated the house to the local fire department to
be burned down in a firefighter training exercise. The
Rolfs claimed a $76,000 charitable deduction on their
1998 tax return for the value of their donated and de-
stroyed house. The IRS disallowed the deduction, and
that decision was upheld by the United States Tax Court.
Rolfs v. Comm’r of Internal Revenue, 135 T.C. 471 (2010).
The Rolfs appeal. To support the deduction, the Rolfs
needed to show a value for their donation that exceeded
the substantial benefit they received in return. The Tax
Court found that they had not done so. We agree and
therefore affirm.
Charitable deductions for burning down a house in a
training exercise are unusual but not unprecedented. By
valuing their gifts as if the houses were given away
intact and without conditions, taxpayers like the Rolfs
have claimed substantial deductions from their taxable
income. But this is not a complete or correct way to
value such a gift. When a gift is made with conditions,
the conditions must be taken into account in determining
the fair market value of the donated property. As we
explain below, proper consideration of the economic
effect of the condition that the house be destroyed
reduces the fair market value of the gift so much that
no net value is ever likely to be available for a deduction,
and certainly not here.
What is the fair market value of a house, severed from
the land, and donated on the condition that it soon be
No. 11-2078 3
burned down? There is no evidence of a functional mar-
ket of willing sellers and buyers of houses to burn.
Any valuation must rely on analogy. The Rolfs relied
primarily on an appraiser’s before-and-after approach,
valuing their entire property both before and after de-
struction of the house. The difference showed the value
of the house as a house available for unlimited use. The
IRS, on the other hand, presented experts who attempted
to value the house in light of the condition that it be
burned. The closest analogies were the house’s value
for salvage or removal from the site intact.
The Tax Court first found that the Rolfs received a
substantial benefit from their donation: demolition
services valued by experts and the court at approximately
$10,000. The court then found that the Rolfs’ before-and-
after valuation method failed to account for the condi-
tion placed on the gift requiring that the house be de-
stroyed. The court also found that any valuation that
did account for the destruction requirement would cer-
tainly be less than the value of the returned benefit.
We find no error in the court’s factual or legal analysis.
The IRS analogies provide reasonable methods for ap-
proximating the fair market value of the gift here. The
before-and-after method does not.
I. Legal Background Concerning Charitable Donations Under
Section 170(a)
The legal principles governing our decision are
well established, and the parties focus their dispute on
competing valuation methodologies. We briefly review
4 No. 11-2078
the relevant law, addressing some factual prerequisites
along the way.
The requirements for a charitable deduction are gov-
erned by statute. Taxpayers may deduct from their
return the verifiable amount of charitable contributions
made to qualified organizations. 26 U.S.C. § 170(a)(1).
Everyone agrees that the Village of Chenequa
and its volunteer fire department are valid recipients
of charitable contributions as defined under section
170(c). To qualify for deduction, contributions must also
be unrequited — that is, made with “no expectation of a
financial return commensurate with the amount of the
gift.” Hernandez v. Comm’r of Internal Revenue, 490 U.S. 680,
690 (1989). The IRS and the courts look to the objective
features of the transaction, not the subjective motives of
the donor, to determine whether a gift was intended
or whether a commensurate return could be expected
as part of a quid pro quo exchange. Id. at 690-91.
The Treasury regulations implement the details of
section 170, instructing taxpayers how to prove a deduc-
tion to the IRS and how to value donated property using
its fair market value. Under section 1.170A-1(c) of the
regulations, fair market value is to be determined as of
the time of the contribution and under the hypothetical
willing buyer/willing seller rule, wherein both parties
to the imagined transaction are assumed to be aware of
relevant facts and free from external compulsion to buy
or sell. 26 C.F.R. § 1.170A-1(c). As with the question of
the purpose of the claimed gift, fair market value
requires an objective, economic inquiry and is a question
of fact.
No. 11-2078 5
We can assume, as the record suggests, that the Rolfs
were subjectively motivated at least in part by the hope
of deducting the value of the demolished house on
their tax return. Applying the objective test, however,
we treat their donation the same as we would if it were
motivated entirely by the desire to further the training
of local firefighters. Objectively, the purpose of the trans-
action was to make a charitable contribution to the
fire department for a specific use.1 The Rolfs docu-
mented their donation and substantiated the basis of
their valuation for the IRS as required by the regula-
tions. The Tax Court did not hold that the transaction
was categorically invalid under section 170(a), and we
agree that nothing in the structure or technical execu-
tion of the Rolfs’ donation precluded its potential
validity as a qualifying charitable contribution under
section 170(a). The Tax Court found instead that when
the transaction was properly evaluated, the Rolfs
(a) received a substantial benefit in exchange for the
1
The fire chief asked the Rolfs for $1,000 in cash for the fire
department to help defray costs of the training exercise. The
Tax Court did not make an explicit finding as to whether the
$1,000 cash donation was an essential condition for the fire
department’s acceptance of the donated house. If it was an
essential condition, then in light of the Tax Court’s finding
that the Rolfs received benefits of up to $10,000 in demoli-
tion services in return, one might easily view the entire transac-
tion objectively as merely a contract for discounted demoli-
tion services and not as a charitable donation at all. The IRS
did not argue this theory, so we express no opinion on
its possible merit.
6 No. 11-2078
donated property and (b) did not show that the value
of the donated property exceeded the value of the
benefit they received. We also agree with these find-
ings. There was no net deductible value in this donation
in light of the return benefit to the Rolfs.
A charitable contribution is a “transfer of money or
property without adequate consideration.” United States
v. American Bar Endowment, 477 U.S. 105, 118 (1986). A
charitable deduction is not automatically disallowed if
the donor received any consideration in return. Instead,
as the Supreme Court observed in American Bar Endow-
ment, some donations may have a dual purpose, as when
a donor overpays for admission to a fund-raising dinner,
but does in fact expect to enjoy the proverbial rubber
chicken dinner and accompanying entertainment. Where
“the size of the payment is clearly out of proportion to
the benefit received,” taxpayers can deduct the excess,
provided that they objectively intended it as a gift. Id.
at 116-18 (“The taxpayer, therefore, must at a minimum
demonstrate that he purposely contributed money or
property in excess of the value of any benefit he received
in return.”). In practice then, the fair market value of
any substantial returned benefit must be subtracted
from the fair market value of the donation.
This approach differs from that of the Tax Court in
Scharf v. Comm’r of Internal Revenue, T.C.M. 1973-265, an
earlier case that allowed a charitable deduction for prop-
erty donated to a fire department to be burned. In Scharf,
a building had been partially burned and was about to
be condemned. The owner donated the building to the
No. 11-2078 7
fire department so it could burn it down the rest of
the way. The Tax Court compared the value of the
benefit obtained by the donor (land cleared of a ruined
building) to the value of the public benefit in the form
of training for the firefighters, and found that the
public benefit substantially exceeded the private return
benefit. Thus, the donation was deemed allowable as a
legitimate charitable deduction, and the court proceeded
to value the donation using the established insurance
loss figure for the building. The Scharf court did not
actually calculate a dollar value for the public benefit,
and if it had tried, it probably would have found the
task exceedingly difficult. Although Scharf supports the
taxpayers’ claimed deduction here, its focus on public
benefit measured against the benefit realized by the
donor is not consistent with the Supreme Court’s later
reasoning in American Bar Endowment. The Supreme
Court did not rely on amorphous concepts of public
benefit at all, but focused instead on the fair market
value of the donated property relative to the fair
market value of the benefit returned to the donor. 477 U.S.
at 116-18. The Tax Court ruled correctly in this case that
the Scharf test “has no vitality” after American Bar Endow-
ment. 135 T.C at 487.
With this background, the decisive legal principle for
the Tax Court and for us is the common-sense require-
ment that the fair market valuation of donated property
must take into account conditions on the donation
that affect the market value of the donated property.
This has long been the law. See Cooley v. Comm’r of Internal
Revenue, 33 T.C. 223, 225 (1959) (“property otherwise
8 No. 11-2078
intrinsically more valuable which is encumbered by
some restriction or condition limiting its marketability
must be valued in light of such limitation”). In Cooley,
the donor could not use the retail price of donated cars
as their fair market value because a contractual condi-
tion prevented them from ever being sold at retail in the
United States. The cars had been bought wholesale at a
special discount price on the condition that they be do-
nated overseas. Id. See also Van Zelst v. Comm’r of Internal
Revenue, T.C.M. 1995-396 (requiring consideration of an
injunction against mining in determining value of
donated land); Thornton v. Comm’r of Internal Revenue,
T.C.M. 1988-479 (accounting for cost of moving and re-
interring remains when donating a cemetery for other
uses); Deukmejian v. Comm’r of Internal Revenue, T.C.M.
1981-24 (refusing to value property in fee simple where
the donation contained a condition, requested by the
donee city, that the property be put only to public use).
II. Valuation Methods
As this case demonstrates, however, knowing that one
must account for a condition in a valuation opens up a
second tier of questions about exactly how to do so. The
Tax Court weighed conflicting evidence on valuation
and rejected the taxpayers’ evidence claiming that the
donated house had a value of $76,000. The Tax Court
found instead that the condition requiring destruc-
tion of the house meant that the donated property
had essentially no value. 135 T.C. at 494. The Tax Court
did not err.
No. 11-2078 9
In this case there is no evidence of an actual market
for, and thus no real or hypothetical willing buyers of,
doomed houses as firefighter training sites. Fire depart-
ments typically conduct their training in burn towers,
which are designed to withstand repeated exercises so
that fire departments pay only a rental fee for use of a
tower. Apparently the Village of Chenequa fire depart-
ment has sometimes used a burn tower at a nearby techni-
cal college for training purposes, but there is no record
evidence of how much the department pays for that
use. Sometimes fire departments also conduct exercises
using donated or abandoned property, but there is also
no record evidence of any fire departments paying for
such property. Without comparators from any estab-
lished markets, the parties presented competing experts
who advocated different valuation methods. The tax-
payers relied on the conventional real estate market, as
if they had given the fire department fee ownership of
the house. The IRS relied on the salvage market and
the market for relocated houses, attempting to account
for the conditions proposed in the gift.
The taxpayers’ expert witness is a residential appraiser.
His suggested valuation methods treated the donation
as one of real estate. This was not an ordinary real estate
transaction, however, and the appraiser needed to ac-
count for the fact that only the house was being donated,
while all rights to the three acres on which it sat were
being retained. (The donation necessarily granted a
temporary easement to permit the fire department to
come onto the property to conduct its exercises, but
neither party deemed this of significant value.) The
10 No. 11-2078
taxpayers argued that the “before-and-after” method
should be applied. Their appraiser started with an esti-
mated value of $675,000 for the land and house to-
gether, based on comparisons to recent sales of similar
properties in the area. Using the same method, he esti-
mated a value of $599,000 for the land alone, without
any house on it. He subtracted the latter from the former
to estimate $76,000 as the value of the house alone.
The before-and-after approach is used most often to
value conservation easements, where it is hard to put
a value on the donated conservation use. Experts can
estimate both the value of land without the encumbrance
and the value of the land if sold with the specified use
limitations, using the difference to estimate the value of
the limitations imposed by the donor. As we explain
below, there are significant differences between the
Rolfs’ donation and a conservation easement. While
this approach might superficially seem like a reasonable
way to back into an answer for the house’s value
apart from the underlying land, the before-and-after
method cannot properly account for the conditions
placed on the recipient with a gift of this type. The Tax
Court properly rejected use of the before-and-after
method for valuing a donation of property on the condi-
tion that the property be destroyed.
The IRS presented two experts, both of whom used
a “comparable sales” method of valuation. The IRS as-
serted that a comparable market could be sales of
houses, perhaps historically or architecturally important
structures, where the buyer intends to have the house
No. 11-2078 11
moved to her own land. Witness Robert George is a
professional house mover who has experience through-
out Wisconsin lifting houses from their foundations
and transporting them to new locations. He concluded
that it would cost at least $100,000 to move the Rolfs’
house off of their property. Even more important, he
opined that no one would have paid the owners more
than nominal consideration to have moved this house.
In his expert opinion, the land in the surrounding area
was too valuable to warrant moving such a modest
house to a lot in the neighborhood. George also opined
that the salvage value of the component materials of the
house was minimal and would be offset by the labor
cost of hauling them away. These conclusions were sup-
ported by witness Marcia Solko, who works for the Wis-
consin Department of Transportation and is responsible
for clearing or moving houses off of property purchased
by the state for highway construction. Solko also con-
cluded that the cost of moving the Rolfs’ house off the
property would make it very unlikely that anyone
would pay money to have it moved. Based on this testi-
mony, the IRS argued that since the house would have
had negligible value if sold under the condition that it
be separated from the land and moved away, the house
must also have negligible value if sold under the condi-
tion that it be burned down.
The Tax Court found that the parties to the donation
understood that the house must be promptly burned
down, and the court credited testimony by the fire chief
that he knew the house could be put to no other use by
the department. The court rejected the taxpayers’ before-
12 No. 11-2078
and-after method as an inaccurate measure of the value
of the house “as donated” to the department. The tax-
payers’ method measured the value of a house that re-
mained a house, on the land, and available for
residential use. The conditions of the donation, however,
required that the house be severed from the land and
destroyed. The Tax Court, accepting the testimony of the
IRS experts, concluded that a house severed from the
land had no substantial value, either for moving off-site
or for salvage. Moving and salvage were analogous
situations that the court found to be reasonable approxi-
mations of the actual scenario. We agree with these con-
clusions, which follow the Cooley principle by taking
into account the economic effect of the main condition
that the taxpayers put on their donation. The Tax
Court correctly required, as a matter of law, that the
valuation must incorporate any reduction in market
value resulting from a restriction on the gift. We review
the Tax Court’s findings of fact for clear error and its
conclusions of law de novo. Freda v. Comm’r of Internal
Revenue, 656 F.3d 570, 573 (7th Cir. 2011). We find no
clear error in the factual findings and conclude further
that it would have been an error of law to ascribe
any weight to the taxpayers’ before-and-after valuation
evidence.
The taxpayers argue on appeal that the before-and-
after method actually does take the relevant conditions
into account. Their argument boils down to an assertion
that the “after” value takes the destruction require-
ment into account because the “after” value appraises
No. 11-2078 13
the land after the house was destroyed. This argument
begs the question in classic fashion. No one disputes
that $76,000 worth of home value was lost in the fire.
The disagreement concerns the portion of that value, if
any, that was actually transferred to the fire department
by gift. By deciding to destroy the house and then
making that demolition a condition of their gift, the
taxpayers themselves became responsible for that
decrease in value, even if the fire department provided
the mechanism to accomplish it. None of the value of
the house, as a house, was actually given away.2
The gift was not a timeshare interest, for which a pro-
rated before-and-after valuation might be appropriate,
nor was it a gift to a charity providing housing for
needy families. The taxpayers here gave away only the
right to come onto their property and demolish their
2
We ascribe no sinister motives to the Rolfs in seeking this
deduction, who could reasonably rely on Scharf to conclude
that their proposed valuation might be allowed. A brief look at
Google uncovers news stories about similar donations and
attempted deductions by an ESPN commentator, a former
Oregon gubernatorial candidate, and a New York investment
banker. It would seem that an application of the before-and-after
method to the New York donation might have produced
a valuation of up to $1.2 million dollars. See Sarah
Jordan, They spent $4.2M on this house . . . then let firefighters
burn it down, N.Y. Post, Apr. 18, 2010, available at http://
w w w . n y p o s t . c o m / p / n ew s /lo ca l/th ey _ s p e n t _ d o w n _ t h i s _
house_then_ z4BQw7JNQgNmf0e12ev3VL (last visited Feb. 3,
2012).
14 No. 11-2078
house, a service for which they otherwise would have
paid a substantial sum. (Testimony indicated that the
taxpayers actually paid $1,000 of the department’s costs
as part of their donation.) The demolition condition
placed on the donation of the house reduced the fair
market value of the house to a negligible amount, well
enough approximated by its negligible salvage value.
The authorities the taxpayers cite to support the before-
and-after valuation method relate to conservation ease-
ments and other restrictive covenants, but the features
of this donation are quite different from such an ease-
ment. When an easement is granted, part of the land-
owners’ rights are carved out and transferred to the
recipient. For example, the Forest Service might be
given the right to manage undeveloped land, or a conser-
vation trust might be given the right to control disposi-
tion of property. Because it can be difficult to measure
the value of this sort of right in isolation, experts
instead estimate the difference in sale price for property
with and without similar encumbrances. Here, in
contrast, the initial value of the home can be estimated
with the before-and-after method, but the donation
destroyed that residential value rather than transferred it.
That’s why conservation easements provide a poor
model for the situation here, and other possible valua-
tion models suffer from a lack of supporting evidence.
The value of the training exercises to the fire depart-
ment is not in evidence. The fire chief testified in the
Tax Court that he could not assign a specific value to
the significant public benefit of the training — but in any
No. 11-2078 15
event, we know from American Bar Endowment that
trying to measure the benefit to the charity is not the
appropriate approach. Perhaps the best “comparable
sales” comparison might have been the price paid by
the fire department to rent a burn tower for the length
of time the department conducted exercises in and
around the lake house, but there is no such evidence here.
The Tax Court also undertook a fair market valuation
of the benefit received by the taxpayers. The expert wit-
nesses for the IRS both agreed with Mr. Rolfs’ own testi-
mony (based on his investigation) that the house
would cost upwards of $10,000 to demolish. Rolfs
claimed that he actually received no real value from the
burn because, even after the training exercises were
complete, he still had to pay $10,000 to $15,000 for debris
clearing and foundation removal. The Tax Court did not
credit this latter testimony, finding no substantiation for
this claim in the documentary evidence, which did not
break out construction expenses by type or purpose.
Common sense tells us that whatever destruction was
caused by the fire would have cost money if performed
by workers with sledgehammers or a wrecking ball,
even if additional clean-up was required. We see no
error in the Tax Court’s factual determination, based on
the available evidence and testimony, that the Rolfs
received a benefit worth at least $10,000.
When property is donated to a charity on the condition
that it be destroyed, that condition must be taken into
account when valuing the gift. In light of that condition,
the value of the gift did not exceed the fair market value
16 No. 11-2078
of the benefit that the donating taxpayers received in
return. Accordingly, the judgment of the Tax Court
is A FFIRMED.3
3
The IRS offered an alternate theory for denying the Rolfs’
deduction: that the gift transferred only a limited right to use
(i.e., burn down) a house and therefore was not a qualifying
contribution under 26 U.S.C. § 170(f)(3), which denies deduc-
tions for gifts of most partial interests in property. Under
section 170(f)(3), donations for mere use do not qualify for
deduction if the donor retains a substantial interest that may
interfere with the donated use. See Stark v. Comm’r of Internal
Revenue, 86 T.C. 243, 252-53 (1986). The Tax Court did not reach
this question, and we affirm without reaching it.
2-8-12