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Thursday, July 12, 2012

No Matter How You Slice (or Demolish) It, Taxpayers Denied Charitable Contribution Deduction for Donations of Homes to Local Fire Departments

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For years, taxpayers wanting to have their homes demolished were allowed to "donate" their homes to their local fire department for training and demolition purposes. After the fire department was finished demolishing the structure, the taxpayers took the lot back, built a new house on the lot, and got a nice charitable deduction for their efforts. The Tax Court had blessed this type of charitable deduction in the case of Scharf v. Comr., T.C. Memo 1973-265. Until recently, it seems the IRS had conceded the issue.

However, the IRS has recently revisited this issue. This issue gained some national headlines when Kirk Herbstreit, former Ohio State quarterback and current ESPN College Gameday host, got caught up in the controversy. See http://www.dispatch.com/content/stories/local/2009/07/23/IRSburn.ART_ART_07-23-09_A1_DDEIB64.html ("[t]he donation -- and the deduction -- have been common for at least two decades for Upper Arlington residents who wanted to build new homes on property where old homes resided").

Recent cases have held that these "donations" are no longer deductible. In the most recent case, Patel v. Comr., 138 T.C. No. 23 (6/27/12), in a sharply divided plurality opinion, the Tax Court held that these donations to fire departments were non-deductible due to the fact that they constitute gifts of a partial interest under sec. 170(f)(3). Some taxpayers may have taken solace in the fact that it was a plurality decision with a dissent signed off on by seven Tax Court judges. However, the Judge who wrote the dissent had also recently denied a similar donation in another case, Rolfs v. Comr., 135 T.C. 471 (2010), aff'd 2012 BL 32337 (7th Cir. 2011), simply using a different analysis, i.e., a quid pro quo analysis valuing donated home at zero.

So, what has happened to Scharf? The Patel decision distinguished Scharf, in part, on the basis that the Scharf donation occurred in 1967, two years prior to Congress' amendments to sec. 170(f)(3) making partial interest donations nondeductible. The earlier Rolfs case stated that the Scharf decision had "no validity" after the Supreme Court established a different method of valuing the donated home in U.S. v. American Bar Endowment, 477 U.S. 105 (1986).

Therefore, whether the court uses the sec. 170(f)(3) analysis of Patel, or the quid-pro-quo analysis in Rolfs, it seems that the taxpayer still loses in the Tax Court.

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