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Thursday, July 12, 2012
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
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.
Joseph J. Ecuyer, J.D., LL.M.
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