Arson is not a capital offense.

• Author: Williford, Jerry S.
• Position: Brief Article

Generally, if a taxpayer demolishes a building to construct a new building, he cannot deduct the cost of demolition or the cost attributable to the building destroyed. These costs are considered part of the cost of the underlying land and therefore must be capitalized.

But what if the taxpayer gives the building to the local fire department to burn down in its training exercises? Can the taxpayer take a charitable deduction for the value of the building?

In at least one case, the taxpayer was successful. In Scharf, TC Memo 1973-265, the taxpayer owned rental property in bad need of repair that was not economically feasible to restore. Because it was unsafe, the building was about to be condemned. Rising land values in the area caused the land to be more valuable than the damaged building.

The taxpayer gave the building to a rural volunteer fire department with the understanding that the fire department would burn it down. Donating the building gave the fire department an opportunity to train its firemen.

The taxpayer claimed a charitable deduction of $13,000 for the building's fair market value (FMV). The IRS disallowed the deduction, arguing that the purpose of the donation was to increase the value of the land by demolishing a damaged building. Thus, the Service argued, there was no "detached and disinterested generosity" for the gift.

The Tax Court allowed the deduction. It noted that there was no doubt that the donation, and...