Charitable contribution deductions - an alternative to capitalization of demolition costs.

• Author: Thompson, Gregory A.

Sec. 280B prohibits a deduction for the owner or lessee of a structure for the cost incurred to demolish or raze such structure. instead, the cost of demolition and the loss sustained must be added to the basis of the underlying land. A deduction may thus be postponed indefinitely (since land is not a depreciable asset). As a planning alternative, taxpayers should consider making a charitable contribution of the structure to a local fire department for use in training drills.

Prior to 1984, the taxpayer's intent on acquisition of property generally governed the tax treatment of costs incurred to demolish an existing structure; that is, a current deduction was allowed if the intent to demolish the structure was formed subsequent to the time of acquisition, while capitalization was required if the intent to demolish existed at the time of purchase. For tax years beginning after 1983, Sec. 280B prohibits a current deduction for the cost of demolition, regardless of when the intent to demolish was formed. Instead, the cost of demolition and any loss incurred is added to the basis of the underlying land, and not to the basis of any replacement structure. The determination as to when the taxpayer actually made the decision to demolish a structure has effectively been eliminated by Sec. 280B.

Despite the stringent results under Sec. 280B, a taxpayer may be able to obtain a charitable deduction under Sec. 170 if a building used in a trade or business or held for rent is donated to a local fire department for use in fire training drills (i.e., a controlled burning exercise). Sec. 170(c)(1) provides, in part, that a charitable contribution includes a contribution or gift to or for the use of a state, or any political subdivision thereof, but only if the contribution or gift is made for exclusively public purposes. A donation to a "volunteer" fire department should also qualify as a charitable contribution. Rev. Rul. 71-47 clarified the application of the statute to include contributions to a volunteer fire department on the grounds that the contributions relieve a political subdivision of a state of the burden of a function normally performed by a municipality.

The Scharf case

In Scharf, TC Memo 1973-265, the Tax Court held that the taxpayer was entitled to a charitable contribution deduction for the fair market value (FMV) of a building donated to a volunteer fire department for use in fire drills. in this case, a building owned by the taxpayer was...