No deduction for house donated to fire department.

• Author: Ransome, Justin

What is the amount of the charitable deduction for the donation of a house to a fire department that intends to use the house for training exercises--including burning it to the ground? One might logically think that it is the fair market value (FMV) of the home. What if only the home and not the underlying property were donated? One might still think it is the home's FMV. In Rolfs, 135 T.C. No. 24 (2010), the Tax Court, in a fully reviewed opinion, took up the issue. While agreeing that the amount of the charitable contribution was the value of the house, the Tax Court denied the taxpayers' charitable deduction because it determined that the taxpayers received a substantial benefit from the donation.

The taxpayers, a married couple, purchased lakefront property in an affluent area in Wisconsin for $600,000. The property contained a lake house, which the taxpayers were initially undecided as to whether to remodel or demolish and rebuild. About a year after purchasing the property, the taxpayers entered into an agreement with the wife's mother to demolish the structure and build a new home on the property to the mother's specifications. The couple and the mother would then swap each other's property. After evaluating the cost of demolition and removal of the lake house, the taxpayers decided to donate the property to the local fire department for use in its training exercises. The parties understood that the house would be used solely for training exercises and that it would be burned down within a relatively short period of time after donation.

At the time of the donation, the lake house was appraised at $76,000, for which the taxpayers claimed a charitable deduction on their income tax return. The IRS denied the deduction, contending that the taxpayers contemplated and received a substantial benefit in exchange for the contribution, namely, demolition services. In the alternative, the IRS argued that (1) a charitable deduction was not allowed because the taxpayers did not donate their entire interest in the lakefront property (i.e., they did not transfer the underlying land) and (2) the lake house as donated to the fire department was worthless.

Under Sec. 170(a), an individual is allowed an income tax charitable deduction for contributions made to an organization described in Sec. 170(c) (a charitable organization generally described in Sec. 501(c)) for the tax year in which the contribution occurred. A charitable contribution for which a deduction is allowed under Sec. 170(a) generally consists of five elements: (1) a transfer (2) of money or property (3) to a permissible donee (4) that is both voluntary and without receipt of economic consideration or benefit and (5) that is in the proper form.

The term "charitable contribution" is defined in Sec. 170(c) as a "contribution or gift" to or for the use of a permissible donee. The term...