Tax Lawyer's Blog

It isn’t often that I side with the IRS’s interpretation of a tax code provision; however, this case compels me to do so.

Several bloggers have written about the IRS’s recent decision to deny a taxpayer a charitable deduction for the value of a home he donated to the local fire department which was then as part of a firefighter training exercise set afire and destroyed.

I think TaxProf Paul Caron got it right when he said,

The whole idea of a charitable deduction is that you give something to charity and you don’t get anything back, right?” said Paul Caron, a tax scholar at the University of Cincinnati. “When you give $100 to the Catholic Church, you don’t get anything for that $100.”

Here’s my take:

It’s a contractual relationship

Taxpayers who donate their homes to the fire department in exchange for the fire department’s promise to demolish the home clearly are receiving value in exchange for the property.

The taxpayer and the fire department have entered into a bargained for and negotiated contractual relationship. The fire department gets to use the home for training and in exchange agrees to burn the property to the ground so the taxpayer can build a new home.

The fire department does not have unrestricted use of the property. It must destroy it.

If the fire department changed its mind and decided to use the home as an office building or if during the training exercise the firefighters performed so well they saved the home from burning to the ground, the taxpayer would presumably have the right to sue the government for breach of contract.

The home is the taxpayer’s garbage and it has no value

I donate my garbage to the local waste management service twice a week but I don’t get a deduction for it. That’s because what I am throwing away has no value.

Here, the taxpayer wants to throw away his house, but because it’s a big job and would cost him money to do so, he “gives” it to the fire department and claims to have given it something of value.

It’s clever, but it’s a scam.

Taxpayers would donate their properties even without the charitable deduction

The taxpayer argued that if the deduction were disallowed taxpayers would no longer donate their properties to fire departments thereby causing public harm (inadequately trained firefighters, I presume).

This is from the Columbus Dispatch:

[The taxpayer] said in court documents that the donations serve an important governmental purpose “and should not be frustrated by an erroneous interpretation and application of the Internal Revenue Code.”

Upper Arlington Fire Chief Mitch Ross said that donated homes are important because they allow firefighters to train in the kinds of structures they’d normally fight fires in.

“We don’t have any type of training structure in our response district, so any training we do has to be at the fire academy or with one of these houses,” Ross said. “We’ve got new techniques to use and new guys coming on.”

This argument is a red herring. Future taxpayers will continue to donate their properties to fire departments because it will allow them to avoid paying the costs of demolition.

These taxpayers don’t want their properties and are willing to give them to whomever is willing to demolish them at their own expense. In short, taxpayers are saving money not losing money by giving their homes to the government.

Taxpayer may have constructive income

Here, the result could have been worse for the taxpayer than the mere denial of a deduction.

The house he wants to discard is a liability to him. In other words, it will cost him money to get rid of it.

Consequently, the IRS could argue that the taxpayer has taxable income to the extent of the value of the demolition services he received free of charge from the fire department.

Oops!

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