Tax Lawyer's Blog

In 2009 I wrote in IRS is Right To Deny Charitable Contribution of Home to Fire Department that,

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 is worthless.

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.

Today, Paul Caron reports that the Seventh Circuit has

[A]ffirmed the Tax Court (135 T.C. 471 (2010)) and held that a married couple could not claim a charitable contribution deduction for a house that they donated to a local fire department for training purposes because they failed to prove that the fair market value of the house exceeded the benefit they received by having the fire department burn down the house. Rolfs v. Commissioner, No. 11-2078 (7th Cir. Feb. 8, 2012):

Charitable deductions for burning down a house in a training exercise are unusual but not unprecedented. By valuing their gifts as if the houses were given away intact and without conditions, taxpayers like the Rolfs have claimed substantial deductions from their taxable income. But this is not a complete or correct way to value such a gift. When a gift is made with conditions, the conditions must be taken into account in determining the fair market value of the donated property. As we explain below, proper consideration of the economic effect of the condition that the house be destroyed reduces the fair market value of the gift so much that no net value is ever likely to be available for a deduction, and certainly not here.

The right result? Of course.

But I also said back in 2009 that the Rolfs were lucky because an argument could have been made by the IRS that they received taxable income by donating their property to the fire department:

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. The Rolfs are actually saving not losing money by giving their home to the government.

In other words, the result could have been worse for the Rolfs than the mere denial of a deduction. The house they wanted to discard was a liability to them. It would, therefore, have cost them money to get rid of it.

The IRS could have argued that the taxpayers had taxable income to the extent of the value of the demolition services they received free of charge from the fire department.

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