In some locales, if you want to demolish a home you can donate it to the local fire department to use for training purposes. They burn it down for you, eliminating the cost of bringing in a wrecking crew. As an added benefit, you get to claim a charitable contribution deduction for the donation to the fire department . . . or so we might have thought prior to a recent decision of the Tax Court.
Why no deduction? First of all, you can’t value the home based on what it would be worth to an owner who can live in it or rent it out, so throw that appraisal out the window. You’re transferring it to the fire department with substantial restrictions: the only thing they’re allowed to do with it is burn it down, so you then have an empty lot suitable for a new building. The value of the home is with these restrictions isn’t zero, assuming the fire department has a need for these training opportunities, but it’s likely to be a small fraction of the value an appraiser might otherwise put on the structure.
And then your deduction is reduced by the value of what you received in return. If you were planning to tear the home down anyway (which is surely the case when these donations are made), you’ve benefitted by eliminating that cost. The Tax Court noted that the taxpayer avoided $10,000 in demolition costs, and found no evidence that the value transferred to the fire department was greater than that amount. The court declined to impose penalties, however, because this was a case of first impression (an issue not previously decided by the court). Rolfs, 135 T.C. No. 24.
Comment: Taken to the next level, the reasoning in this case supports the notion that the taxpayer has to report taxable income if the value of the fire department’s services in removing the home is greater than the value of the training opportunity transferred to the fire department. The IRS didn’t make that assertion in Rolfs and it seems unlikely they would pursue that theory, but the idea might give pause to anyone considering challenging the result in Rolfs.
