Friday, November 5, 2010
In Rolfs v. Commissioner, the Tax Court upheld the IRS's position that no charitable contribution deduction would be permitted for the donation of a house to a local volunteer fire department for use in training exercises and eventual demolition. The court found that the taxpayers had decided to demolish the house and construct a new house on the site by the time they contacted the volunteer fire department about the donation. The court therefore compared the value of the benefit the taxpayers had received - the demolition - with the value of the house. Based on expert testimony, the court discounted the house's value to account for the fact that the donation did not include the underlying land and that the use of the house was limited to training for emergency services personnel. The court then concluded that given these limitations, the value of the house did not exceed the value of the quid pro quo demolition and so the taxpayers were not entitled to any charitable contribution deduction. The court rejected, however, the Service's attempt to impose an accuracy related penalty. Interestingly, neither the IRS nor the court relied on the theory that the donation failed to qualify for a deduction because it was only a partial interest in the property at issue.
Other taxpayers have tried this same technique and run into similar opposition. For example, the Columbus Dispatch reported last month that a couple had unsuccessfully fought the IRS on this issue in federal district court, although that defeat stemmed from a failure to properly document the donation and its value. The same article reported that ESPN analyst Kirk Herbstreit and his wife had tried to take a similar deduction but run into IRS opposition (see TaxProf Blog post), and losing Oregon gubernatorial candidate Chris Dudley had also taken a similar deduction, which the IRS apparently did not challenge but which did come up during his close election last week (see this memo from his campaign, citing an AICPA article).