In Florida, it is not uncommon for purchasers of real estate to purchase old homes in "up and coming" areas for the underlying land. They purchase the property, knock down the existing home, and rebuild a new more modern home in its place. Some purchasers plan to live in the new home while others plan to flip it for a profit. Whatever the case, one thing is clear - it's expensive to demolish a home.
So why not make a charitable contribution of the home to the local fire department to be burned down in a firefighter training exercise?
That's exactly what Theodore Rolfs and his wife, Julia Gallagher did. See Rolfs v. Commissioner, No. 11-2078 (decided February 8, 2012).
Facts:
Theodore Rolfs and Julia Gallagher purchased a three-acre lakefront property in Chenequa, Wisconsin. Their plan was to demolish the existing home and build another in its place. Pursuant to this plan, they donated the existing home to the local fire department to be burned down in a firefighter training exercise. In connection with this donation, the couple claimed a $76,000 charitable deduction on their 1998 tax return for the value of the house. The IRS challenged the deduction.
Holding:
The couple took their case to the United States Tax Court which ruled in favor of the IRS. The taxpayers appealed the Tax Court decision to the U.S. Seventh Circuit Court of Appeals, which affirmed.
Takeaway:
When a gift is conditional, the conditions must be taken into account in determining fair market value of the donated property. In this case, the value of the benefit received (i.e. demolition) reduced the fair market value of the gift so substantially that no net value was available to support a charitable deduction. In this respect, the Court emphasized that the taxpayers failed to show that the value of their donation exceeded the substantial benefit they received in return.
So remember: if you receive a substantial benefit in connection with a charitable gift, you have the burden as the taxpayer to establish value of the gift in excess of the benefit received to support a charitable deduction.
