Florida Tax Attorney Blog

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.

As someone who frequently speculates on high-risk penny stocks, I never could have imagined that buying tickets to my alma mater's homecoming football game would become one of the most volatile investments in my portfolio. But as the University of Miami's season opener against Maryland quickly approaches, news of what has been dubbed the worst college football scandal in NCAA history continues to dominate the headlines, and the future of one of the Nation's most renowned collegiate athletic programs remains uncertain.

In a recent article, Forbes contributor, Kelly Phillips Erb, put an interesting spin on the University of Miami football scandal by asking why the multi-million dollar college sports industry is exempt from federal taxation? In her opinion, the U.S. Tax Code should recognize college athletics for what it is: a business.

In support of her argument, Erb calls attention to the over $5 billion in revenue generated by college athletic programs in public universities last year and to football-related expenditures in excess of $70 million by schools like Auburn and Ohio State. But these figures are misleading when considered in the abstract.

In a 2010 report published by the NCAA, Professor Daniel L. Fulks, Ph.D., CPA, offers a pragmatic representation of the financial aspects of collegiate athletics. For Football Bowl Subdivision athletic programs (formerly known as Division 1-A), the median figure for revenue generated during 2009 was $32,264,000; the corresponding figure for expenses incurred was $45,887,000. For Football Championship Subdivision athletic programs (formerly known as Division I-AA), the median figure for revenue generated during 2009 was $2,886,000; the corresponding figure for expenses incurred was $12,019,000. For Division I athletic programs without football (formerly known as Division I-AAA), the median figure for revenue generated during 2009 was $2,099,000; the corresponding figure for expenses was $10,502,000.

With the median expenses of Division I athletics exceeding median revenues by $8.4 - $13.6 million, this is not the type of operation that comes to mind as a for-profit venture.

Still, Erb is right to call attention to the issue because although not every athletic program is being operated with an improper profit motive, a significant minority of programs probably are. In the end, the relevant question is one of profit motive. If an athletic program's primary purpose is profit, then tax-exempt status is not appropriate. However, the presence or absence of a profit motive must be evaluated on a program-by-program basis. Otherwise, undue hardship would be imposed upon many compliant colleges and universities.

But is a program-by-program evaluation practical? Probably not. The benefit of any additional tax revenue generated by revoking the tax-exempt status of a few non-compliant athletic programs would almost certainly be outweighed by the costs associated with establishing and operating a governmental program to evaluate the profit motives of collegiate athletic programs.

SOURCES:

• NCAA Division I Intercollegiate Athletics Report: Revenue & Expenses
• Kelly Phillips Erb, Miami Football Scandal Raises Questions About Tax-Exempt Athletics
• PHOTO CREDIT: Jeffrey Boan - AP