Discussion:Donation of House to Fire Department

I have a client under audit for taking a deduction of a house contributed to the fire department for training purposes. I've ready many times that this is legal, but can't find any authoritative source to defend my position. The auditor is coming next week to challenge the deduction, and I need a tax court case, rev ruling, or something to defend my position.

Thanks.

- Tim Doyle, TaxAlmanac Moderator - Talk to me 17:04, 6 September 2006 (CDT)

I will review Morris N. Scharf v. Commr, TC Memo 1973-265 noted above.

The probelm I see is with the fair market value of the building and what valuation method should be used. I have not found any IRS guidance on the valuation method to use for the building. I am sure you could find an appriaser who would use market value replacement which would give the taxpayer a really high value, but the IRS could argue that another value method should be used. Anythoughts on the valuation method?

And be careful - fire departments are private membership clubs-non-501(c)(3). It's the fire DISTRICT - the government agency that provides fire protection to the district - that's the tax exempt institution. It's like an analogy to an organization of teachers vs. a school district.

I understand how they operate - because I spent 19 years as a Fire District Treasurer. In order to get the 501(c)(3) status you have to apply for it -via Form 1023-it's NOT automatic. Most fire departments - and I understand in different sections of the country state to state- it's different - but basically operate like this - The fire company owns the building where the trucks are housed. There's probably a social hall to hang out in. The fire DISTRICT owns the vehicles and equipment, pays the insurance coverage, firemens' health benefits, other compensation benefits, provides the training, pays rent to fire company for use of premises. The DISTRICT obtains the funding from government taxes. Fire departments, unless operating under the jurisdiction of a government unit, most likely never filed for 501(c)(3) status, and operate like a private membership social club - and only become subject to the jurisdiction of the District when the whistle blows for a fire call, until the fire call is completed and equipment is put back in place for the next call. Not having the resources enough to have a paid professional like an attorney or accountant on board - they are probably unfamiliar with the compliance rules of IRS (and probably other government levels as well). The fire departments' only funding come from volunteer community contributions, some state fire insurance rebate money, and Fire District rent. Their social activities are not, for the most part, operated for fundraising purposes. So when an outside party wishes to make an in-kind "contribution" - they must be cognizant of WHOM the contribution is being made to, because it's conceivable that the volunteer fire department is NOT 501(c)(3) - and as much as they may have the best of intentions - the contribution (even though the intent is for volunteer emergency training purposes) may NOT be tax deductible.

What part of the Revenue Ruling don't you understand? A Fire Company does not have to be organized under 501(c)(3) for contributions to be deductible. Social activities are completely irrelevant. The company exists for the use of a political subdivision. That does not make the "donation" of a house deductible. As previously noted we charge for the service and alleged donor gets far more benefit than we do.

Per §280B the loss, if any, gets capitalized back into the land, or the remainder of the structure.

Discussion:Houses_Donated_To_Fire_Department_For_Training

IRC 170(f)(3): contributions_and_gifts

I concur that there is no transfer of property - merely the USE of the property - so the taxpayer cannot receive a donation deduction for something not given up. The value of in-kind services is not deductible to begin with. So I don't see where a taxpayer can claim a donation deduction for letting a fire department train on the building for whatever use they're going to make of it.

The IRS is taking a two tier approach regarding disallowing the deduction:

1) Is is not allowable under 170(f), which was issued after the Sharf case.

2) They are looking at valuation of deduction, and saying that there should be reduction for the FMV for disposal etc..

I have had recent discussions with the appeals officer and we have agreed to wait for the outcome of a case in Wisconsin that has went to tax court. I am making an assumption that there won't be a settlement, based on what I hear from the IRS agents. The IRS wants to establish guidelines, or eliminate the deduction.

For your audit you have the Sharf case, and there was a case in Oregon (it was a state case, so precendece does not carry) but those are it. There was an IRS General office Memorandum allowing the deduction but that was before code section 170f.

So depending on the Wisconsin case get ready for the invaders coming over the hill if the IRS wins.

That's interesting. Who could you really talk to in IRS, several times even, and get an authoritative answer? Has Chief Counsel opened up their phone lines to anybody and everybody?

But that doesn't qualify him to provide tax advice. Since he may not be a technically conversant person with tax law terminology, who knows what he asked vs what he was told by IRS? How often have your clients asked tax questions of third parties and have misinformed in the question, and/or misinterpreted what they were told?

Can you reference which sub-section of 170(f) is relevant? Can you provide a reference for the Oregon case and the Wisconsin case, anything to use to look them up? Thanks...

Tax Deductions that shout "Audit Me"

Steve Bennett, president and CEO of Intuit, the maker of the TurboTax software program, reports this one:

A client gave away his house to a local fire department to burn up in a training exercise. So far, so good. It appears to be a legitimate, allowable charitable contribution that was made to an appropriate organization.

But here's the kicker: The value of the property actually went up once the house was removed.

Because the value increased, sorry, there could be no deduction.

In addition, there is no requirement that the taxpayer deed the home over to the fire department in order to secure the tax deduction. Merely giving the fire department permission to destroy the home is sufficient. See Scharf v. Commissioner.

Does anyone have an update on the Wisconsin case?

Best regards, Molly Samietz

Discussion:Houses donated to fire dept for practice

There might be some in there.

Tom

I am wondering why people keep referencing Section 280B? That sections discusses casualty loss deductions and capital loss, not charitable contributions. Am I wrong??? I am doing research on this for a client who wants to donate his house and I cannot find anything that says you cannot claim a deduction for the donation of your house to a volunteer fire department for practice.

Tami M. Wells v. Dept of Rev was a great example and more recent (2003) than any of the most recent changes made to Section 280B (1997).

If you Google the name of the case I just mentioned you will find the Tax Court Opinion along with Rev Ruls that have been extremely helpful to me. Note that Rev Rul 71-47 is clarified by Rev Rul 74-361 but doesn't actually change anything, obviously.

No need to look in Pub 78 for your local fire department, volunteer fire departments are considered charitable organizations for the most part. There are exceptions and I recommend comparing and contrasting your fire department and the requirements before taking this deduction.

Also note that the benefit to fire department and town outweighs any potential amount the taxpayer saved by not having the home professionally demolished.

You'd BETTER check if they're registered in Pub 78. Many fire departments around the country may not have even registered with IRS. There's a distiction between the Fire District - which is the government municipality that's charged with providing fire protection and collects tax money for its budget - vs. a volunteer fire department that is a private social membership club - who COME under the JURISDICTION OF THE DISTRICT when the fire alarm blows.

DON'T assume EVERY fire department is automatically tax exempt.

Tax supported Fire Departments that do not own assets are generally not incorporated.

That said, a quick review of IRC § 170 appears to indicate IRC § 170(f)(3)(A) regarding partial interests was added by PL 91-172 and was effective January 1, 1970. Therefore it was not a consideration when Sharf was decided. I doubt Sharf would withstand the scrutiny of a new case where the Service would in fact raise both the partial interest issue and IRC § 280B.

This reminds me of the discussion where we couldn't even agree on what it means to "replace a roof." This is quite a profession we've picked for ourselves. As the Wicked Witch of the West lamented, "What a world. What a world."

However, I am not sure that I see any difference between pre-1970 Sec. 170 and post-1969 Sec. 170 as far as the donation of a burned-out residence is concerned. If the taxpayer does not retain any substantial rights of ownership in the structure, has he not contributed his entire interest in the property? In the case of a donation of a dwelling unit for fire drill purposes, I see no real retention of ownership rights by the taxpayer.

Not really sure how 280B comes into play here since the taxpayer is not expending any amount for demolition, nor is he sustaining any losses with respect to a demolition.

SCAM ALERT? Kjtax has not responded to many (any?) of the people who provided e-mails and requested the promised information. May just be trying to gather e-mails for some other purpose - caveat emptor.

Thanks.

Just curious.

Tom

Any chance KatieJ (with her magical resources) can get the WI details for us? I have a friend who's considering doing this very thing soon - she'll probably do it anyway even if there's no charitable donation. But I'd like to provide her with up-to-date info if I can...

The reason I asked is I saw he joined the same day he imparted this information and abruptly left and hasn't been back since making him basically a "hit-and-run" contributor. I figured that when I saw all the people asking for the information and lack of responses to this thread from him. That made me curious.

Thanks for the information.

Tom

JOA article - Contributing a House to Fire Dept

Belle - Crow doesn't need to give me any ideas. I am quite capable of burning my own house down!

Tom

This article seems to say you CAN take the charitable deduction, if structured properly. I still want to track down what happened with the case in WI.

And yes, Tom - us TA locals are familiar with your pyrotechnic tendencies... <W>

What you need to do is move a homeless family in, and let them grow potatoes on the land (sharecrop). If you're in California, have them grow that "mary jane", it's a good cash crop, and you can always claim you didn't know anything about it.

I was reading in the High Times magazine at my Dentist's office that there's a premium being paid for American Weed, what with the flu pandemic going on in Mexico.

So if it is over a $5,000 charitable contribution you will need an appraisal. It will be fun watching the appraiser try to go into the POS house on my wife's property and try to appraise it as it is falling down around him. Clearly i'm doing the fire department a favor though! I would like to see a case where someone donates the deed to the house and a member of the fire department decides to fix the house up and live there!

Completed contribution. And if the fire department decides to fix it up and live in it, oh well, too bad, so sad. You cannot specify what they do with the property if it is to stand as a completed contribution.

Dispatch article 7/23/09

The story reads like it was planted by Herbstreit's lawyer. IRS is a bit hamstrung by privacy rules. Note the reference to Taxalmanac and this discussion.

Does that make us authoritative?

Petitioner: Theodore Rolfs

Docket #: 009377-04

It is considered similar to the Hendrix case referenced above.

I am dealing with a donation of property to a county fire house in 2009. The total home appraised at $415,000 in 2009. This includes land. Since the owner still owns the land, this is what I came up with for the donation amount.

1) County site says land is worth $450,000 and improvement is $73,100 for 2009. This gives me a prorata amount of 14% (73,100/450,000+73,100). I then multiplied the amount of $415,000*14%=58,100. This gives me the FMV of just the building to be $58,100.

Am I right to show this is as the charitable donation of property for this calculated amount?

Thank you.

Milwaukee Journal article

The Kiplinger Tax Letter reports that the Hendrix, D.C. vs Ohio case has now been decided. NO DEDUCTION

The District Court determined the appraisal was defective 1) It didn't list the expected date of donation. the terms of the agreement with the fire company or the appraiser's professional qualifications. 2) The appraisal did not state that the appraisal was prepared for income tax purposes.

http://www.oregonlive.com/politics/index.ssf/2010/10/dudley_defends_350000_tax_dedu.html

http://bojack.org/2010/10/dudley_pushed_another_envelope.html

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I think this is a good decision and hope they close this loop hole tightly so we don't look like dummies when clients want us to put in. Note: Rolfs did not have to pay accuracy penalties because of the current ambiguities in the law.

If the court's denial of the TPs' deduction was - and it certainly appears to be, per my reading of the case - based solely on the TPs' inability to establish and support a value for the donated property, then the court hasn't ruled against the idea that giving your home to the fire department to burn down might [or does] yield a deduction.

So EasternPA's hoping that the "loophole" be closed is still valid, because the "loophole" - his term, not mine - is still good law if it was, indeed, good law before this case.

Seems to me that leaves us right where we were. [I could've said "...right where we were at." But I didn't.]

But even had they been more lenient, the problem of setting a value on the building severed from the land is formidable. Using the trestimony of house movers showed some smarts on the part of the government.

For example, an appraisal of the value of the building could be based on its value to:

a) a third party who wants to live there

b) a salvage yard

c) an investor interested in the land [who does not want to pay insurance/maintenance on a building in need of repairs and/or incur the liabilities of someone getting hurt]

Which would be the more relevant valuation?

Harry, I think there is no lack of run down buildings for good citizens to let VFDs use to train on. I'm not keen on giving a $100,000 deduction to some one who'd have to pony up $20,000 to have the demolition done. Would you get a PBR out of the ice chest for me? Watching this fire is making me thirsty.

The appraiser began with the value of the property using comparative sale values, then subtracted the value of the land and other building and Voila, came up with the value of the standing building. The Court notes that such a method can be used to value an easement, but not from the removal of the house.

about 12 years old. The valuation was about $250,000 which was about the same value carried on the local assesed value.

If I donate an autographed rifle appraised at $100K [used by Dick Cheney to shoot a fellow hunter] to a charity and they resell it for $3000. Then my deduction is limited to $3000. If the dinner at the auction was worth $100 for me and the missus, then my net deduction is $2900.

I'd say the net value of the burn home is equal to ValueToFiremenTraining - ValueOfDemolition. Or in other words ValueToCharity - ValueReceivedByTaxpayer.

In Rolfs, the firemen asked for $1000 to cover the costs. So they weren't desperate to practice.

"lake house because they have not satisfied the Am. Bar Endowment test: they have not shown that the market value of the property they donated exceeded the market value of the benefit they received in exchange."

To further D&T's comments, this is the test for being entitled to deduction in this factual situation, therefore, as Dennis says cross your t's and dot your i's.

It is also my understanding that the preparer can be held responsibility (for preparer penalties) if the appraisal does not meet the standards for use under the tax rules.

Comments welcome.

The Court in this case comments on difference between Scharf and this case, and the fact that they have replaced the former with Am. Bar Endowment. They have set the bar high to gain the deduction.

taxbilly

http://taxprof.typepad.com/

http://law.justia.com/cases/federal/appellate-courts/ca7/11-2078/11-2078-2012-02-08.html

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(edit, and I see Dave beat me to it... Discussion:Burning down the house deduction)

Tom

"Paul Caron, a law professor at the University of Cincinnati, said in an e-mail that the split on the Tax Court indicates that the issue “still burns brightly.” Caron added that the details of the decision, which turned on aspects of Virginia property law, may make it difficult to predict how courts will consider similar cases in other states." http://taxprof.typepad.com/