If you want a great big deduction for allowing the local fire department to burn down your house, the Tax Court yesterday threw a fire blanket over your flaming hopes. The court ruled that a Wisconsin couple could not get a big charitable donation for allowing the local fire department to tear down a lake home that they planned to replace.
The Court focused on two issues --
- The appropriate way to value allowing the fire department to burn down a house, and
- The "quid pro quo" benefit to the taxpayers of allowing the fire department to burn down the house.
The taxpayers wanted to deduct the fair market value of the house to be torn down. They hired an appraiser and claimed a $77,000 deduction, which they later raised to over $200,000. The Tax Court, however, decided there was less to the donation than it would appear.
When the taxpayers agreed to donate the house to train firemen, there were lots of strings attached. The firemen didn't get the full value of a house. They instead got a very restricted set of rights:
By transferring the lake house to the VFD without the underlying land, however, petitioners created a substantial restriction or condition on the property's marketability; namely, the lake house could not remain indefinitely on the land upon which it was sited.
Petitioners attached two additional restrictions or conditions on the lake house incident to its donation; namely, the permissible use of the lake house was restricted to firefighter and police training exercises and there was a condition that the lake house be burned down relatively soon after the conveyance.
The asset donated amounted to the right to move the house or torch it. Expert witnesses said the remote location of the house made it worthless as a prospect for moving. As for the right to ignite, while it may have a market value among the Arson-American community, the court found insufficient evidence to decide that the recreational blaze value exceeded the value to the donors of having the house removed.
The court rejected other approaches to valuation. The court ruled that caselaw holds that "the value of the public benefit of the donation" -- the value of the training to the firefighters -- was not relevant. They also said that the reduction of the value of the house to be caused by the fire was not the proper measure, as the gift wasn't of an unrestricted interest in the entire property.
This decision was a "regular" decision, so the Tax Court likely meant this case as a precedent for other fire-donation cases. It will be hard for planners figure out how to donate enough unrestricted house to qualify for a big donation while still making sure space is cleared for the replacement house quickly.
Cite: Rolfs, 135 TC No. 24
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