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Saturday, September 26, 2009

IRS Denies Deduction for Homes Donated to Fire Departments and Burned Down

Fire

Following up on my prior post, IRS Burns Kirk Herbstreit's Donation of Home to Fire Department: the Associated Press picks up on the story in Burning Down the House? IRS Nixes Tax Deductions:

Lured by the prospect of free demolition, homeowners around the country sometimes offer their houses to the local fire department for training purposes. The department burns down the house, clearing the way for the owner to build a bigger and better home.

In court cases in Ohio and Wisconsin, the IRS is arguing that because such houses are already slated for demolition, donating them for fire training isn't an act of charity. ...

Steven Willis, a professor at the University of Florida who studies income tax law, said a charitable deduction can be no greater than the value of whatever was donated, and a house given to a fire department has negative value, since the owner was going to have to pay somebody to get rid of it.

"The whole idea of a charitable deduction is that you give something to charity and you don't get anything back, right?" said Paul Caron, a tax scholar at the University of Cincinnati. "When you give $100 to the Catholic Church, you don't get anything for that $100."

The IRS maintains in court papers in the Wisconsin case that the homeowners do not qualify for a deduction because they are donating only a "partial interest" in their home, rather than the entire property. The agency also says homeowners are letting firefighters only use the property, not donating it in full.

The story has been picked up by over 100 media outlets and newspapers, including

http://taxprof.typepad.com/taxprof_blog/2009/09/irs-challenges.html

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Comments

"Steven Willis, a professor at the University of Florida who studies income tax law, said ...

Having read Professor Willis' The Tax Benefit Rule: A Different View and a Unified Theory of Error Correction, 42 Fla. L. Rev. 575 (1990) and Professor Matthew J. Barrett's
"Determining an Individual's Federal Income Tax Liability When the Tax Benefit Rule Applies: A Fifty-Year Checkup Brings a New Prescription for Calculating Gross, Adjusted Gross, and Taxable Incomes",1994 Brigham Young University Law Review 1 (1994), reprinted in 63 Tax Notes 899 (1994), I would not be inclined to place much credence in any of Professor Willis' opinion without serious analysis.

Professor Barrett answered the following question in his article while Professor Willis did not seem to understand that the question needed to be asked:

Precisely, what is it about the language in section 111(a) of the Internal Revenue Code that allows IRS to issue instructions that can result in the gross income attributable to an itemized deduction recovery exceeding the amount of the recovery?

For a start see IRS instructions for determining the taxable portion of Social Security benefits and then consider the following from the United States Code Annotated under 26USC111:

Purpose

"Purpose of the tax benefit rule is not simply to tax "recoveries" but, on contrary, is to approximate "results produced by tax system based on transactional rather than annual accounting, and basic purpose is to achieve rough transactional parity in tax and to protect government and taxpayer from adverse effects of reporting transaction on basis of assumptions that an event in subsequent year proves to have been erroneous. Hillsboro National Bank v. C.I.R., 1983, 103 S. Ct. 1134, 460 U.S. 370, 75 L. Ed.2d 130, on remand 704 F.2d 1167."

When the gross income attributable to a recovery can exceed the amount of the recovery by 1.85 times, that goes beyond rough transactional parity and the inclusion of the recovery and the additional taxable Social security attributale to the recovery in the calculation of the Hope educational credit (for single taxpayer prior to 2009) is an outright mugging of the taxpayer.

Posted by: WD Kebschull | Sep 26, 2009 8:24:18 AM

"The whole idea of a charitable deduction is that you give something to charity and you don't get anything back, right?" said Paul Caron, a tax scholar at the University of Cincinnati. "When you give $100 to the Catholic Church, you don't get anything for that $100."

Unless, of course, the one giving to the Church believes it is part of their belief system to tithe, receiving salvation or church access in return. Following this logic, many gifts to church's would not qualify for a deduction as the donor is receiving something in return.

I have always been under the impression that a deductible gift is one that is given to an organization meeting the requirements set forth in 170, fire departments included. The value of that gift is a willing buyer/willing seller test. Certainly there is room to debate the value of the use of home to a fire department for training purposes: rental value over the period less demolition costs saved, or some fraction of the cost of similar facilities for the fire department. Regardless, there is some value here being given to the "charity."
That said, the IRS has always required that the value of the charitable donation be reduced by the amount of economic benefit received by the donor.

I do not mean to state that the IRS is without an argument. There is room to discuss if the partial interest rule applies in this situation. My point in this post is only that the comments provided by the experts, and then repeated on "over 100 media outlets" should have been better worded to address the legal issues present. As provided, the comment fails to inform readers about the issues present in these cases and oversimplifies tax issues. I do not fault the expert nearly as much as the author for including comments that distract from the law at issue.

Posted by: AS | Sep 27, 2009 1:41:33 AM

Both Willis and Caron miss the fundamental question at issue in the litigation. The question here is not one of valuation, nor of quid pro quo. The question is one of whether giving the fire department the right to burn down your house conveys the entire interest in the property as required by the Code.

Posted by: taxworep | Sep 28, 2009 7:11:08 AM

I agree that a gift must be of a complete interest in property. I do recall, however, working on a matter where one of my clients donated to the Smithsonian a piece of art for a period of time. In that case the complete interest was the property for a period of time. In the instance of a home donated to the fire dept to burn down, the interest must be the ability to use the property for a specified period of time. During the time the home could be burned down. I think the more curious question is that of valuing the home donation, which I would peg at the value the fire dept would have to pay to have a similar training exercise.

I have always operated under the premise that tax law should encourage good business decisions being made. It would be a shame if the IRS did not reconsider its position, because a gift of a house to burn down is one I want to happen so our firefighters are prepared as best they can be. The issue should have been one of gift value.

Posted by: Jerry Gensiejewski | Sep 28, 2009 9:23:41 AM