District Court Denies Charitable Deduction for Donation of Home to Fire Department

Following up on my prior posts:

• IRS Burns Kirk Herbstreit's Donation of Home to Fire Department (July 24, 2009)
• IRS Denies Deduction for Homes Donated to Fire Departments and Burned Down (Sept. 26, 2009)

The U.S. District Court in Columbus, Ohio (Kirk Herbstreit's hometown) denied a couple's charitable contribution deduction for the house they donated to a suburban fire department that was demolished and the land returned to the couple (who built a larger home on the land) because they did not submit with their return a qualified appraisal or a contemporaneous acknowledgment of the donation from the city. Hendrix v. United States; No. 2:09-cv-00132 (S.D. OH July 21, 2010):

Plaintiffs had retained the accounting firm of Deloitte & Touche regarding a possible donation of the house to the city that would result in the city demolishing the structure and then returning the real estate back to Plaintiffs. In a March 2004 report, a Deloitte & Touche advisor analyzed the possible transaction and concluded, among other things, that “[d]onation of property to a fire department is aggressive and not explicitly sanctioned by the Internal Revenue Code.” ...

The city used the house from June 29, 2004, until October 29, 2004, at which time the house was demolished. Plaintiffs then proceeded to construct a new, larger house on their lot. Plaintiffs also reported a charitable contribution on their 2004 income tax return, claiming a deduction for the house in the amount of $287,400. The IRS disallowed the deduction and proceeded to assess a tax deficiency of $100,590. ...

The parties’ dispute presents four core issues, each of which is arguably potentially dispositive of this litigation. The first issue is whether Plaintiffs have met the requirement of submitting a sufficient qualified appraisal. The second issue is whether Plaintiffs filed a sufficient contemporaneous acknowledgment of the purported donation. The third issue is whether the Internal Revenue Code precludes a deduction for the conduct involved here. The fourth issue is whether Plaintiffs have otherwise established that they are entitled to a deduction. Because the first two of these issues prove dispositive, this Court need not and does not reach the remaining issues. ...

Ciardelli’s appraisal ... fails to constitute a “qualified appraisal.” ... The end result is that Plaintiffs are not entitled to the claimed deduction.

Plaintiffs contest this result, although they concede that their appraisal lacks several areas of content. They argue that they substantially complied with the regulations and statutory scheme, however, and point to components of the appraisal that did include required information. Defendant counters that it does not appear that the Sixth Circuit has recognized the substantial compliance doctrine in regard to taxpayer deductions and that, even if this Court were to assume that the doctrine could apply here, Plaintiffs have failed to demonstrate substantial compliance.

This Court agrees that the substantial compliance doctrine cannot salvage Plaintiffs’ case. Contemplated application of the doctrine in this Circuit to Internal Revenue Code provisions has previously arisen in the context of statutory language that specifically provides for substantial compliance. ... Assuming arguendo that the doctrine indeed could apply in such taxpayer actions, the Court finds that the appraisal at issue wholly lacks even a modicum of content in critical areas to say that it substantially complies with numerous statutory and regulation mandates. The substantial compliance doctrine is not a substitute for missing entire categories of content; rather, it is at most a means of accepting a nearly complete effort that has simply fallen short in regard to minor procedural errors or relatively unimportant clerical oversights. The required content Plaintiffs neglected does not constitute such instances of technicalities. ...

Plaintiffs’ appraisal is insufficient and precludes their claimed deduction. Additionally, even if this first ground did not resolve the litigation, the Court concludes that Defendant is still entitled to summary judgment under its second rationale: that Plaintiffs failed to file a contemporaneous acknowledgment as required by § 170. ... [B]ecause none of the documents produced in this case, including the June 29, 2004 contract between Plaintiffs and the city, satisfies § 170(f)(8)(B), Plaintiffs in turn have failed to avoid the § 170(f)(8)(A) bar on their claimed deduction.

Either of the foregoing grounds ends this litigation. Thus, as noted, the Court declines to reach the remaining moot issues involved in the parties’ dispute. The consequent result of the foregoing analysis is that, regardless of whether taxpayers may be able to claim a deduction for the type of donation involved in this case–a question this Court need not ultimately answer today–the deficient manner in which Plaintiffs pursued such a donation here proves dispositive. Defendant is therefore entitled to summary judgment, while Plaintiffs are not. 

For more on this case, see Joe Kristan, Is Extreme Remodeling a Charitable Contribution? For more on the deductibility of homes donated to a local fire department, see:

• Scharf v. Commissioner, T.C. Memo 1973-265:  "While we are confronted here with an exceedingly close question, we conclude under these particular circumstances that the benefit flowing back to petitioner, consisting of clearer land, was far less than the greater benefit flowing to the volunteer fire department's training and equipment testing operations. The Margolin building, even after razing, still was not completely cleared from the land. Petitioner needed to remove the debris, demolish the foundation and chimney and cover the land before he could market the property. We think the petitioner benefited only incidentally from the demolition of the building and that the community was primarily benefited in its fire control and prevention operations. Consequently, on balance, we hold that the petitioner is entitled to a charitable contribution deduction."
• ABA Tax Listserv
• Charitable Contribution Deductions - An Alternative to Capitalization of Demolition Costs
• Encyclopedia Britannica, Tax Aspects of Contributing a House to a Fire Department
• Forbes, Ultradeductible
• The Tax Adviser, Arson Is Not a Capital Offense