Contributing a Lake Home to a Fire Department

In Scharf v. Comm’r 32 T.C. Memo 1247 (1973) acq, in result, 1974 WL 36031, the United States Tax Court decided, and the IRS had acquiesced to the decision, that a charitable contribution deduction was available for the donation of a building (albeit partially destroyed) to a volunteer fire department for demolition in firefighter training exercises.

Taxpayers and their tax advisors use this case to support a charitable contribution of their home, often a lake home, to a local fire department. The situation usually involves an older home on a very valuable piece of land. The taxpayer enters an agreement with a fire department allowing the department to use the home for training purposes, including destroying the structure. The taxpayer takes a charitable deduction for the contribution to the fire department and then builds a new home on the property.

The state or the IRS can claim that the value of the contribution has been overstated. Their arguments may include:

1. The Appraisal Did Not Properly Calculate the Fair Market Value of the Contribution. Too often, the appraisal simply separates the value of the structure from the value of the land, and then claims the value of the structure as the deductible amount. This rarely represents the Fair Market Value and often results in an excessive value for the contribution.

“[F]air market value” for this purpose “is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.” Sec. 1.170A–1(c)(2), Income Tax Regs. Restrictions on the property’s use or marketability on the date of the contribution must be taken into account in the determination of fair market value.Rolfs v. C.I.R., 135 T.C. 471, 480-81 (2010)

The state and the IRS want the taxpayer to demonstrate how much a good faith third party would pay for the structure, separate from the land. They may require the appraiser to include the cost of removing the structure from the land, as a third party buyer could not leave the structure in place.

2. The Taxpayer Received Something of Value for the Contribution. The state or the IRS will often claim that the taxpayer is receiving valuable demolition services in exchange for the contribution. They will likely cite the United States Supreme Court decision in United States v. Am. Bar Endowment, 477 U.S. 105, 116, 106 S.Ct. 2426, 91 L.Ed.2d 89 (1986). “The Am. Bar Endowment test examines whether the fair market value of the contributed property exceeded the fair market value of the benefit received by the donor. . . . Instead, we must consider whether the value of the lake house as donated exceeded the value of the demolition services petitioners received.” Rolfs v. C.I.R., 135 T.C. 471, 487-88 (2010). The taxpayer needs to deduct the value of the demolition services from the value of the contribution. This can result in eliminating the charitable deduction as the value of the demolition services can exceed the value of the rights contributed to the fire department.

Contributing a structure to a fire department is valid transaction, but , to be deductible as a charitable contribution, it needs to be done properly and the value of the rights contributed must be supported.