DBTC Law Firm

$340,000 Home Up In Smoke And No Tax Deduction

You may be aware that sometimes fire departments are allowed by property owners to burn private structures for training purposes. It may be fun to watch, and the fire department will certainly enjoy the training opportunity, but the Tax Court has ruled that there is no tax deduction for the loss. A Virginia property owner purchased a house and lot for $625,000 and then granted to the local fire departments the right to burn the house (appraised at $340,000) for a training exercise. The house was burned over several weeks in training exercises in which half a dozen different fire departments participated. The taxpayer claimed the donation of the $340,000 house to charity, which resulted in a $98,000 deduction on their tax return. The deduction was disallowed, and the IRS position was confirmed in the United States Tax Court.

The case reporting this was Patel vs. Commissioner, 138, T.C.#23, issued on June 27, 2012. It invoked several quite complex provisions of the Tax Code, having to do with the charitable deduction of “partial interests” in property. While there were seemingly angles that could have been resolved in the taxpayer’s favor, the court prominently noted in its Opinion that the taxpayer had purchased the property with the intent to promptly demolish the house existing on it and build a new house.  While that particular facet did not directly relate to the very complex analysis of the charitable gifting provisions of the Internal Revenue Code reviewed by the court, one cannot help but wonder how much the court was influenced by this fact. It is a frequent subject of challenge by the IRS what the value of a particular charitable gift may be: a painting, a tract of real estate or a stamp or coin collection. The taxpayer, of course, wants the highest possible value for the charitable gift; the IRS seeks the opposite. If the starting place for analysis is that the taxpayer really thought the property was worthless, should it be justified as a charitable donation?  The Tax Court thought not in these circumstances.

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