In a long-awaited decision, the U.S. Tax Court ruled
yesterday against a Wisconsin homeowner who claimed a $76,000 income tax deduction for donating to his local fire department the right to burn down his house for the department's training purposes.
The underlying circumstances in the Wisconsin case mirror those in the case of Republican gubernatorial candidate Chris Dudley
, who, as WW reported
earlier, donated his house to the Lake Oswego Fire Department in 2004 and claimed a $350,000 tax deduction that year.
In its ruling in the Wisconsin case, the Tax Court found that because of the restrictions the homeowner placed on his donation—that it could only be used for a training burn—the house had no value. And the taxpayer actually got a benefit—demolition—that did have value. So effectively, the homeowner benefited from the donation, which is contrary to the concept of a charitable donation.
Here's an excerpt from the opinion:
"We are persuaded by the evidence that petitioners [i.e. the homowner-donors] anticipated a substantial benefit in exchange for their donation of the lake house, in the form of demolition services worth approximately $10,000, and that the fair market value of the [Wisconsin] lake house as donated did not exceed that figure. Petitioners have failed to prove the lake house had a fair market value exceeding $10,000, because the expert testimony they offered to prove value failed to account for substantial conditions and restrictions imposed on the property incident to its donation, including in particular its severance from the underlying land. The remaining evidence
supports a conclusion that the fair market value of the lake house as encumbered at the time of the donation was de minimis. The lake house could not remain on the land on which it was sited, could not be used for residential purposes, yet had no value as a structure to be moved or any salvage value. We therefore hold that petitioners are not entitled to any charitable contribution deduction for the donation of the lake house."
The Tax Court decision follows a July ruling
in federal court in Ohio that upheld an IRS decision to disallow similar deductions in that state, including one taken by ESPN broadcaster Kirk Herbstreit
. In the Ohio ruling, Judge Gregory Frost agreed with the IRS' disallowing the deductions without addressing the issue of whether the donations constituted legitimate deductions. The Tax Court ruling in Wisconsin answers that question.