Discussion:Donation of House to Fire Department

I have a client under audit for taking a deduction of a house contributed to the fire department for training purposes. I've ready many times that this is legal, but can't find any authoritative source to defend my position. The auditor is coming next week to challenge the deduction, and I need a tax court case, rev ruling, or something to defend my position.

Thanks.

- Tim Doyle, TaxAlmanac Moderator - Talk to me 17:04, 6 September 2006 (CDT)

I will review Morris N. Scharf v. Commr, TC Memo 1973-265 noted above.

The probelm I see is with the fair market value of the building and what valuation method should be used. I have not found any IRS guidance on the valuation method to use for the building. I am sure you could find an appriaser who would use market value replacement which would give the taxpayer a really high value, but the IRS could argue that another value method should be used. Anythoughts on the valuation method?

And be careful - fire departments are private membership clubs-non-501(c)(3). It's the fire DISTRICT - the government agency that provides fire protection to the district - that's the tax exempt institution. It's like an analogy to an organization of teachers vs. a school district.

I understand how they operate - because I spent 19 years as a Fire District Treasurer. In order to get the 501(c)(3) status you have to apply for it -via Form 1023-it's NOT automatic. Most fire departments - and I understand in different sections of the country state to state- it's different - but basically operate like this - The fire company owns the building where the trucks are housed. There's probably a social hall to hang out in. The fire DISTRICT owns the vehicles and equipment, pays the insurance coverage, firemens' health benefits, other compensation benefits, provides the training, pays rent to fire company for use of premises. The DISTRICT obtains the funding from government taxes. Fire departments, unless operating under the jurisdiction of a government unit, most likely never filed for 501(c)(3) status, and operate like a private membership social club - and only become subject to the jurisdiction of the District when the whistle blows for a fire call, until the fire call is completed and equipment is put back in place for the next call. Not having the resources enough to have a paid professional like an attorney or accountant on board - they are probably unfamiliar with the compliance rules of IRS (and probably other government levels as well). The fire departments' only funding come from volunteer community contributions, some state fire insurance rebate money, and Fire District rent. Their social activities are not, for the most part, operated for fundraising purposes. So when an outside party wishes to make an in-kind "contribution" - they must be cognizant of WHOM the contribution is being made to, because it's conceivable that the volunteer fire department is NOT 501(c)(3) - and as much as they may have the best of intentions - the contribution (even though the intent is for volunteer emergency training purposes) may NOT be tax deductible.

What part of the Revenue Ruling don't you understand? A Fire Company does not have to be organized under 501(c)(3) for contributions to be deductible. Social activities are completely irrelevant. The company exists for the use of a political subdivision. That does not make the "donation" of a house deductible. As previously noted we charge for the service and alleged donor gets far more benefit than we do.

Per §280B the loss, if any, gets capitalized back into the land, or the remainder of the structure.

http://taxalmanac.com/index.php/Discussion:Houses_Donated_To_Fire_Department_For_Training

IRC 170(f)(3): http://taxalmanac.com/index.php/Internal_Revenue_Code:Sec._170._Charitable%2C_etc.%2C_contributions_and_gifts

Ths issue that we are having in this arena is the valuation method, FMV as a house, replacement value, or the resale value of the pieces - any thoughts are appreciated.....?

In any case no one is signing over their land or the ownership of the house to the non-profits. There is an agreement to remove the structure (just like any other demolition agreement) and as it happens the result is the non-profit obtaining a contribution that has tax deduction value.

As I understood Scharf when read some time ago - there is a value in the house that was provided to the local non-profit fire department as a training facility, for which the fire department would pay a substantial sum to create otherwise, and for which there was a public value in being able to conduct training. I assume the same would be true if the house was used to train in the practice of deconstruction (a contruction trade) by a non-profit if it was established as a work-force development organization.

If a tax deduction for donating a house as a training facility to a non-profit fire department is not legal then why did Sharf win their case?

If not signing over the ownership of ths house or the land voids the contribution of the whole house for "deconstruction", then why do you suppose dozens of non-profits are able to engage in this practice at this time?

Or in other words, why would the homeowner need to deed anything, is there is an agreement that the non-profit will as a result of its related activities remove the house, and if this is value (either as an activity or a raw material value) as a non-cash contribution?

FMV of the pieces I would say, but there are all kinds of limitations that could apply. The tricky part would be determining the taxpayers basis of the salvaged pieces. I guess you could base it off of the ratio of the FMV of the pieces to the FMV of the house.

§280B superceedes Scharf.

Value of deduction might be difference of basis of house (minus) value of land without building…

This is still the basis of the “whole” house (based on what justification, as a house, or this is the basis irregardless of what is done to it or its use by non-profit?)… and then is using the basis of a “whole” house legitimate when the house is “removed” by agreement between donor and donee? Is it germane to the donation aspect of the transaction that the non-profit then took the house and dismantled it and it is no longer a functional house, but a bunch of pieces of materials?

It some cases the non-profit might relocate it, and if one were smart they would just say “remove the building” in the agreement?

In this case, if owner of house had basis of house separate from land appraised at $100,000, then the donation is $100,000 (minus estimated cost of demolition)….?? Or something like $100,000 - $10,000 (high-end of an average demolition) = $90,000 ??? given that the non-profit rendered a service / benefit of house removal.. that is a huge donation... especially given the resulting salvage will clearly be much less than $100,000 in value... or is this irrelevant? Forms 8282 and 8283 would suggest it is relevant. If the non-profit sells the resulting salvage for say $10,000 is the homeowner then going to have some serious consequences, or it is the problem only of the non-profit...?

What if the non-profit charges more say $15,000 for "removal" because it is more labor intensive to deconstruct… then still subtract the $10,000 from donation as the lowest cost for demolition, or the $15,000 as actual cost of the deconstruction? for benefit / service received.

Or.. alternative for donation value is ratio of FMV of pieces to FMV of house (still separate from land)? The FMV of parts is the value for resale as used building materials, based on sales prices. Say the salvage is worth $10,000 FMV. The house before destruction is $100,000 FMV. What is the ratio here?

Off-topic The IRS Exempt Organization Division FY 2008 Implementing Plan includes investigating non-profits using deconstruction to obtain non-cash charitable contributions and the use of deduction value as a means to compete with demolition. Somehow the grey area(s) need to be resolved for the sake of homeowners being able to do a "good" thing per the point of charitable contributions, and for the non-profits seeking to provide this opportunity. HfH affiliate ReStores obtain and sell used and surplus materials at low prices to those who may not be able to afford new materials, to raise money for their low-income home-building activities. Apologies for the proselytizing off-topic

I concur that there is no transfer of property - merely the USE of the property - so the taxpayer cannot receive a donation deduction for something not given up. The value of in-kind services is not deductible to begin with. So I don't see where a taxpayer can claim a donation deduction for letting a fire department train on the building for whatever use they're going to make of it.

I have found a a non-profit that purchases homes for $1.00 and then moves them. If this was the method for deconstruction or fire-department training would this avoid the basis of a demolition added to the land ? It is a sale not a donation and the non-profit "removes" the building, not the now-previous owner. In the house moving situation the homeowner is also asked for a cash donation to help with cost of moving. Are there any holes in this process, such that the homeowner cannot still receive maximum allowable deduction for their cash donation and also be clear of adding basis of house to the land? In a way their cash donation is substituting for demolition cost, but at this point they do not own the house anymore... any problems with this concept? as a means to use old house for something more than landfill... Thanks.

The IRS is taking a two tier approach regarding disallowing the deduction:

1) Is is not allowable under 170(f), which was issued after the Sharf case.

2) They are looking at valuation of deduction, and saying that there should be reduction for the FMV for disposal etc..

I have had recent discussions with the appeals officer and we have agreed to wait for the outcome of a case in Wisconsin that has went to tax court. I am making an assumption that there won't be a settlement, based on what I hear from the IRS agents. The IRS wants to establish guidelines, or eliminate the deduction.

For your audit you have the Sharf case, and there was a case in Oregon (it was a state case, so precendece does not carry) but those are it. There was an IRS General office Memorandum allowing the deduction but that was before code section 170f.

So depending on the Wisconsin case get ready for the invaders coming over the hill if the IRS wins.

That's interesting. Who could you really talk to in IRS, several times even, and get an authoritative answer? Has Chief Counsel opened up their phone lines to anybody and everybody?

But that doesn't qualify him to provide tax advice. Since he may not be a technically conversant person with tax law terminology, who knows what he asked vs what he was told by IRS? How often have your clients asked tax questions of third parties and have misinformed in the question, and/or misinterpreted what they were told?

Can you reference which sub-section of 170(f) is relevant? Can you provide a reference for the Oregon case and the Wisconsin case, anything to use to look them up? Thanks...

Tax Deductions that shout "Audit Me"

Steve Bennett, president and CEO of Intuit, the maker of the TurboTax software program, reports this one:

A client gave away his house to a local fire department to burn up in a training exercise. So far, so good. It appears to be a legitimate, allowable charitable contribution that was made to an appropriate organization.

But here's the kicker: The value of the property actually went up once the house was removed.

Because the value increased, sorry, there could be no deduction.

In addition, there is no requirement that the taxpayer deed the home over to the fire department in order to secure the tax deduction. Merely giving the fire department permission to destroy the home is sufficient. See Scharf v. Commissioner.

Does anyone have an update on the Wisconsin case?

Tom

If I paid a CPA and received the same advice, would that same opinion then have value?

If you'd be so kind as to tell me what an enrolled agent is and how I go about getting a referral for one, I'd appreciate it.

Does the IRS ever allow you to sit down and discuss things before you put them on your 1040 or do they only play "gotcha"?

Best regards, Molly Samietz

How do you use a replacement cost method when the house is not actually donated in place or moved to another location, nor as the function of a house such as for the fire department training?I

Isn't the value of the donation actually what is salvaged (which is not all of the house, or represents a 'house' functionally?) And if you use both methods don't you end up with a big difference between a real estate appriasal of a house on a piece of property and a personal property appraisal of a bunch of cabinets, doors, etc. disassociated from the building and land underneath?

This is also still a demolition, for which any costs are not deductible and most be added to basis of land. Do you substract the payment by the owner for deconstruction from your appraised value in either case - since this is a demolition cost?

And lastly if the donation is over $5,000 which it would be as a replacement value, how does the non-profit report the subsequent resale value of the materials (assuming it is less than a whole house) and reconcile any potential difference between the resale as individual materials and the donation value as a whole house? Thanks