Charitable Contribution: Donated Real Estate

19 Jul Charitable Contribution: Donated Real Estate

I have a new case involving donated rental real estate and in preparation for appeal I stumbled across the US Tax Court case of Theodore R. Rolfs, et ux. v. Commissioner 135 TC No. 24 in which the taxpayer donated a lake house with conditions to the local Volunteer Fire Department (VFD) for training purposes.  The following are my notes from reviewing the case.

The US Tax Court held that the taxpayers were not entitled to any charitable contribution deduction for the lake house because they failed to prove that the fair market value (FMV) of the lake house as donated exceeded the FMV of the demolition services foregone not withstanding the conditions of the donation that the lake house could not remain on the land on which it was sited, could not be used for residential purposes, had no value as a structure to be moved, and had no salvage value.

In 1998 the taxpayers claimed a charitable contribution deduction of $76,000 on their tax return for what they believed to be the fair market value (FMV) of their lake house as determined by a qualified appraisal which was attached to the return. The IRS denied the deduction and claimed that the taxpayer did not make a charitable contribution because the FMV of the lake house as donated with conditions did not exceed the FMV of the demolition services they received from the VFD in exchange for the donation. This is commonly referred to as the ‘quid pro quo argument.’

The Court determined that the taxpayers saved at least $10,000 in demolition costs as a result of their arrangement with the Volunteer Fire Department (VFD) in question and subsequently received a benefit with a FMV in that amount in exchange for the donation. As a result, the FMV of the lake house as donated had to exceed $10,000 for the taxpayers to claim a charitable contribution deduction for the difference.

FMV is determined at the time of the donation, measured by the willing buyer/willing seller standard. However, the FMV must take into account any restrictions or conditions limiting the property’s marketability. In this case the taxpayers had several restrictions on the property and their appraisal treated the value of the donated property as equal to the difference between the FMV of the property with the lake house and the FMV of the property without the lake house.