Tax Break

Appeals Court: You can’t burn down your house for a big tax deduction

February 9, 2012

The U.S. Court of Appeals ruled Wednesday against a couple who claimed a sizeable deduction after donating their house to be burned in a firefighter training. Circuit Judge David Hamilton wrote in the opinion:

“Taxpayers Theodore R. Rolfs and his wife Julia Gallagher purchased a three-acre lakefront property in the Village of Chenequa, Wisconsin. Not satisfied with the house that stood on the $675,000 property, they decided to demolish it and build another. To accomplish the demolition, the Rolfs donated the house to the local fire department to be burned down in a firefighter training exercise. The Rolfs claimed a $76,000 charitable deduction on their 1998 tax return for the value of their donated and destroyed house. The IRS disallowed the deduction, and that decision was upheld by the United States Tax Court… To support the deduction, the Rolfs needed to show a value for their donation that exceeded the substantial benefit they received in return. The Tax Court found that they had not done so. We agree and therefore affirm.”

Apparently these types of claims, though unusual, are not all together unknown, and the court found that the value of the donation would need to take into account the fact that it was made with conditions. In this case, the condition is the house being burned to the ground left the house with “essentially no value” according to the decision.

The Rolfs’ attorney, Michael Goller, declined to comment on the decisions as he was still reviewing it, though he did say it was “disappointing.” No decision has yet been made about whether or not to appeal, he said. Messages left for Ted Rolfs seeking comment on the decision were not returned.

Goller noted that there are many other tax court cases pending and reviews of refunds claimed for burn downs, that will be impacted by the court’s decision, and that already fewer homes are being donated for these purposes due to uncertainty around the tax break.

  • In 2010, the New York Post reported that Arthur Penn, a former vice president of Lehman Brothers Holdings, and his wife, Ielene, paid $4.2 million for a two-acre property on Old Barn Lane in the expensive neighborhood of Sagaponack on Long Island, only to invite in the Bridgehampton fire department to burn it down so they could build a new home.
  • ESPN commentator Kirk Herbstreit, once a football star at Ohio State, had the $330,000 tax deduction he claimed on the burn down of a home in Upper Arlington, Ohio denied. His lawyer on that case, Terrence A. Grady, did not respond to requests for comment.
  • Chris Dudley, a former NBA basketball center and Republican candidate for Governor of Oregon, defended, through his spokesperson, his $350,000 tax deduction on the 2004 burn of his property in Lake Oswego as legal and entirely by the books.

In the Rolfs case, the court had no issue with the Village of Chenequa and its volunteer fire department getting a charitable contribution. The problem is the number they put on its value.

Though Hamilton acknowledged, “There is no evidence of a functional market of willing sellers and buyers of houses to burn,” he did not like the method the Rolfs chose to value their home. That was taking an appraiser’s value of their property with the house, and after without it, and subtracting the second value from the first. One specific issue: They failed to factor in the benefit they got. Demolition would have cost them $10,000.

It is ok to get something in return for a charitable donation and still take a deduction for the amount above and beyond what you got for it, Hamilton writes:

A charitable deduction is not automatically disallowed if the donor received any consideration in return. Instead, as the Supreme Court observed in United States v. American Bar Endowment, some donations may have a dual purpose, as when a donor overpays for admission to a fund-raising dinner, but does in fact expect to enjoy the proverbial rubber chicken dinner and accompanying entertainment. Where “the size of the payment is clearly out of proportion to the benefit received,” taxpayers can deduct the excess, provided that they objectively intended it as a gift.

But putting a value on “amorphous concepts of public benefit” like the training of fire fighters, he sees as an “exceedingly difficult” task. Agreeing with the tax court, he concludes “the condition requiring destruction of the house meant that the donated property had essentially no value.”

(with additional reporting by Jonathan Stempel).

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