Charitable Contribution Must Be Appraised In Light Of Donation Conditions
ROLFS v. COMMISSIONER OF INTERNAL REVENUE (February 8, 2012)
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Theodore Rolfs and his wife purchased a house and three-acre lakefront lot in Chenequa, Wisconsin. In order to make way for a new house they wanted to build on the property, the Rolfs donated the house to the local fire department to be burned in a training exercise. The Rolfs then claimed a $76,000 charitable deduction on their tax return, relying on a before and after appraisal. The IRS disallowed the deduction. The Tax Court agreed. The Rolfs Appeal.
In their opinion, Seventh Circuit Chief Judge Easterbrook, Circuit Judge Hamilton, and District Judge Myerscough affirmed. The Court began with the well-established legal principles that: a) taxpayers may deduct the amount of charitable contributions, b) the objective features of the transaction determine its deductibility, c) the fair market value is an objective determination at the time of the contribution, and d) any return benefit must be deducted from the contribution's fair market value. Here, the taxpayers' before and after appraisal method fails to take into account two things. First, the taxpayers did not donate the house to the fire department unconditionally. It had to be burned down. Therefore, it has negligible value and the Rolfs’ before appraisal was overstated. Second, by donating the house to the fire Department, the taxpayers saved approximately $10,000 in demolition costs. They had to deduct this amount from any donated value. Any value remaining in the house was certainly less than the benefit received by the taxpayers and they are entitled to no charitable deduction.
Michael Rigney practices in the law offices of GVC Ltd. in Chicago. In this blog, he reports on select