Wednesday, August 8, 2012
In Patel v. Commissioner, 138 T.C. No. 23, the full Tax Court rejected taxpayers' attempt to claim a charitable contribution deduction for the donation of their house for fire department training exercises. As is common in these cases, the taxpayers wanted the house destroyed so they could build a new one on the same piece of land. While the Seventh Circuit previously rejected a similar deduction, the Tax Court's reasoning for the denial was different. While the Seventh Circuit concluded that the net value of the "gift" was actually zero given that the training exercise saved the taxpayers $10,000 in demolition costs, the Tax Court in Patel concluded that the deduction failed because under the applicable state law a house is regarded a part of the land, and even if the house is considered separately from the land the taxpayers retained significant ownership interests in the house and only granted the fire department a "mere revocable license that does not vest any property interest in the fire department." As a result, the taxpayers only donated a partial interest in the property, which does not qualify for a deduction under Internal Revenue Code section 170(f)(3).