The Tax Court disallowed the taxpayers' charitable contribution deduction for the value of a donated house that would later be destroyed in a training exercise by a county fire department. The court held that a deduction should not be allowed since the taxpayers did not transfer an undivided portion of an entire interest in the property.
Contributions to nonprofit volunteer fire departments are deductible under Sec. 170(c)(1). Generally, contributions of partial interests in property are not deductible; however, contributions of an undivided portion of the taxpayer’s entire interest in property, a qualified conservation contribution, or a remainder interest in a personal residence or farm are deductible. An undivided portion of an entire interest in property consists of a portion of each and every substantial right in the property and extends over the whole term of the taxpayer’s interest in the property. State law determines the nature of the rights.
In 2006, Upen and Avanti Patel purchased a house on a half-acre lot in Vienna, Va., with the intent of razing it and building a new one. The couple entered into an agreement with the Fairfax County Fire and Rescue Department (FCFRD) that permitted the department to burn down the existing house as part of its training exercises. In October 2006, the FCFRD destroyed the house, and subsequently the taxpayers had the debris removed and began building their new home. The Patels reported a noncash charitable contribution of $339,504, the value they assigned to the house donated to the FCFRD, on their 2006 joint federal income tax return, of which $92,865 was deducted in that year. The IRS disallowed the entire $339,504 contribution, stating a partial interest in property had been donated that did not meet one of the three allowed exceptions. The taxpayers petitioned the Tax Court for relief, arguing that they had donated their entire interest in the house.
The court held that the donation was a gift of a partial interest since, under Virginia law, the house was considered part of the land, in which the taxpayers retained a substantial interest. The court held the donation was not a qualified conservation donation or a gift of a remainder interest in a personal residence or farm; therefore, it would have to be a donation of an undivided portion of property to be deductible.
Under common law, a building is considered part of the land until it is severed from the land. The court held that giving the FCFRD the right to burn down the house did not sever the building from the land but instead gave the FCFRD the right to use the house. According to the court, severance occurred when the house was destroyed; however, since the taxpayers were still liable for the removal of debris and any injuries on the property until it was removed, the taxpayers still had a substantial ownership interest in the house after it was destroyed. Because the taxpayers had retained a substantial ownership interest, the court held, an undivided portion had not been transferred and no deduction should be allowed for the donation.
Seven judges joined in a dissenting opinion, stating when the house was destroyed, it was severed from the land and became personal property in which the taxpayers retained only insubstantial rights (the debris). Furthermore, according to the dissent, any burdens of the taxpayers were because of their ownership of the land, not the house; therefore, the taxpayers had transferred their entire interest in the house.
Patel, 138 T.C. No. 23 (6/27/12)
By Charles J. Reichert, CPA, instructor of
accounting, University of Minnesota–Duluth.