House Donated to Fire Department Was a Contribution of a Partial Interest and Thus Not Deductible. (Parker's Federal Tax Bulletin: July 13, 2012)

Taxpayers who grant a fire department the right to conduct training exercises on their property and destroy a building thereon during the exercises do not donate any ownership interest in property, and Code Sec. 170(f)(3) denies them a charitable contribution deduction for the donation of the use of their property regardless of the value of that use. Patel v. Comm'r, 138 T.C. No. 23 (6/27/12).

At the end of May 2006, Upen and Avanti Patel purchased property Virginia, with the intention to demolish the house situated thereon and construct a new one on the site. Their realtor told them about the Fairfax County Fire and Rescue Department (FCFRD) Acquired Structures Program, where a property owner allows FCFRD to conduct live fire training exercises on his or her property. As part of the exercises, FCFRD destroys, by burning, the designated building on the owner's property. Within a few weeks of purchasing the Virgina property, the Patels contacted FCFRD and obtained information about the requirements for participating in the program. After the Patels obtained a demolition permit and completed all the other requirements, they executed documents granting FCFRD the right to conduct training exercises on the property and to destroy the house by burning it during the exercises. During October 2006, FCFRD, along with six other fire departments, used the Virginia property to conduct live fire training exercises, during which the house was destroyed.

On their 2006 federal income tax return, the Patels reported a noncash charitable contribution of $339,504 on Schedule A, Itemized Deductions, for the donation of the house to FCFRD. Because they were subject to certain charitable limitations under Code Sec. 170(b), the Patels deducted $92,865 as a noncash charitable contribution for 2006. The IRS disallowed the deduction, asserting that the Patels' donation to FCFRD was a contribution of a partial interest in property and, under Code Sec. 170(f)(3), was not deductible. The IRS also assessed an accuracy-related penalty.

A sharply divided Tax Court held that a landowner's grant to a fire department of the right to conduct training exercises on his property and destroy a building thereon during the exercises is a mere license that permits the fire department to do an act that, without such a grant, would be illegal and that conveys no interest in the property to the fire department. The Tax Court also held that taxpayers who grant a fire department the right to conduct training exercises on their property and destroy a building thereon during the exercises do not donate any ownership interest in property to the fire department, and Code Sec.. 170(f) (3) denies them a charitable contribution deduction for the donation of the use of their property regardless of the value of that use. As a result, the court concluded that the Patels donated only the use of the Virginia property and the house to FCFRD. That donation, the court stated, was a donation of a partial interest in the property, and under Code Sec. 170(f)(3), was not deductible. However, the court also concluded that the Patels acted with reasonable cause and in good faith and, thus, were not liable for any accuracy-related penalty.

While eight judges agreed with the end result on the charitable donation issue, seven judges dissented. In the dissenting opinion, those judges said that the Patels gave more than the use of their house and retained no substantial interest therein by virtue of their grant of permission to destroy. According to those judges, where the interest retained by the taxpayer is so insubstantial that he has, in substance, transferred his entire interest in the property, the tax treatment should so reflect. Such a taxpayer, the dissenting opinion noted, satisfies the original congressional purpose behind Code Sec. 170(f)(3). These dissenting judges concluded that Code Sec. 170(f)(3) did not apply to limit the Patels' deduction. They did note, however, that while Code Sec. 170(f)(3) did not bar the Patels' charitable contribution deduction, the Patels still had to satisfy the sine qua non of a charitable contribution, namely, a transfer of money or property without adequate consideration in return. Thus, the Patels would have to show that the value of the house, taking into account the conditions on its donation, exceeded the value of the benefit they received from the fire department in the form of demolition services.

OBSERVATION: The facts in this case are similar to those in Rolfs v. Comm'r, 135 T.C. No. 24 (2010), aff'd, 2012 PTC 19 (7th Cir. 2012), where the Tax Court denied the taxpayers a charitable deduction based on a quid pro quo argument advanced by the IRS. That court concluded that the taxpayers anticipated a substantial benefit in exchange for their donation of a house to a local fire department, in the form of demolition services worth approximately $10,000, and that the fair market value of the donated house did not exceed that figure. As a result, the court in Rolfs did not address the IRS's alternative argument that Code Sec. 170(f)(3) operated to deny the taxpayer's a deduction. In the Patel case, the Tax Court decided the issued based on Code Sec. 170(f)(3).

For a discussion of the rules relating to contributions of partial interests in property, see Parker Tax ¶84,155.

Parker Tax Publishing Staff Writers

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