A Burning Issue . . .

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“The fault of most men is not that they aim too high and miss, but that they aim too low and hit.”   – Michelangelo

An article in the Sunday edition of the Milwaukee Journal Sentinel addressed an issue that is particularly relevant in our area. For some time it has been fairly common for owners of tear-downs to make a charitable contribution of the house to their local fire departments for a tax deduction. The fire department burns it down for practice. Lately that strategy has been under attack by IRS.

This is something that has been done for a long time, but IRS is looking at it differently now. For years, IRS allowed deductions for homes donated to fire departments, based on a 1973 court opinion interpreting the IRS code written in 1968. But the tax code changed in 1969 to specify that donating anything less than the entire interest in a property, such as its use, is not deductible as a charitable contribution. Around 2004, IRS started disallowing deductions for homes donated for fires.

The heart of the issue is the value of the house. Usually when you give to charity, you can deduct the fair market value of the property that is gifted. In this case, what is the value of something that is going to be destroyed anyway?

This article tells the story of a Chenequa couple that bought an old house on Pine Lake in 1996. In 1998, they let the Chenequa Fire Department burn it down and claimed a charitable deduction of $76,000. Replacement value was about $235,000. IRS disallowed the deduction, saying that because the home was going to be torn down anyway, it had negative value, or was worth approximately $1,000 if someone was willing to move it. The owner decided to fight the case. It was argued before a tax judge in 2005, but they’re still waiting for a decision.

If the U.S. Tax Court agrees with IRS, the decision will likely end the symbiotic relationship between owners of tear-downs and their local fire departments.

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