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Lessons from the Tax Court: Charitable deduction up in smoke

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in Small Business Tax,Small Business Tax Deduction Strategies

A court has decided another “burning tax issue.” It affirmed a Tax Court ruling that denied a charitable deduction to taxpayers who donated a house to the local fire department to burn down for training purposes.

New case: A couple bought lakefront property in Wisconsin. They intended to tear down the existing house on the property and replace it with the new one. The demolition would cost at least $10,000.

Instead, the couple donated the house to the local fire department, but not the underlying land.

The condition: The house could only be used for training exercises if it was burned down. Then the couple claimed a charitable deduction of $7,600. This amount was based on appraisal of the “before” and “after” value of the combined land and house.

But the Tax Court rejected this approach and now the 7th Circuit Court of Appeals has agreed. Because the demolition was a requirement of the gift, the house’s value was effectively reduced to a negligible salvage amount.

This didn’t exceed the value of the demolition benefit received, so the couple gets no deduction. (Rolfs, CA-7, 2/8/12) 

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