No Charitable Deduction for Contribution to Fire Department of Building Burned In Training

The Tax Court in Rolfs and Gallagher v. Commissioner reconsidered the basis of its decision in the Scharf case from 1973 (T.C. Memorandum 1973-265) regarding a charitable contribution deduction to be received by a taxpayer who donates a building to be used for training by a volunteer fire department. In both this case and the earlier Scharf case the taxpayers receive the benefit of the demolition of a building that they were intending to tear down. In Scharf the taxpayer needed to demolish the building because of a prior fire that had damaged the building, while in this case the taxpayers merely wanted to tear down the existing building and build a larger new one.  However, in both cases the taxpayers escaped having to pay for the building itself to be demolished.

The IRS objected that the taxpayers received a substantial benefit in exchange for the donation, that is the demolition of the property that they were planning to demolish in any event. The taxpayers argued that the Tax Court’s prior decision in Scharf argued for a deduction, as they claim there was a significant public benefit to their donation (the fire department found the training provided in this manner was superior to other training methods). The Tax Court pointed out that the Scharf was decided 13 years prior to the Supreme Court’s decision in the case of United States v. American Bar Endowment, where the Supreme Court laid down a two-pronged test in cases where the taxpayer receives a benefit from the charitable contribution.

Under the Supreme Court’s holding, the taxpayer must first show that the contribution made exceeded the value of the benefit received, with the deduction limited to that excess. Second, the taxpayer must show that the excess payment was made with the intention of making a gift. The Tax Court found that the methodology it had used in the Scharf case of looking for a significant public benefit to justify the deduction could not be reconciled with the Supreme Court’s holding.

In this case, the court found that the restrictions imposed on the contribution, that is that the donation was for the building only and not the land and that the building had to be used solely for training by the fire and police departments amounted to a substantial restriction on the item donated. That restriction impacted the fair value of what was donated, and the court found that taxpayers could not show that the value of the donation was greater than the benefits they received by not having to pay for demolition costs.



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