ROLFS v COMMISSIONER OF INTERNAL REVENUE

United States Tax Court, 135 T.C. No. 24, Nov. 4, 2010: Affirms, based on a quid pro quo benefit that exceeded the donation, the IRS denial of a charitable deduction by Petitioner Rolfs for his gift to the local fire department of a house (but not the land on which it was located) for the express purpose of its destruction. Following the Court’s discussion of the quid pro quo argument and precedents, it rejects the before-and-after valuation put forward by the taxpayer’s appraisal as the amount from which the quid pro quo benefit should be subtracted. The Court’s opinion distinguishes this case from cases of qualified conservation easement contributions. The Court wrote:

“While the ‘before and after’ method used by [the appraiser] has been accepted as an appropriate measure of the fair market value of donations of restrictive covenants on real property such as conservation easements, petitioners cite no authority for the use of a ‘before and after’ method in valuing a structure that has been severed from its underlying land and encumbered with additional restrictions on use [i.e., no residential use; prompt destruction of the house]. The ‘before and after’ method as used in valuing easements treats the diminution in the value of the real property that arises from the easement as the measure of the easement’s fair market value…. Petitioners did not donate an easement–i.e., an intangible property right permanently encumbering the lake property; they donated a structure, severed from the lake property, with substantial restrictions and conditions on its use.”

Decision available at http://www.ustaxcourt.gov/InOpHistoric/ROLFSGALLAGHER.TC.WPD.pdf.

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