Earlier today, I blogged the case of the Herbstreits who have sued the IRS for denying a charitable deduction for donating their home (but not the related property) to the local fire department for training purposes. Since then, I’ve had a few interesting conversations (including on twitter) about the value of the deduction. The IRS generally defines the value of a charitable deduction as the lesser of your basis in the item (meaning what you paid for the item) or the fair market value. Yes, it’s actually a little more complicated than that, but for our purposes, it’ll do.

Those conversations of earlier today lead to my Fix the Tax Code Friday question:

How should the IRS value an item for the purposes of charitable deductions? Should the cost of labor be included (it currently isn’t) or should the IRS always the replacement value of the item? Does it matter what the item is?

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Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

Comments

  1. Yes, the IRS has to value items differently.
    No, labor shouldn’t be included.

    The house burning shouldn’t be allowed. Basically they were only letting the Fire Department use the property. They didn’t donate anything.

    I might be more sympathetic if it wasn’t clear that the couple was only trying to save money on demolition costs. Since the Fire Department performed that service for them, income considerations would wash any deductions.

  2. Donating the house had a definite value for the fire department. Just ask them! They need to train in “real world” conditions. If they can’t burn down a real house then they have to build a house from scratch, then burn it down. Not only is that more expensive for them, but a house purpose built for burning down isn’t quite like the real thing.

    Perhaps the best idea would be to ask the firemen. The time and money they saved not having to build a house are of value to them. Perhaps not the same value the home owners place on the house, but value non the less.

    So, my idea in this case is to let the firemen value the house.

  3. I’d like to see charitable donations go above the line. Studies show that low-income people give a higher percentage of their income to charity than do the wealthy — yet they can’t write it off! How fair is that?

    Urb

  4. Angela makes a very good point. The taxpayers were planning to demolish the structure anyway, so they actually got a “free” demolitioin service from the fire department. To, to the taxpayers, at least, the structure was “worthless” — indeed, it had “negative” value since it would have copst them to get rid of it another way.
    As for the IRS argument that they didn’t donate the whole thing — that’s absurd. With a different kind of building they could donate the use of the building to a charity and get no argument for deducting the discounted rent over the donated period.
    As for valuing donated assets — I think the IRS should be consistent about how it values assets. For capital gains and losses, the value at the time of the “event” (sale) is fair market value. So, therefore, should be the value of donated assets. Yes, we can argue that donators of greatly appreciated assets get a nice tax deduction from a gain that they didn’t actually “pay” for — but if they had sold the asset they would have realized (and been taxed on) that same gain. Or, we could figure out how much $ they’s have left from a sale of the aset (after taxes) and allow them to deduct that amount. That would result in a wash — they’d get the same deduction whether they sold the asset and donated the net proceeds in cash, or they donated the asset itself.

  5. It seems to me the argument that they were going to demolish it anyways won’t wash. Most items outside of cash were going to be sold, gifted, thrown away, or otherwise disposed of and yet they generate a deduction. Take for example the kids old toys that are given to charity and then deducted.

    What Herbstreit did was provide a valuable gift to a local service group that happens to be a part of the local government. How would that be different from me buying a load of crayons for the local school to use? Not much difference.

    Seems like the method they used in this case to demolish the house was very much in line with what those advocating sustainable practices are after.

    Is the reason this is controversial is that it is unusual and perhaps unique?

    What is that saying about pioneers and arrows sticking all over them?

  6. “Seems like the method they used in this case to demolish the house was very much in line with what those advocating sustainable practices are after.”

    I’m not sure the greenies would be ok with burning, for several reasons.

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