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Torched home not allowable deduction

A federal court in Ohio has extinguished the charitable tax deduction hopes of an Ohio couple who donated their home to their local fire department so it could be burned as part of a training exercise.

The problem in this case was not the controlled arson issue that caught everyone's fancy, but rather basic tax law requirements in such pricey donations.

Firefighters dousing fire

The court's finding means that James and Lori Hendrix of Upper Arlington, Ohio, now owe the IRS an additional  $100,590 in tax, plus interest and penalties.

The problem with the donation the Hendrixes made back in 2004 was, according to the ruling by U.S. District Judge Gregory L. Frost, that the couple didn't submit a proper appraisal of their home to substantiate the $287,400 value claimed on their tax return.

Now they weren't so tax naive to ignore this requirement for gifts of $5,000 or more. The Hendrixes did indeed get an appraisal "to assist the owner in estimating the fair market value of the subject property."

In fact, that appraisal valued the home at almost twice the amount claimed on the Hendrix 2004 Schedule A.

The IRS, however, rejected that assessment, saying the document did not contain the expected date of contribution, the terms of the donation agreement between the couple and the city, the appraiser's qualifications (including background, experience, education, and any membership in professional appraisal associations) and the required statement that the appraisal was prepared for income tax purposes.

Frost ruled that the IRS' "evaluation of the appraisal's deficiencies is accurate" and that "substantial compliance" to the tax requirements "cannot salvage" the Hendrix case for allowing their deduction.

Basically, as has been noted here many times before, deductions demand documentation.

Tax Update Blog sums up the Hendrix case quite nicely:

The IRS isn't crazy about charitable deductions for authorized arson, but the taxpayers made it easy for them here. Whenever you donate appreciated property (other than publicly-traded securities) to charity, be sure to follow the IRS property donation rules carefully. Burning your house may or may not be a good idea, but letting a deduction go up in smoke is always a tragedy.

In addition to Tax Update Blog's take on the case, you can read more at TaxProf Blog and in the court ruling itself (the previous link is a PDF file; if you prefer HTML, here's the LEAGLE version).

Two couples, one case: The ruling also is probably being carefully reviewed by ESPN commentator and former Ohio State quarterback Kirk Herbstreit and his wife.

The Herbstreits also donated their suburban Ohio home to the local fire department. And they, too, filed suit after the IRS rejected their deduction claim.

However, their attorney, who also represented the Hendrixes, withdrew the Herbstreit filing last year, noting that both cases were so similar there was no reason to pursue both.

If the Herbstreits had batter donation substantiation and an IRS acceptable appraisal, I wonder if this fiery tax deduction issue will be heading back to court.

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