June 11, 2021 - Douglas Myser

Deduction denied for donated home. In our ongoing coverage of cases related to tax issues or Tax Court cases, we want to discuss a Fourth Circuit case where a couple's deduction of a charitable deduction a materials that they salvaged from their home's demolition were denied. The problem was the couple retained ownership of the property, with the court ruling that a transfer agreement with the charity for the items was insufficient to support a transfer of ownership interest in the items. Deduction denied for donated home.

The Mann's purchased a house and accompanying land in Maryland. They decided to tear the house down and construct a new one on the property, and entered into an agreement by which they would retain ownership of the land and donate the house to Second Chance, a charitable organization. Second Chance would perform deconstruction of the house to salvage any useful or profitable components, which it would then sell to fund its charitable operations. The Mann's claimed a $675,000 charitable deduction on their income tax return, the apprised value of the house.

Upon audit, the IRS disallowed the entire deduction. The IRS argued that the Mann's had not met the requirement that they donate an undivided interest in the relevant property, which was the land and the improvements affixed to it. To transfer the house separately, the Mann's were required to sever the property from the land by recording the transfer of the house with the county (Sec. 1700 (f)(3) ). The Mann's did not record the transfer of the house, so the house was not severed from the land, and the Mann's had not transferred an undivided interest in the property they owned, the IRS argued.

The Fourth Circuit affirmed the district courts finding, finding that the Mann's had not recorded the house's transfer, and still retained ownership of the house and were still liable for paying the property taxes on it under Maryland law. The Mann's argument did not hold water and they owed taxes. The Mann's would do well to look for tax resolution.