Rolfs v. Commissioner
2012 U.S. App. LEXIS 2446
7th Cir.2012Background
- Rolfs donated their demolished house to the Village of Chenequa fire department for a firefighter training exercise.
- They claimed a $76,000 charitable deduction under 26 U.S.C. §170 for the donation.
- IRS disallowed the deduction; Tax Court upheld, finding no net value in light of the destruction condition.
- The key dispute was how to value the gift given the requirement that the house be destroyed rather than used.
- The court held that the destruction condition must be incorporated into fair market value, reducing the donor’s deduction to zero or near zero.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| How should the donated house be valued given the destruction condition? | Rolfs relied on before-and-after valuation. | IRS favored salvage/move analogies accounting for destruction. | Valuation must reflect destruction; before-and-after is improper. |
| Does charitable deduction depend on net value after considering the donor’s returned benefit? | Net value exceeded the benefit received. | Net value did not exceed the benefit; no deduction. | No net deductible value under the gift with destruction condition. |
| Is the before-and-after method appropriate for a house donated to be burned? | Yes, to separate land value from house value. | No, condition prevents meaningful application. | Not appropriate; court rejected it. |
| What governing legal principle controls valuation of conditioned charitable gifts? | American Bar Endowment allows considering benefits. | American Bar Endowment supports subtracting value of substantial returns. | Valuation must account for the donor’s condition, reducing value appropriately. |
Key Cases Cited
- Hernandez v. Comm'r of Internal Revenue, 490 U.S. 680 (U.S. 1989) (objective factors determine gift vs. quid pro quo)
- American Bar Endowment v. United States, 477 U.S. 105 (U.S. 1986) (donations may have dual purpose; excess value deductible if value over benefits shown)
- Cooley v. Comm'r of Internal Revenue, 33 T.C. 223 (Tax Ct. 1959) (restrictive conditions must be reflected in valuation)
- Freda v. Comm'r of Internal Revenue, 656 F.3d 570 (7th Cir. 2011) (clear error standard; de novo review of law on valuation with conditions)