“Quid Pro Quo” Torpedoes Charitable Deduction

So that “tear down” which you just purchased provides a tax opportunity, you think, for a charitable contribution tax deduction.

            That’s what some folks in Wisconsin thought, some years ago, when they bought a lakefront property, and then “donated” the house to the local fire department, for use in firefighter training exercises and demolition in a controlled burn setting.  A game plan which we’ve actually heard of in these parts.

            Seems the Revenooers took exception, in this case, and were recently backed up by the Tax Court which told the taxpayers “no soap” when it came to a tax deduction.

            The taxpayers thought they had done everything right, even securing an appraisal of the property, and attaching the necessary form and documentation to their tax return, in support of the claimed “noncash charitable contribution.”  But the government, after an exhaustive analysis of the specific facts of the case, concluded that the taxpayers were not entitled to a deduction because they anticipated and received a substantial benefit in exchange for the contribution: namely, demolition services which had significant value.

            Remember that the law does clearly say that no charitable deduction results to the extent that the taxpayer receives goods or services in return.  If the return is greater than the gift, no taxable deduction whatsoever!

            And the beat goes on in California.  All of you service providers operating in the corporate form, out there, may have long ago become familiar with the California rules which require “apportionment” of the bottom line amongst the various states in which you do business.  The point being, of course, to ultimately allow you to determine how much of your corporate income is “earned” in each state – California in particular!

            For lo these many years, the California guidelines governing apportionment of revenues from services you provide have been based on the so-called “costs of performance” rule.  Generally speaking, this has meant that revenues have been sourced to California by reference to where the folks are physically located who actually rendered those services, and how much the business paid those folks compared to costs expended in other locations.

            But a 2009 change in California law will kick in for taxable years beginning on or after January 1, 2011 – when a new “market-based” sourcing regimen will take over, based on the notion that sales from services will be deemed to occur in California to the extent the purchaser of those services received the benefit of the services in California.

            A pretty fundamental change – the place where the work is done no longer governs; it’s where the customer is located that’s important.

            All you multistate service providers, out there:  sharpen your pencils!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

            Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He is also a contributor to the recently published 13th edition of Tax Savvy for Small Business, published by Nolo.  He can be reached at 831-7288, and welcomes comments below.

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