It amazes me that some people think they have a say in something they have relinquished ownership of. Good grief. You had a deal, you honored it, do what you want with the couch. She can pound sand. And don't let her rip into you again.
I would toss it, it's not even worth the effort to move it to the basement in that shape! You offered it back to her and she said no so if she calls again about it I would tell her the truth, that it just was not in as good a shape as you or she thought and it had served it's purpose to her but isn't up to serving the purpose for your family! It's not a good position she's put you in so I feel for you, but it's best to be honest with her or you will feel worse about it in the end!
I dunno - if she is that upset, load the sucker back on your truck and return it. Tell her you are sorry to have upset her but the couch wasn't what you were looking for and you didn't want to get rid of it.
Let her figure out what to do with her own treasures. (really wanted to call it something else but for the sake of political correctness, I'll leave it at that)
It sounds like she was just upset that something that just came out of her home "isn't good enough" to make it into your basement and is sitting in the garage. Unfortunately, its true lol but I bet it is a bitter pill to swallow. I wouldn't feel bad about tossing it (I'd be hauling it to the dump!), but you can see why she might be hurt.
I can't believe you have to ask if you are in the right! This is obviously not a situation where she is thinking clearly, and given space and time, she'll probably just get over this.
She's not a part of the decision-making process for this couch anymore. If you put it in the house, you may get bugs from it anyway, it sounds, because she clearly has had trouble maintaining her house lately.
This doesn't make her a bad person, but it sounds like she's overwhelmed and you're getting displaced aggression from her. Give the situation a rest and let her recover. Don't mention it again, and toss the foam chew-toy. Don't even mention what happened to it unless she asks. Go on about your business, and she'll come around.