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Mann v. United States

United States District Court, D. Maryland

January 31, 2019

LAWRENCE P. MANN and LINDA S. MANN, Plaintiffs,
v.
UNITED STATES OF AMERICA, Defendant.

          MEMORANDUM OPINION

          THEODORE D. CHUANG UNITED STATES DISTRICT JUDGE

         Plaintiffs Lawrence P. Mann and Linda S. Mann ("the Manns") have filed this tax refund suit against the United States of America to challenge the disallowance by the Internal Revenue Service ("IRS") on their 2011 joint tax return of three claimed charitable deductions: (1) $675, 000 for the donation of a house; (2) $24, 206 for the donation of personal property in that house, and (3) $10, 000 in cash to Second Chance, Inc. ("Second Chance"), a non-profit property deconstruction organization. They also challenge the disallowance on their 2012 joint tax return of a claimed charitable deduction of $1, 500 to Second Chance. The IRS has moved for summary judgment on all claimed deductions. The Manns oppose the IRS's Motion and have filed a Cross Motion for Summary Judgment seeking summary judgment in their favor on the issue of the cash donations and partial summary judgment on the issue of the house donation. Having reviewed the briefs and submitted materials, the Court finds no hearing necessary. See D. Md. Local R. 105.6. For the reasons set forth below, the IRS's Motion is GRANTED IN PART and DENIED IN PART, and the Manns' Motion is GRANTED IN PART and DENIED IN PART.

         BACKGROUND

         In April 2011, the Manns purchased real property located at 5300 Moorland Lane in Bethesda, Maryland ("the Property"). At the time the Manns purchased the Property, it included a remodeled colonial-style house ("the House") in good condition. However, the Manns later discovered that the House had a wet basement, and given that they also did not consider the layout to be suitable to their needs, the Manns decided to have the House demolished and to build a new home on the Property. At no point before the demolition did the Manns reside in the House.

         The Manns hired Potomac Valley Builders to demolish the House and to build a new residence on the Property. Prior to the demolition, the Manns contacted Second Chance about donating the House. Second Chance is a charitable organization under section 501(c)(3) of the Internal Revenue Code ("§ 501(c)(3)") that engages in property "deconstruction," the salvaging of building materials, fixtures, and furniture from properties. Joint Statement of Undisputed Facts ("JSUF") ¶ 16, ECF No. 33. Second Chance's deconstruction employees are disadvantaged individuals in need of workforce training. Second Chance provides these employees with general life-skills training and also, through its deconstruction projects, with specific work skills. Employees are paid an hourly wage. Second Chance sells some salvaged items at its retail store and endeavors to recycle the rest. Although Second Chance performs deconstruction, it does not perform demolition and advises potential donors to that effect. Second Chance's deconstruction efforts at times result in destruction of parts of the subject property, either because disassembly requires some destruction or because destruction is useful in training employees in proper deconstruction methodology.

         To defray the costs of the deconstruction program and workforce training, Second Chance asks individuals who are donating property for deconstruction to supplement their donation with cash, in an arrangement called a "funded deconstruction." JSUF ¶ 26. Second Chance rarely undertakes deconstruction projects absent a supplementary cash donation. Unfunded projects are referred to as "mission projects" and are undertaken only if they involve property or material of historical significance. JSUF ¶ 28.

         On December 1, 2011, Linda Mann signed an agreement with Second Chance to donate the House for deconstruction. That agreement stated that Linda Mann was "legal title holder" of "Premises" defined as "a certain lot or parcel of ground, currently improved by a residential dwelling unit known as 5300 Moorland Lane, Bethesda, Maryland" and that she wished to "contribute to Second Chance the existing single-family residential dwelling upon such Premises." Joint Record ("J.R.") 494, ECF Nos. 40-1 to 40-37. Specifically, Linda Mann conveyed to Second Chance all of her rights, title, and interest in "the improvements, building and fixtures located on the Premises." Id. The conveyance expressly excluded a shed located on the Property. That same day, Linda Mann signed a second agreement with Second Chance conveying various furniture and other personal property ("the Personal Property") in and around the House.

         As to the tax implications of Second Chance's deconstruction services, in a December 20, 2011 email to Lawrence Mann, a deconstruction sales manager for Second Chance explained that generally, donors could claim a tax deduction for all material that "crosses the threshold of [the Second Chance] warehouse." J.R. 508. The manager stated that Second Chance would create a manifest list of everything it removed from a site, and that the fair market value of those items could then be deducted, with the value to be determined by a qualified appraiser. The manager stated that Second Chance expected deconstruction of the House to yield items with a fair market value of at least $150, 000 at a "conservative minimum," which would translate to a tax savings of approximately $45, 000. Id. The Manns were also expected to make a $20, 000 cash donation to Second Chance, to offset the over $20, 000 Second Chance expected to spend on the deconstruction, leaving the Manns with approximately $25, 000 to $30, 000 in tax savings. That donation level was based on Second Chance's estimate of the Manns' "lowest expected outcome," with the hope that the Manns would make additional contributions "based on an improved outcome as we discussed." J.R. 509. Second Chance provided a worksheet outlining the estimated financial benefits to the Manns from the deconstruction in which it deemed the cash donations to be fully deductible charitable contributions.

         The Manns negotiated with Second Chance to spread the cash donation over two years, with $10, 000 to be paid in 2011 and $10, 000 to be paid in 2012. The Manns sent Second Chance a check for $ 10, 000 dated December 31, 2011. In December 2012, the Manns sent Second Chance a second check in the amount of $1, 500. In response to both contributions, Second Chance sent a letter acknowledging the donation, verifying that the Manns "did not receive anything of value in exchange" for the donation, and stating that "the entire value of your donation is tax-deductible." J.R. 516, 519.

         As part of their planned donations, the Manns commissioned three appraisals, two of the value of the House, both with an effective date of October 12, 2011, and one of the value of the Personal Property, with an effective date of October 19, 2011. Using a sales comparison methodology, which relies on comparable home sales in the same neighborhood, the first House appraisal ("House Appraisal A") valued the entirety of the Property at $1, 875, 000, the Property without the House at $1, 200, 000, and thus the House specifically at $675, 000. The $675, 000 valuation figure was premised on consideration of the House at its highest and best use, which the appraiser determined was keeping the House intact but moving it to another site for use as a residence. The appraiser concluded that moving the entire House to another site would "produce the highest return to the non-profit organization," and was thus superior to deconstruction, which would "destroy[] part of the structure during the process." J.R. 379.

         Because House Appraisal A was based on the value of the House as moved intact to another site for residential purposes, the Manns obtained a second appraisal ("House Appraisal B") to establish the donation value of the House if it were deconstructed, and thus not put to its highest and best use. House Appraisal B was premised on what the appraiser characterized as the "extraordinary assumption" that the Manns had "conveyed full ownership rights of the structure to Second Chance Inc. with the understanding the entire structure is to be used by Second Chance Inc. for training purposes" and that any salvaged building materials would later be sold by Second Chance. J.R. 419. House Appraisal B valued the House at $313, 353. This figure was derived by calculating the cost to construct the House with new building materials using the "R.S. Means Building Material Cost Estimating Software," subtracting out labor and administrative costs, and then accounting for depreciation, an approach used because of "the lack of a well[-]established second hand market for all building materials" used in the construction of the House. J.R. 419.

         The Personal Property appraisal included an itemized list of 40 pieces of furniture or home decoration, individually valued and photographed. The total appraised value of those items was $24, 206. This figure was calculated using the "R.S. Means method," which requires taking the cost of the items if new, subtracting labor and other costs, and depreciating the resulting "materials costs" by 42 percent to reflect that the items had an expected lifespan of 60 years and were approximately 25 years old. J.R. 307. Here, the appraiser calculated the new cost value of the 40 items at $372, 000. Appended to the appraisal are several website listings for new versions of items comparable to those that were donated. For example, the appraisal includes the printout of a webpage offering new Adirondack style chairs for sale for $149.99 and $129.99; similar chairs at the House are valued in the appraisal at $ 100.00. A gas fireplace at the House, listed new at $2, 778, is valued at $2, 500.

         Deconstruction is generally divided into two phases: a first phase of interior deconstruction followed by a second phase of exterior deconstruction. On December 19, 2011, the Manns left the keys to the House for Second Chance. On December 22, 2011, Second Chance began the first phase of deconstruction, which was completed around January 17, 2012. The second phase was begun on June 19, 2012 and continued until July 6, 2012. In a July 6, 2012 email, Second Chance informed the Manns that they had not been able to extract as much salvage material from the House as they had hoped. Second Chance did not keep a manifest or other record of exactly what materials were salvaged from the House, but Lawrence Mann took about 50 photographs of the deconstruction process. Second Chance incurred approximately $13, 144.35 in expenses in deconstructing the House. The deconstruction did not reduce the cost to the Manns of the later demolition of the House.

         On their 2011 tax return, the Manns claimed charitable donations in the amount of $675, 000 for the value of the House, $24, 206 for the value of the Personal Property, and $10, 000 for the cash donation to Second Chance. On their 2012 tax return, the Manns claimed a charitable deduction of $1, 500 for the cash donation to Second Chance. In June 2014, the IRS disallowed all of these claimed donations. Accordingly, for 2011, the Manns were assessed an outstanding tax liability of $195, 837 plus interest. For 2012 they were assessed an outstanding tax liability of $4, 065 plus interest. The Manns' appeal of these determinations was denied in February 2015. In May 2015, the disallowance of the deductions was finalized, and the Manns were assessed tax liability of $191, 638 for 2011 and $2, 464 for 2012, together with statutory interest. After the Manns paid the outstanding tax debts so as to allow them to contest the disallowed deductions in federal district court, on November 9, 2015 they filed claims for a refund for both tax years, seeking $209, 914 for 2011 and $2, 619 for 2012. In an effort to avoid litigating the 2011 deductions, the Manns filed an amended 2011 tax return in August 2016. In that amended return, they adjusted the claimed deduction for the donation of the House from $675, 000 to $313, 353, the value of ...


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