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Charitable Deduction Disallowed for Donation of House to Deconstruction Organization

(Parker Tax Publishing February 2019)

A district court granted summary judgment for the IRS on its denial of a married couple's charitable donation of a house, and the personal property in it, to a charitable organization that provides job training to disadvantaged individuals through the salvaging of building materials from properties because the taxpayers failed to validly convey an interest in the house to the organization and did not include with their tax return a qualified appraisal of the donated property. However, the court allowed the couple's charitable deduction for cash payments to the organization, finding that the payments were not quid pro quo payments but donations to support the organization's charitable mission. Mann v. U.S., 2019 PTC 46 (D. Md. 2019).


Lawrence and Linda Mann purchased real property, including a colonial-style house in Bethesda, Maryland in 2011. 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, they decided to have the house demolished and to build a new one on the property.

The Manns hired a contractor to demolish the house and build a new residence on the property. Prior to the demolition, the Manns contacted Second Chance about donating the house. Second Chance is a Code Sec. 501(c)(3) organization that engages in property "deconstruction," the salvaging of building materials, fixtures, and furniture from properties. Second Chance's deconstruction employees are disadvantaged individuals in need of workforce training. The organization provides these employees with general life skills training and specific work skills through its deconstruction projects. It also sells some salvaged items at its retail store. Second Chance does not perform demolition services, although its 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. To defray its costs, donors are asked to supplement their property donations with cash donations.

In 2011, the Manns signed a contract conveying to Second Chance all of their rights, title, and interest in the improvements, the building, and the fixtures on the property. The agreement was not recorded in the county land records. By a separate agreement, Mrs. Mann also conveyed various pieces of furniture and other personal property in and around the house.

Regarding the tax implications of their donation, Second Chance told the Manns that donors could claim a deduction for all material that "crosses the threshold" of the Second Chance warehouse. Second Chance said it expected the deconstruction to yield items with a fair market value of $150,000 at a minimum, which would translate to a tax savings for the Manns of approximately $45,000. The Manns also made cash donations of $10,000 in 2011 and $1,500 in 2012. In response to both contributions, Second Chance sent a letter stating that the Manns received nothing of value in exchange for the donation and that the entire amount was tax deductible.

Second Chance completed the deconstruction in 2012. It 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. Second Chance incurred approximately $13,100 in expenses in deconstructing the house. The deconstruction did not reduce the cost to the Manns of the later demolition of the house.

The Manns commissioned three appraisals in connection with their donations, two for the house and one for the personal property inside it. Appraisal A valued the house at $675,000 based on consideration of the highest and best use of the house, which the appraiser determined was keeping it intact and moving it to another site for use as a residence. Appraisal B established the donation value of the deconstructed house at approximately $313,000. This figure was derived by calculating the cost to construct the house with new materials, then 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. The personal property appraisal valued the personal property at approximately $24,200.

On their 2011 tax return, the Manns claimed charitable donations of $675,000 for the value of the house, $24,200 for the personal property, and $10,000 for the cash donation. They claimed the $1,500 donation to Second Chance on their 2012 return. The IRS disallowed all of these deductions and denied the Manns' appeal of the additional tax assessments in 2015. The Manns then paid the taxes and sued for refunds in a district court. In 2016, in an effort to avoid litigating the 2011 deductions, the Manns filed an amended 2011 tax return, adjusting the deduction for the house donation from $675,000 to $313,000. In 2017, the Manns filed suit seeking a determination that their original claimed deductions were valid and a full refund of the additional taxes paid in 2011 and 2012 as a result of the disallowance of the deductions.


Under Code Sec. 170(a)(1), taxpayers are generally allowed to deduct a charitable contribution paid within a tax year if the donation can be substantiated in accordance with the regulations. Charitable deductions are generally not allowed for donations consisting of less than the taxpayer's entire interest in the donated property. Whether a donation is of an entire interest or a partial one depends on the taxpayer's property rights under state law. Under Code Sec. 170(f)(11), contributions for which a deduction of more than $5,000 is claimed must be accompanied by a qualified appraisal, which must include the method of, and specific basis for, the valuation. A charitable donation cannot be made with the expectation of any quid pro quo.

The IRS argued that the Manns could not deduct either the $675,000 fair market value or the amended $313,000 deconstructed value of the house because they donated only a partial interest in the property. The IRS also contended that the Manns could not deduct the donation of their personal property inside the house because the appraisal was deficient in several respects. As for the cash donations to Second Chance, the IRS asserted that they were nondeductible as quid pro quo for Second Chance's deconstruction services. According to the IRS, the Manns received the specific benefit of the deconstruction services in exchange for the cash donation and it noted that such services are available from for-profit businesses.

The district court granted summary judgment for the IRS as to the house and personal property deductions. The Manns raised no opposition on the issue of the personal property deductions, so the court concluded that they effectively abandoned their claim for that deduction.

The court found that under Maryland law, ownership of improvements to land follows title to the land; thus, for someone other than the record landowner to own the improvements, there must be a recorded deed showing the transfer of title to the improvements. In other words, record ownership, not contractual ownership, demonstrates ownership of improvements in Maryland, according to the court. The court noted that the Manns tried to convey their interest in the house through a contract with Second Chance but never recorded the transaction, and therefore concluded that the house had not been properly severed from the land and transferred. In the court's view, the Manns' donation was comparable to the granting of a license to access and use the house for salvage and training purposes.

The court also determined that, even if the conveyance had been valid, the Manns would not be entitled to a deduction because neither of their appraisals were qualified appraisals. The court found that Appraisal A was invalid because it calculated the value of the house at its highest and best use, which did not apply to its use by Second Chance. Appraisal B, in the court's view, was invalid because it determined the fair market value of the house's building components when sold on the secondhand market, which was also not consistent with the use of the house for Second Chance's program. The proper way to calculate a tax deduction, according to the court, was to determine the resale value of the specific building materials and contents actually taken from the site.

However, the court upheld the Manns' deductions for their cash donations. The court found that the Manns received no specific benefit in return for the donations. Second Chance's deconstruction services actually benefited Second Chance, not the Manns, the court reasoned, by allowing the charity to convert the overall donation into components that could be sold for value and to fulfill its mission of providing training to disadvantaged individuals. The court also found that the deconstruction services provided no collateral benefit to the Manns, because it did not provide the Manns with the benefit of not having to engage demolition services. In fact, the court found that the deconstruction hindered the progress of the demolition. The court explained that the intangible benefits that came from supporting Second Chance's mission were the hallmarks of a charitable donation, not a transaction for goods and services, and that if such benefits transformed a donation into a quid pro quo, virtually no charitable gift would be deductible.

For a discussion of charitable contributions of partial interests in property, see Parker Tax ¶84,155. For a discussion of recordkeeping and substantiation requirements, see Parker Tax ¶84,190.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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