A Bethesda couple allege in a lawsuit that Baltimore-based nonprofit Second Chance misled them into believing they would benefit from significant tax refunds and deductions by donating a house they owned for "deconstruction," the process of taking apart and salvaging materials.
The couple, Nitin Gogtay and Kiran Dixit, are seeking to lead a class-action lawsuit, which also names Fredericksburg, Va., appraisal firm NoVaStar Appraisals Inc. The lawsuit, filed last week in Montgomery County Circuit Court, alleges that hundreds of consumers have been similarly deceived.
Gogtay and Dixit, who bought a lot in 2013 on River Road that included a house they planned to demolish, said in the lawsuit they expected a net benefit of $76,000 after donating money to Second Chance to pay for deconstruction and then donating the salvaged materials to the nonprofit. That benefit, the lawsuit said, was based on an appraisal from NoVaStar.
The couple claimed a $250,000 noncash charitable contribution to Second Chance on their 2013 taxes, but were audited by the Internal Revenue Service in 2015, the suit said. The IRS disallowed the deduction and determined the appraisal was noncompliant.
"Second Chance and the appraisal company had a mountain of information about the IRS' hostile view of the benefits that the defendants were promoting," said Ugo Colella, a partner with Duane Morris, the law firm representing the plaintiffs. "The representations they were making were at best incomplete, and at worst, they were hiding this information to ensure the donors keep coming. Either way, the defendants withheld critical information from Maryland consumers."
Mark Foster, Second Chance's founder, CEO and president, said Thursday the lawsuit is without merit and contains inaccuracies.
The nonprofit operates out of a huge warehouse on Ridgely Street, where it salvages and sells old building materials and furnishings. It also offers job training to the unemployed in the warehouse, retail operations and deconstruction projects. The group has built a following among homeowners, interior designers, commercial builders and art students in search of unusual items from old structures.
"Second Chance intends to vigorously respond to them at the appropriate time," Foster said in an email. "Second Chance is devoted to providing meaningful assistance to people in our community who are most in need, and it is a shame that this litigation is attempting to harm a charity that is in the service to others less fortunate."
A representative of NoVaStar did not respond to a request for a comment on Thursday.
The lawsuit alleges that Second Chance and Novastar have known for years that the IRS did not allow tax refunds or deductions for house donations made to the nonprofit and that NoVaStar's appraisals were considered noncompliant by the IRS. Other Maryland consumers have faced IRS audits and similar disallowances in the past, the lawsuit says.
According to the suit, the IRS did not allow donations to Second Chance because "there was a 'quid pro quo' by which the consumer received demolition services in exchange for a donation to Second Chance," and consumers did not contribute their entire interest in a donated property to the nonprofit.
The IRS does not comment on individual taxpayer cases.
The defendants worked together, the lawsuit says, and "acted in an agreed-upon, concerted effort to deceive plaintiffs and Maryland consumers."
"Together, defendants conspired or otherwise aided and abetted one another in actively misleading consumers and prospective donors into believing that house donation through deconstruction and the purchase of a high-priced NoVaStar appraisal would result in significant financial benefits," the lawsuit contends
Instead, the Bethesda couple suffered losses of at least $143,000, the suit said. Losses included more than $69,000 in federal back taxes, nearly $20,000 in Maryland back taxes and $27,500 in cash contributions to Second Chance in 2014 and 2015 that went to pay for the deconstruction of the house, the suit contends.