The Baltimore-based nonprofit Second Chance has seen a drop in donations of houses to a program that trains workers in “deconstruction" despite the dismissal of a Bethesda couple’s lawsuit alleging they were misled about the program’s tax benefits.
Donations of homes, which are taken apart for salvaging, have fallen as much as 15% since the lawsuit was filed three years ago, said Mark Foster, the nonprofit’s founder. But he believes few people know that the couple eventually dropped the case.
Foster, the organization’s president and CEO, said reputational damage takes little time to occur, but it takes a long time to regain your reputation.
In the now-dismissed lawsuit, filed in October 2017 in Montgomery County Circuit Court, Nitin Gogtay and Kiran Dixit sought to lead a class-action lawsuit, which also named Fredericksburg, Virginia, appraisal firm NoVaStar Appraisals Inc., but a class never was certified.
The couple had bought a lot in 2013 on River Road that included a house they planned to demolish. They 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 the Internal Revenue Service audited them in 2015 and disallowed the deduction, determining the appraisal was not compliant, according to the suit.
In an August 2019 statement to the Circuit Court, the couple said they brought their claims in good faith but wanted to dismiss the case after going through the discovery process and finding Second Chance had a valid defense.
“We understand that damage to Second Chance’s reputation has occurred and that it cannot be easily undone,” the couple’s statement said. “We do not believe that any reputational damage is warranted, and we did not intend for this to occur.”
Gogtay and Dixit wrote that they did not receive and do not expect to receive any payment from Second Chance to dismiss the claims.
The couple also signed a similar statement regarding allegations against NoVaStar, which has since rebranded as Green Donation Consultants. An attorney for Green Donation, Steve Grygiel, said his clients believed the case had no factual or legal basis and said the couple’s statement confirmed that.
In a reversal from the lawsuit, the couple said that neither the IRS nor Maryland taxing authorities found NoVaStar’s deconstruction appraisal noncompliant or deficient.
“The IRS disallowed the plaintiffs' deconstruction deduction for reasons having nothing to do with NoVaStar or NoVaStar’s appraisal,” a settlement agreement said.
Gogtay could not be reached for comment.
The nonprofit operates out of a huge warehouse near M&T Bank Stadium in South Baltimore, where it salvages and sells old building materials and furnishings, often unusual items from old structures. It also offers job training to the unemployed in the warehouse, retail operations and deconstruction projects.
In its deconstruction program, Second Chance has razed old structures and resold salvaged materials since 2003 for reuse or repurposing and used the proceeds to support workforce development programs.
The homeowners' lawsuit had alleged that Second Chance and Novastar had known for years that the IRS did not allow tax refunds or deductions for house donations made to the nonprofit and that other consumers have faced IRS audits and similar disallowances in the past.
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.
An attorney for the couple had argued that the nonprofit withheld critical information from consumers.
But in court documents in 2019 Second Chance argued that the vast majority of its house donors successfully obtained substantial charitable donation deductions on their federal tax returns and that no more than 4% have faced IRS audits. Those who have faced challenges have kept as many as half of their claimed deductions and some have kept all of them, Second Chance said in its motion for summary judgment.
“Second Chance informs donors of the potential tax benefits of deconstruction, but makes very clear that Second Chance does not provide tax advice,” a court memo said.
It said the couple’s argument would mean any charity that promotes potential tax benefits would be guaranteeing a donor’s claimed income tax deductions.
The plaintiffs failed to show Second Chance made false claims or had a duty to disclose information it may have known about audits of other donors, “let alone that Second Chance possessed fraudulent “intent” in connection with any alleged representation or omission,” the nonprofit’s court memo said.
The lawsuit was dismissed against both Second Chance and NoVaStar in August 2019.
But publicity about the allegations continues to hurt Second Chance’s ability to attract donors, especially those considering donating a home, Foster said.
When they hear about the lawsuit, he said, “that person is most likely to say, ‘I’m going to move on and forget about that as an option.’”
After the lawsuit was filed, building donations fell as much as 25 percent, Foster said. The nonprofit has been able to win back some donations by working to rebuild its reputation, he said.
While house donations have been down, business has been up on the retail side as donations and sales of furniture and housewares has picked up as people focused more on their homes and remodeling during the pandemic, Foster said.