A federal lawsuit filed last week by Second Chance reveals that the Baltimore nonprofit and its founder are under IRS scrutiny.
The IRS fined the building salvage and workforce training program and its founder and CEO Mark Foster last year after determining that they helped donors overestimate the value of their gifts to avoid paying taxes.
Now, Second Chance and Foster are fighting back, saying in their lawsuit that the federal taxing authority is on an unfair “crusade” and hasn’t provided clear guidance on appraisals of donated building materials.
IRS agents made threatening statements about wanting to “put a stake through the heart” of the organization, the complaint alleges.
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The dispute centers largely on questions about the tax benefit associated with donating salvaged building materials and items to Second Chance.
The IRS opened an investigation into the nonprofit in 2021 and audited 22 donors who claimed deductions for the 2020 tax year, according to Second Chance’s complaint filed Friday in U.S. District Court for the District of Maryland.
The IRS rejected those donors’ deduction claims in full, some of which topped five or six figures, and charged interest and penalties instead, the lawsuit says. Second Chance and Foster also were fined $1,000 per donor, or $22,000 each, for “aiding and abetting the understatement of another person’s tax liability,” the lawsuit says.
Foster and attorneys representing Second Chance did not respond to a request for comment Tuesday.
The IRS generally does not comment on pending litigation, a spokesman for the bureau said Tuesday.
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Revelations of a battle with the IRS come as the beloved Baltimore nonprofit also faces questions about Foster’s use of nonprofit resources on a home he now lives in. And last year, some workers filed a federal lawsuit accusing Second Chance of wage theft.
Tax write-offs are a key incentive in the model Second Chance has used since 2003 and touts as a win-win-win for property owners, workers and the environment.
The nonprofit hires people facing barriers to employment, such as a recent incarceration, to “deconstruct” homes up and down the Eastern Seaboard. Then it sells salvaged materials at bargain prices out of the nonprofit’s sprawling warehouse in South Baltimore.
Property owners who seek an independent, third-party appraisal of donated items are told they can claim a tax deduction.
According to Second Chance’s lawsuit, the IRS alleges that some donors improperly claimed to have donated their “entire house” instead of just certain materials. All 22 donors used the same appraiser who relied on a methodology that the IRS did not consider qualified and omitted the physical condition of the item.
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None of the donors, or the appraiser in question, are named in the lawsuit.
Some of Second Chance’s written acknowledgements of the donations were found to be deficient. The IRS also said some of the donations should have been recorded in state land records.
The IRS had its own expert review the appraisals submitted with the donors’ 2020 tax returns and concluded the value of each donation to be “zero,” according to the lawsuit.
Second Chance claims the audits uncovered no material evidence suggesting the donors held onto donated materials. The IRS appraisal failed to provide a fair market value and contained errors and “incorrect assumptions contradicted by the underlying facts and data,” the lawsuit says.
Several of the donors have since seen some of their penalties waived, the lawsuit says. Second Chance and Foster have also contested the fines, a process that required them to pay 15% of the penalties amounting to $3,300 each.
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Although the lawsuit centers on the 2020 tax year, it hints that Second Chance’s tussle with the IRS dates back more than a decade.
“Despite Second Chance’s laudable IRS-approved missions and goals, and continued efforts at compliance, the IRS has at various times over the past 15 years or so unfairly targeted Second Chance and/or its donors,” the lawsuit states.
Second Chance’s complaint against the IRS takes the position that donors, charities, tax professionals and appraisers nationwide would benefit from clarity on the IRS’ rules and regulations for donating deconstructed building materials.
Second Chance is in the midst of expanding its footprint in South Baltimore and potentially opening a location in Philadelphia.
At the same time, the organization is defending itself against a federal wage theft lawsuit filed by workers who claim they were improperly classified as subcontractors. The status denied workers overtime pay and other forms of compensation.
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Questions have also been raised internally within Second Chance over Foster’s financial ties to the organization he founded.
A Baltimore Banner investigation in March revealed that Foster bought a Baltimore County house for $375,000 in 2013 and soon tapped into his resources at Second Chance to rehab the property. The executive then moved into the home and sold it to the nonprofit for $1.5 million, a figure he said reimburses him for what he spent on the project.
Foster continues to live in the home with his wife and has declined to share details of the financial arrangement, but said he has not personally benefitted from it.
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