A piece on a Tax Court decision concerning the deduction for used building material on the deconstruction, as opposed to the demolition of a building, has elicited quite a response.  The original piece was published on Forbes.com here and republished on this site here.  The version on this site allows comments.

Below is a response from members of the Build Resue Appraisal Working Group.

I apologize for the delay in posting it. -PJR

2/19/2020
Dear Mr. Reilly,
Thank you for taking the time to write, “Tax Court Demolishes Deconstruction Deduction” from the perspective of a tax professional. Your description of the pros and cons within our industry was insightful, however, notably disproportionate. One fact that you may not be aware of is that the appraiser, in this case, was well known in the reuse industry for having inflated values and for using an incorrect methodology. Appraisers and other reuse stakeholders were doing their part to make this known for a good ten years. Having this methodology finally disallowed by the IRS is a victory. Unfortunately, at the expense of the taxpayer.

So, when you say, “Chad and Dana Loube thought that they had found a great deal.”, they had. Unfortunately, they engaged the wrong appraiser. If Mr. and Mrs. Loube had the tools to find an appraiser who was using proper methodology and appraising the fair market value of reusable building materials, the reality would have played out differently. Most certainly they would not be looking at a $297,000 value, but something is better than nothing.

On a positive note, the knowledge of this happening within our industry and the seeming lack of ability to extinguish it, was the very thing that ignited many reuse professionals to work together to begin building a solid foundation with clear and ethical practices.  It is clear that Reuse Appraisers, Deconstruction contractors and Reuse nonprofits need to work independently on specific assignments however, we are convinced that working together to develop and promote accepted standard practices within the reuse industry will provide the best way forward.  Appraisers are now collaborating with the IRS, appraisal associations, and reuse organizations to solidify best practices within our specialty. Appraisers are also developing questions to educate donors about selecting appraisers who are qualified to appraise the value of used building materials. And Reuse nonprofits are recognizing donation receipts need greater detail and documentation of items received.

We believe that this collaborative approach will help pave the way for current and future reuse professionals.  Until now, people involved in promoting building material reuse have had to rely upon independents within our industry who speak as authorities, putting their perspectives on paper without a mechanism for those perspectives to be acceptable/vetted within the larger reuse community.  Without a more collaborative approach, the result can lead to confusion, a lack of cohesion, and misinformation being perpetuated.

It is in this spirit that we would like to clarify a couple of topics you discuss in your article. The first being the comparison to used cars. When dealing with used cars, it is a pretty simple process as it is one item, easily documented, and little chance of charities becoming overloaded with cars to a point where they need to liquidate. No bs detector needed. The solution by the IRS to limit deductions to the sales price was simple. Deconstruction and reuse is far more complex in documentation, distribution, and valuation. Typical reuse inventories are between 100-200 items all sold at different times. Many nonprofits end up liquidating materials if too many come in at once, and sales prices vary depending upon how full their warehouse is at any given time. This does not represent fair market value. If the reuse deduction is to continue, an appraisal will likely always be necessary.

The second topic is, “The fair market appraised value of what is salvaged does not seem to have a real-world anchor.” To the contrary. For appraisers that are familiar with reuse marketplaces and how the resellers price their materials, the anchor is firm. Research is the key. Your point of just selling stuff to somebody is absolutely an option, but this would not necessarily dictate FMV. The average person would not be able to sell an Edwardian cut crystal chandelier, a kitchen cabinet set, hardwood flooring, Sherle Wagner plumbing fixtures, 15 tons of lumber, or a Sub Zero for anywhere near FMV without enlisting “vendors” that are knowledgeable, have proper marketing, a client base, shipping options, etc. Fortunately, there are resellers that have this, and they dictate FMV.

Finally, based upon our interactions with the IRS, they are not looking to disallow reasonable deductions. They are looking for fraud. You correctly note that, “Rather than tackling valuation, they go over deals with a fine-tooth comb looking for technical foot faults to deny the deduction altogether.” What you do not mention is that they are taking flagged / over-valued deductions and going over those with that comb. It is much less expensive to catch the technical details than to enlist experts and go after the appraisal. Having said that…the IRS did rule that the appraisal was not accepted in the Loube case. The appraisal was disallowed because the subject property (a whole house less depreciation) described in the appraisal was not what was donated to the nonprofit (reuse materials). They also noted that the whole house less depreciation was a partial interest which is also not allowable.

We would like to thank you once again for writing this article and for shining a light upon our industry. As with anything, reuse does have bad actors, but they represent a tiny slice of the pie. We would love to challenge you to write an article featuring any one of the tens of thousands that have donated reuse materials resulting in a successful deduction. You may be hard pressed to turn these successes into a topic that generates the kind of response received by, “Tax Court Demolishes Deconstruction Deduction”, but it would be a far more accurate representation of charitable contributions in the reuse industry.

Build Reuse, formerly the Building Material Reuse Association, is a national nonprofit organization working to promote the reuse of building materials for the past 25 years. Construction materials consume 60% of the resources on the planet. In the US, the EPA estimates that demolition and construction related debris reached 184 million tons in 2017. Deconstruction contractors and Reuse Retail operations fight an uphill battle on a daily basis to develop an alternative infrastructure to discover, extract and market the maximum amount of renovation material that can be diverted from the landfill and reused. To describe our efforts on the scale of David vs. Goliath does not begin to capture the magnitude of our task. In a system that is designed for disposal, the reuse industry needs the support of tax incentives for some people to even consider the option of deconstruction. Many people are not aware of the deconstruction/salvage of building material donation option exists or that one can even shop for quality used building materials in a retail setting. When the tax deduction is used correctly it is a critical driver to help address the waste of building materials.

Kindest regards,
Build Reuse Appraisal Working Group Member Contributors,
Mike Gable – Build Reuse Board Member
Joe Connell –Build Reuse Member
Leslie Suh – Reuse Appraiser
Marianna Sparks – Reuse Appraiser
Contact the Appraisal Working Group through the Build Reuse website
https://buildreuse.org/ or send email to info@buildreuse.org
Build Reuse is a non-profit organization providing education and advocacy resources to promote the recovery and reuse of building materials. The Appraisal Working Group is an ongoing effort that was launched during the 2019 Deconstruction and Reuse Conference to develop standard building blocks around the process of donating building materials that require an appraisal.