Wednesday, November 3, 2010

If Huge Tax Breaks for your Home's Salvaged Materials Sounds Too Good to be True - That's Because it is!

Now that California State Assemblyman Ira Ruskin has given Paul Gardner and Whole House Building Supplies the Small Business of the Year Award for State Assembly District 21, I suppose more and more environmentally-minded (or tax deduction-minded) folks will want to bring down their house through Mr. Gardner’s operation, right? Not so fast! Mr. Gardner should have gotten the tax-break racket of the year award, instead. Apparently no one else put their glasses on and took a close look at the texture of Mr. Gardner’s too-good-to-be-true operation.

In the fall of 2006 the IRS instituted their 3 year recapture program which was designed to address the donations of non-cash goods to recipient charitable organizations where deductions taken by tax payers and the net benefit to charities didn’t remotely match. Mr. Gardner’s little operation gives us an excellent example of the big-dollar issue the IRS is hoping to solve with its 2006 invention, IRS Form 8282.

These discrepancies occur when a person or entity assumes the role of third party fundraiser, like Whole House Building Materials does when it solicits deconstruction business in conjunction with a tax donation. The fundraiser directly receives and sells the non-cash donation and subsequently gives the charity some part of the sales proceeds.

If the fundraiser actually gives the real charity anything, the charity receives what it receives without ever touching the material donation. In most of these cases, a significant portion of the material sales revenues stay with the fundraiser to pay for its costs of doing business, like rent, and salaries, and all the other things a for-profit company pays for. Mr. Gardner claims he gives 100% of the material sales proceeds to something called the EPACT Educational Fund. But upon closer examination, things just don’t add up.

But this is how the deal goes down. Let’s say, instead of traditional demolition, you’re considering doing “deconstruction” with Whole House Building Supplies. You call up Mr. Gardner and he tells you that by doing deconstruction with him, you can take a tax deduction for your donation – just as he told a friend of mine who called him with a possible project. Mr. Gardner said she should expect a $50.00 per square foot tax deduction (even though he’d never seen the house or its condition, and not to mention Mr. Gardner isn’t an appraiser, and never mind his conflict of interest in so far has he also stands to win the deconstruction project dollars, if not all the materials in the house too!) and that the deconstruction would run about $10.00 per square foot. What this adds up to is that homeowners get their demo for free and put a healthy chunk of money in the bank after that, because for every fifty dollars that a typical home builder deducts, they pay twenty dollars less in taxes. So in effect, you pay $10.00 to get $20.00 in return, but you also don’t have to pay the $5.00 to $10.00 per square foot that traditional demolition would have cost you, so your savings is even greater.

If this was all on the up and up, every traditional demo contractor in the state would be out of business, because every homeowner in the state would have a Paul Gardner deconstructing their home to near windfall savings. But Mr. Gardner and his donors have simply been lucky to fly under the radar of the IRS. His days of doing business like he presently is, are numbered (Just ask the hundreds of folks whose tax deductions were disallowed in the Watts 13 donations scam, that spread across Los Angeles and Orange Counties in the 1990’s.). In all likelihood, the reason he’s able to give deconstruction prices at little more than machine wrecking prices (despite the labor intensive nature of taking a house apart piece by piece, with many people, over several weeks, instead of smashing it in several hours with one guy and a machine) is that he really never plans to make any money on the deconstruction itself; rather, Mr. Gardner makes all his money on the sales of the materials, instead.

Oh yes, but Mr. Gardner claims he gives 100% of the material sales proceeds to this EPACT Educational Fund run by some guy by the name of William Byron Webster in condominium # 307 at 480 East O’Keefe, in East Palo Alto – EPACT Fund headquarters. Let’s suppose for a moment that what Mr. Gardner says is true about 100% of the proceeds going to EPACT; if this really happens, Mr. Educational Fund is supposed to sign every donor’s IRS Form 8283 as having received their donation, which according to Mr. Gardner an appraiser will assign a $100,000 value to, if all you have is a dinky little 2,000 square foot house! Doing the math, obviously there ain’t no way in high heaven, Mr. Gardner is either going to sell the materials for, or right a check to, Mr. EPACT for $100,000 dollars for the material sales out of that little 2000 sq. ft. house!

In an extremely optimistic scenario, Mr. Gardner might sell those materials from the donated home for $10,000. Then let’s say he really does give 100% percent to EPACT; EPACT only gets a net benefit of 10K from the donation, which is 90K less that Mr. 2000-sqft-homeowner-donor deducted.

Now the new deal from the smart people at the IRS is that Mr. EPACT (William Byron Webster) must fill out IRS Form 8282 as soon as the non-cash donation is disseminated for cash (which in EPACT’s case should be immediately, because EPACT never actually receives any of the donated materials) and stating the net dollar amount EPACT received from the donation, which in this scenario is 10K. What happens next is that the really smart people at the IRS then reconcile the difference between the 8283 they got from Mr. 2000sf-100K-deduction-homeowner-donor-guy, and the 8282 they get from Mr. EPACT. Then the IRS sends Mr. 2000sf-100K-deduction-homeowner-donor guy a letter saying he owes taxes on the 90K of income which he didn’t pay taxes on.

Oops! I hope Mr. 2000sf-100K-deduction-homeowner-donor guy has a savings account, because that’s the optimistic scenario. But let me digress for one paragraph in order to clarify a small point.

When donors of non-cash goods donate directly to a bona-fide non-profit, the rules are the same, unless the non-profit uses the donated material in the course of its mission. The IRS gives us an example of a company donating donating medical supplies to a releif organization: The relief organization doesn’t need to fill out the 8282 if it uses the medical supplies in the field, in support of its mission. As long as this is the case, the donor need not worry about the IRS taking issue with its 8283 deduction, as long as the donation’s fair market value can be substantiated. Another example would be, if you donated twenty thousand sheets of drywall to Habitat for Humanity and deducted their fair market value; you’re golden as long as Habitat builds houses with that drywall (that Habitat's mission). If, on the other hand, they broker off the drywall or sell it all in their stores for fifty cents on the dollar, that’s another matter. In the second scenario they’ve used the material in a fundraising capacity and must submit the 8282, stating the net cash benefit they received.

But getting back to the folks who donate through the Whole House plan, it may get much worse, because according to Mr. Gardner he only charges a measly $10 a square foot for labor–intensive deconstruction. But he also states he doesn’t make any money selling the materials! I’m betting he can’t match his material sales receipts with the checks he writes to EPACT (if there really are any checks) and that if anyone really took a close look they’d find Mr. Gardner uses a significant portion of the material sales to pay his rent, and salaries, and utilities, and all the other costs retail sales usually go to pay for. What’s more, according to the website “The Charities Guide” EPACT has no assets and receives no income and hasn’t filed a return since 2003. They have a highly suspicious website  running off the Stanford server, which doesn’t talk specifically about a single project they’ve been involved with since the year 2000. Check it out for yourself.

(from: The Charities Guide)
PO BOX 50142 
PALO ALTO, CA, 94303-0142
Employee Identification Number: 770249384 
Ruling Date: April 1992 
Deductions: Contributions are deductible 
Foundation Type: Organization that normally receives no more than one-third of its support from gross investment income and unrelated business income and at the same time more than one-third of its support from contributions, fees, and gross receipts related to exempt purposes. 
Activity: Described in section 509(a)(2) of the Code 
Activity: Other instruction and training 
Organization Type: Corporation 
Latest Return Filed: December 2003 
Filing Requirement: 990 - Not required to file Form 990 (income less than $25,000). No 990PF return. 
Asset Amount: $0 
Income Amount: $0 
Form 990 Revenue Amount: $0 
Organization Type: Education N.E.C. 
Number: C1655424 Date Filed: 12/29/1989 Status: active 
Jurisdiction: California
Agent for Service of Process
480 EAST O'KEEFE ST #307 

So, attempting to wrap this up, if Mr. Gardner deconstructs dozens of homes every year, and using the numbers he gave my friend (remember the $50.00 per square foot) that means donors are literally taking millions of dollars in tax deductions through Whole House and Mr. Webster; yet this EPACT Fund has nothing to show for it! Even if Mr. Gardner sold the materials for 10% of what donors are writing off, and then gave 100% of those revenues to EPACT, EPACT should show revenue and checks from Mr. Gardner for several hundred thousand dollars a year.

Now after giving Whole House Building Supplies the Small Business of the Year Award, maybe Assemblyman Ruskin gets some things I don’t get. But it sure seems to me, somebody is giving somebody the business!

Assemblyman Ruskin may want to put a large disclaimer on his endorsement of Mr. Gardner who will otherwise soon be riding even higher on the tax deductions of homeowners who were led their by Mr. Ruskin himself. One day the IRS is going to catch up with Mr. Gardner and Mr. Webster and all the donors who bought their bill of goods, and Mr. Ruskin might have a little egg on his face.

Of course, contributions to this topic by Mr. Paul Gardner and Mr. William Byron Webster are more than welcome.

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