Couple Denied $18.5 Million Charitable Deduction
In a recent Tax Court Memorandum Decision (*The Case of Joseph Mohamed Sr.,) the Court sided with the IRS in denying charitable deductions of millions of dollars in realty for the benefit of various children’s charities.
A Sacramento, California developer and his wife contributed $18.5 million of real estate to a charitable remainder unitrust (CRUT) in 2003 and 2004. This type of trust pays the donor(s) income for life and upon the passing of the donor(s) the remaining trust assets revert to a designated charity.
The taxpayers self-prepared their tax returns in 2003 and 2004 which properly included Form 8283, Noncash Charitable Contributions. Upon examination, the IRS denied the taxpayers’ deduction for the contribution of appreciated real estate to the CRUT claiming that the taxpayers failed to attach a qualified appraisal of the donated property to their return.
The taxpayers argued that they provided all of the information required to complete Form 8283, but admitted that they did not read the form’s instructions which states, within Section B, that donors must attach a qualified appraisal for donated property valued in excess of $5,000, as well as, requiring the appraiser to sign the form. During the years in question, the form instructions only noted that an appraisal was required for donations of art, and did not specifically make note that appraisals were required for other types of property as well. The IRS later changed the form to make the appraisal requirement more evident.
One of the taxpayers was a real estate developer and appraiser and he provided a short description of each property and intentionally undervalued the properties on Form 8283 at $18.5 million because he did not want to risk claiming too large of a deduction even though he believed the properties were more valuable. Upon examination, the Commissioner audited the taxpayers and denied the deduction for lack of substantiation and failing to attach a qualified appraisal. As part of the audit, the taxpayers had formal appraisals prepared for each of the donated properties which totaled in excess of $20 million. The taxpayers’ argument to the Tax Court stated that the deduction should be allowed since the property was originally stated as undervalued. Further, all other parts of Form 8283 were properly completed. The Mohamed’s also claimed that the appraisal requirement was confusing since the form listed art, but did not list other asset types.
The Tax Court determined that failing to obtain a qualified appraisal was sufficient to deny the deduction. In its analysis, the Court noted that a qualified appraisal must:
- be made no more than 60 days before the transfer and no later than the due date of the return,
- be signed by a qualified appraiser,
- include specific descriptions of the donated property, and
- could not include a prohibitive fee.
One aspect of these rules that the Court focused on was that a qualified appraiser cannot be the taxpayer claiming the deduction, the donor, or the donee. In this case, the taxpayer, who claimed the deduction, was the donor, as well as a trustee of the donee. Therefore, making the taxpayer disqualified from providing a qualified appraisal of the donated properties.
Further, the Court noted that an appraisal summary must be attached to the tax return in which the deduction is first claimed. Specific information must be included within a qualified appraisal such as:
- the name and SSN of the donor,
- description of the property,
- condition of the property,
- manner and date of original acquisition,
- cost basis,
- name, address, and tax ID number of the done,
- date of donation,
- name and SSN of the qualified appraiser,
- appraised fair market value of the property,
- declaration by the appraiser that s/he has sufficient qualifications to make the appraisal and is not one of the people prohibited from being a qualified appraiser.
Even if the taxpayer was qualified as an appraiser, the Court found that the descriptions included with the tax form failed to describe most of the required items above. As a result, the Court made a finding for the Commissioner despite the taxpayers’ claims that they substantially complied with the rules, completed the required form, and that the form was confusing.
Even though the taxpayers believed that they had complied with the form’s requirements, the Court found that it is the taxpayer’s responsibility to determine if there are additional requirements that must be met in order to properly claim a deduction.
While the ruling stated sympathy to the Mohamed’s case, the judge stated that taxpayer’s cannot rely on the form instructions or private interpretation of the law. The Court further stated that Congress drafted specific laws for the charitably inclined to adhere to defend deductions and these rules must be followed.
For these reasons, it is critical for taxpayers to obtain advice in the completion of their tax forms. Failure to understand the instructions can cost a taxpayer a significant deduction, as was apparent in the Mohamed case.
Should you have questions related to appraisals or charity deductions, please contact your Marcum Tax Advisor.
* TC Memo 2012-152 (2012)