THE TAX COURT SYMPATHIZES - BUT RULES ARE RULES

In a case that trounces any semblance of fairness, the Tax Court has denied more than $4 million in charitable contribution deductions claimed by a couple who had undervalued the contribution.

Joseph Mohamed is a real estate broker, a certified real estate appraiser and a successful entrepreneur. In 1998, he and his wife Shirley formed a charitable remainder unitrust, or CRUT.

A CRUT is a special kind of trust that allows someone to claim an immediate deduction for a portion of the value of property transferred to the trust. The income from the trust goes to the donor for life or for a term not to exceed 20 years, with the remainder going to charity.

The Mohameds contributed a number of real estate properties to the trust. Joseph prepared his own tax returns and listed the gross value of the properties at about $18.5 million and the charities' share at more than $4 million.

After their returns were examined by the IRS, the Mohameds hired appraisers, who valued the properties at more than $20 million. The problem was that no appraisal was attached to the original returns filed by the Mohameds.

Although Joseph was a certified real estate appraiser, he was not a "qualified appraiser" as defined by the IRS. A qualified appraiser cannot be the donor or the donee. As a result, the court somewhat reluctantly concluded that the Mohameds did not comply with the Treasury Regulations governing charitable contribution deductions.

The court stated:

We recognize that this result is harsh - a complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions - all reported on forms that even to the Court's eyes seemed likely to mislead someone who didn't read the instructions. But the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.

The moral of this story: Joseph should not have tried to prepare his own return (Joseph Mohamed, Sr., et ux. v. Commissioner, TC Memo 2012-152, May 29, 2012).

 
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