Good intentions do not replace a qualified appraisal.
In the recent case of Joseph Mohamed
Sr., et. ux. v. Commissioner,T.C. Memo 2012-52,
the U.S. Tax Court determined that a taxpayer and his spouse, after making
almost $20 million worth of charitable real estate gifts to qualified
charitable recipients, could not take the $18.5 million tax deduction for the
The reason is a failure to follow
Internal Revenue Code regulations and use a qualified appraiser. As this case
illustrates, in charitable contributions of this size, if such steps are not
properly undertaken, there can be a complete loss of the deduction.
are generally allowed a charitable contribution deduction when a gift is given
to a qualified charitable recipient. Additionally, the IRC requires a qualified
appraisal undertaken by a qualified appraiser. As defined by Internal Revenue
Service regulations, a qualified appraiser has earned certain appraisal designations
or has met certain educational requirements. The appraiser also needs to
regularly perform the kind of appraisals for which the individual client is
paying and meet certain other requirements, as noted by the Secretary of the
Treasury in IRC Section 170.
Mohamed Sr., a real estate broker and a certified real estate appraiser, and
his wife set up a charitable remainder trust in which the taxpayer receives a
current deduction for the property as to the gift portion. After setting up the
trust, the Mohameds donated a number of properties in 2003, worth millions of
dollars. Mohamed filled out his own tax return and completed a tax form for
noncash charitable contributions.
noted that he did not read all of the form’s instructions and he made some
mistakes on the form. He also claimed substantial deductions, including about
$230,000 for one property and over $3.6 million on another property. Mohamed
said that he claimed a lower value than the actual value of the properties,
because he did not want to risk “overvaluing” the properties. The taxpayers
signed the IRS forms but did not comply with all of the instructions.
2004 the Mohameds donated another property, a shopping center, to the CRT. The
taxpayer filled out IRS form 8283 to make the contribution but did not complete
the entire form, leaving certain parts of it blank. He claimed a deduction of
almost $500,000. He did not sign the declaration as to the gift, which is
required by the IRC.
did not include appraisal information and did not have a qualified appraisal
from a qualified appraiser. He said he supported income and expenses on the
property and the capitalization rate utilized to compute the fair market value
of the property.
IRS audited the Mohameds’ 2003 return. At that time, the taxpayer engaged
appraisers to perform independent appraisals of some of the properties. Some of
the independent appraisals came back with valuation determinations that were
very close to the positions that Mohamed held. Mohamed’s total appraisal value
was a little more than $18.5 million; the independent appraisals showed a
little more than $20.2 million.
the fact that the Mohameds claimed a deduction that was less than the
independent appraisers determined, the tax court denied the deduction. The
commissioner held that the Mohameds made many mistakes on the forms that they
filed and that the forms were incomplete.
court noted that IRC Section 170 states the requirements to gain the tax
deduction and specifically requires substantiation and steps to undertake when
one is making a substantial charitable deduction. The taxpayer did not properly
comply with the regulations. (The general rule is that when the deduction
exceeds $5,000 with property as opposed to cash, the substantiation to support
the same is necessary.)
court also stated that the qualified appraiser cannot be the taxpayer but must
be an independent appraiser. One of the threshold requirements is that the
appraisal summary needs to be signed by the appraiser. The court held that the
appraisals were not qualified appraisals because Mohamed did the appraisals
himself. Further, he attached statements that were not proper appraisal
summaries, and the independent appraisals that were undertaken came too late to
meet the requirements of the Treasury regulations. The court concluded that the
regulations were valid and there was not substantial compliance.
court found that “the Mohameds made several of their own mistakes” and
concluded that the mistakes were significant. “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....”
court said that the problems of the Mohameds were so great, and the regulations
were so specific to allow a taxpayer to claim a charitable deduction, that “we
cannot in a single sympathetic case undermine those rules.”
case illustrates that taxpayers must be very careful to comply with the
requirements in the law for charitable deductions. A “good faith attempt” at a
reasonable valuation and an altruistic goal to give to charity are not
sufficient to support a deduction.
Lee Levine, CCIM, JD, LLM (tax), is a professor and past
director of the Burns School of Real Estate and Construction Management,
Daniels College of Business, University of Denver. Contact him at email@example.com.