Summary – California couple donated real estate worth USD18 million to a charity but their failure to complete the Internal Revenue Service (IRS) form correctly lead to their loss of the entire associated tax deductions.
California couple, Joseph and Shirley Mohamed, donated real estate worth USD18 million to a charity in 2003 and 2004 but their failure to follow instructions on how to document their donations when completing the Internal Revenue Service (IRS) form lead to a loss of the entire associated tax deductions.
Joseph and Shirley Mohamed set up a charitable remainder trust and donated six (6) properties to it. Under the tax relief allowed to these types of trusts, the couple would have been entitled to USD4.2 million in immediate charitable contribution deductions and another USD15 million in future years.
As the couple did not complete the IRS form correctly when claiming tax relief for non-cash charitable contributions, they were denied any associated tax deductions. The IRS form required the couple to validate the declared values of the properties, however, such declared values were not validated by an independent appraiser but rather were valued by Joseph Mohamed himself, as a professional property expert, which was not sufficient for the purposes of the form.
The couple did not retain a tax expert nor seek any other professional advice when completing the IRS form. Joseph also admitted that he did not read the instructions attached to the IRS form as he did not think it was necessary for him to do so, which led to the couple not being able to reap any tax benefits from their real estate donations.
When valuing the properties himself, Joseph ironically decided to under-value the properties to avoid any risks involved in over-valuing the properties. Notwithstanding that the properties were under-valued and not over-valued, the lack of a valuation from an independent qualified appraiser made the IRS form invalid. As well as not obtaining the required valuation, the couple also omitted other required information about the donated properties when completing the form.
When appearing in the Tax Court, the couple pleaded that the form substantially complied with the IRS regulations and that such substantial compliance should favour the couple obtaining the associated tax deductions. The couple also argued that the IRS form did not provide sufficient instructions on how individuals should complete the form and that the relevant IRS regulations were invalid.
After hearing the above three arguments by the couple, the Tax Court decided to reject the entire claim for tax relief on the basis of technical irregularities. The Court upheld the decision that, although the IRS form seemed likely to mislead those who did not read the instructions, 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 that it “cannot in a single sympathetic case undermine those rules” (Mohamed v Commissioner of Internal Revenue, T.C. Memo. 2012-152, 29 May 2012).
As the tax system, anywhere, can be complicated and convoluted for those seeking tax benefits, it is crucial to seek professional advice when making a claim for tax relief so as to avoid the pitfalls in any such claim, particularly when donating property in specie rather than cash and where the value of the donation is substantial.