The TaxProf reports on yesterday’s Tax Court case disallowing an $18.5 million charitable deduction for failure to properly complete Form 8283 for non-cash charitable contributions:
Joseph Mohamed, a prominent Sacramento real estate broker, certified real estate appraiser, and entrepreneur, and his wife donated six properties worth at least $18.5 million to a charitable remainder trust in 2003 and 2004, but failed to read the instructions to Form 8283 (Noncash Charitable Contributions). Although the Tax Court acknowledgef that “the property was quite likely more valuable than the Mohameds reported on their tax returns,” the Tax Court denied the claimed charitable deduction for failure to comply with the substantiation requirements.
The tax law has very specific paperwork requirements for appreciated property charitable dieductions. The Tax Court explains (my emphasis):
Section 1.170A-13(c)(4), Income Tax Regs., tells us what qualifies as an appraisal summary. One of the threshold requirements is that it be signed by the qualified appraiser who prepared the appraisal. Sec. 1.170A-13(c)(4)(i)(C), Income Tax Regs. Section 1.170A-13(c)(4)(ii), Income Tax Regs., says the summary also must include the following information:
- the name and Social Security number of the donor;
- a description of the property;
- a brief summary of the overall physical condition of tangible property;
- the manner and date of the donor’s acquisition of the property;
- the cost or other basis;
- the name, address, and taxpayer identification number of the donee;
- the date the donee received the property;
- a statement about whether the contribution was made by bargain sale;
- the name, address, and identification number of the qualified appraiser;
- the appraised fair market value of the property;
- a declaration by the appraiser that he is an appraiser, with sufficient qualifications to make this appraisal, and not one of the people unable to be a qualified appraiser; and
- a statement by the appraiser that the fee charged was not of a prohibited type, and that the appraiser has not been barred from presenting appraisals to the IRS under 31 U.S.C. section 330(c).
Joseph failed to include information about several of these categories on his Forms 8283 and the attached statements. For instance, he didn’t include his bases in the properties, there is no bargain-sale statement, and there are no statements from a qualified appraiser. In fact, the statements Joseph attached to the Forms 8283 don’t indicate that they are appraisals at all. If Joseph had hired a qualified appraiser, the lack of appraisal summaries might not have been a problem — section 1.170A-13(c)(4)(iv)(H), Income Tax Regs., says that if a donor forgets to attach the appraisal summary, the IRS can request it and the taxpayer can still get the deduction if he submits the summary within 90 days of the request. But the underlying appraisal still has to be a qualified appraisal completed before the due date of the tax return, and the appraisal summary must still contain the information required by section 1.170A-13(c)(4)(ii), Income Tax Regs. Sec. 1.170A-13(c)(4)(iv)(H), Income Tax Regs. Since Joseph didn’t seek an independent appraisal until after the audits started (well after his returns were due), he can’t even find refuge in this section.
So the taxpayer has given away $18 million and gets all of nothing as a deduction. The judge said the taxpayer was out of luck:
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.
Anthony Nitti observes:
Mohamed is a bright guy with one fatal flaw: he ventured to prepare his own tax return. In doing so, he filled out Form 8823 — Noncash Charitable Contributions — without reading the instructions, because it “seemed so clear that he didn’t think he needed to.” This would prove to be a costly mistake.
That’s the scary thing about property gifts. Appreciated or not, if you are giving away $5,000 or more, you need a qualified appraisal and you need to properly report the gift on your return with a Form 8283. No appraisal or no 8283, no deduction.
The moral? Cheap tax help is often the most expensive. By doing a return with an $18 million deduction by himself, the taxpayer saved on tax prep fees altogether, so he has that going for him, anyway.