U.S. Tax Judge Mark Holmes ruled against Joseph Mohamed, a successful entrepreneur, real estate developer and appraiser, and rejected his $18.5-million tax deduction. Mr. Mohamed donated several pieces of real estate toward a charitable remainder trust in tax years 2003 and 2004 and claimed $18.5 million in charitable deductions.
Remainder trusts allow their owners to enjoy instant tax deductions on their contributions, despite the fact that they are collecting income on these assets. Upon the owners’ death, what is left of the trust is given to charity.
Unfortunately, the Mohamed’s prepared their own taxes and didn’t submit a qualified appraisal form – that would have provided an up-to-date value of the assets being donated. This form is required for this type of trust donation. Not surprisingly, this triggered the IRS to audit the Mohamed’s and insisted that they have their assets appraised.
The appraisal found that the properties were actually worth $20.3 million. Surprisingly, the IRS rejected these amended higher deduction amounts due to the fact that the Mohamed’s had failed to submit the proper forms.
U.S. Tax Judge Mark Holmes stated that, “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,” in his court opinion. However, Judge Holmes followed the dictates of federal tax law – that requires a qualified appraisal as documentation to support the deductions that were claimed. Since the law is clear, Judge Holmes wrote, “a taxpayer relies on his private interpretation of a tax form at his own risk.”
This case reinforces the importance for business owners to consult and review their businesses affairs with a lawyer both during the year and at tax filing season to ensure that you don’t fail to see small mistakes that could produce significant losses following an IRS audit.
This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at firstname.lastname@example.org or call him at 925-327-1019.