It can be a challenging and emotional experience to consider financial matters or make long-term…
If you’re donating assets to a charity, don’t scrimp when it comes to an appraisal and don’t try to file the tax forms yourself. That’s the lesson of a recent case from the U.S. Tax Court.
The case involved Joe Mohamed, an extremely successful real estate investor in Sacramento, California. Joe donated real estate he valued at $18.5 million to a charitable trust. Because foe was a qualified appraiser, he valued the properties himself. He also filled out the relevant tax form himself to claim a deduction for the donation.
But the IRS denied any deduction for the real estate, claiming that Joe made mistakes on the form. And the Tax Court reluctantly agreed that the IRS was right.
For one thing, the IRS rules say that a donor of property can’t act as the appraiser. They also contain a laundry list of things that must be included with the form, such as the taxpayer’s basis in the property, which Joe didn’t include.
Joe argued that the IRS form was confusing. The court agreed that the form was confusing (the IRS has since changed it to make it easier to fill out), but the court said it was up to Joe to understand the form or hire a tax expert.
Joe also argued that he hired an independent appraiser after the IRS complained. The appraiser valued the property at more than $20 million, and in fact the trust sold most of the property shortly afterward for more than $25 million. But the court said this didn’t matter, because under the IRS rules the independent appraisal was too late to count.
So Joe’s do-it-yourself approach meant that he got no tax deduction at all for an enormous charitable gift.
This isn’t the first time the IRS has completely denied a deduction because someone didn’t follow the formalities. There have been other recent cases where a deduction was denied because an appraisal was conducted too long before or too long after the donation was made, didn’t include the complete laundry list of required items, or was made by an appraiser who didn’t have the proper qualifications or was connected to the donor in some way.
For instance, the IRS said that a high school principal wasn’t qualified to put a value on a donation of art supplies, and that an appraisal of partnership interests mistakenly valued the underlying assets of the partnership rather than the interests themselves.
Consult a tax professional before attempting this.