A Big Ouch


The English novelist and playwright Henry Fielding once wrote that “a rich man without charity is a rogue; and perhaps it would be no difficult matter to prove that he is also a fool.” But sometimes you can be rich, charitable, and foolish, all at the same time. And that can make for some really expensive mistakes.

Joseph Mohamed is a millionaire California real estate broker and appraiser. In 1998, he and his wife Shirley set up a trust for various charities. Then, in 2003 and 2004, he donated six California properties to the trust.

Mohamed prepared his own taxes for those two years. While filling out Form 8283, “Noncash Charitable Contributions,” he neglected to follow instructions and appraised the donated property on his own, as he was an appraiser himself. He attached statements to his returns explaining how he valued the two biggest parcels, then deducted $18.5 million for the gift, satisfied that he had done all he needed to substantiate his write–off.

The IRS, though, has very specific rules for deducting any gift of property worth more than $5,000. By skipping over the instructions, Mohamed missed the rule that required a “qualified” appraisal, made no sooner than 60 days before the gift and no later than the due date of the return reporting the gift itself. He also missed that it had to be signed by a certified appraiser – not the donor or the taxpayer claiming the deduction.

The IRS audited Mohamed’s 2003 return in April 2005. In response, Mohamed got independent appraisals showing the properties were worth over $20 million – actually, two million more than he had deducted. Although it would appear that this would be sufficient, the IRS held firm and the case went to Tax Court.

Last month, the Court ruled that none of Mohamed’s appraisals were “qualified” and rejected his entire deduction. While the Court confessed that the ruling was harsh, as Mohamed and his wife had actually undervalued their property, they had to follow the laws set by Congress, which was very clear on what taxpayers must do to defend their deductions.

Mohamed’s mistake was costly, and emphasizes how important it is to pay attention to tax codes, especially involving large financial transactions. While you may not have millions on the line like Joseph Mohamed, you definitely don’t want to cheat yourself out of deductions you qualify for by not following instructions.