Obtaining a qualified appraisal is an essential requirement for claiming an income tax deduction for charitable donations of property worth more than $5,000. In a recent Tax Court Memorandum, Judge Holmes denied millions of dollars in charitable deductions because the taxpayers failed to obtain a qualified appraisal of several parcels of real estate. The court ruled against the taxpayers despite the fact that the value of the property (and the tax deduction to which they were entitled) was likely greater than reported.
In 2003 and 2004, Joseph and Shirley Mohamed donated millions of dollars in real estate to a charitable remainder unitrust ("CRUT"), a type a charitable trust that pays the donor income for life (or for a term up to 20 years) with the remainder to pass to charity. Had they complied with the relevant regulations, the Mohameds would have been able to claim an immediate income tax deduction for the present value of the charitable remainder. When reporting the gifts, however, they submitted statements prepared by Mr. Mohamed, which valued the properties at approximately $18.5 million. In response to an IRS audit, the Mohameds hired outside appraisers who valued the properties at over $20 million. In addition, by the end of 2004 one of the properties (valued by Mr. Mohamed at almost $14.9 million and by an appraiser at almost $16.4 million) was sold in 2 pieces for nearly $23 million. Despite the fact that Mr. Mohamed most likely undervalued several of the properties, the IRS claimed that all charitable deductions should be denied because he failed to submit a qualified appraisal.
Although the Court was sympathetic to the Mohameds' claim that they found the relevant tax forms confusing, the Court ruled that no tax deduction could be allowed because the taxpayer failed to comply with the regulations for reporting the value of donated property. The regulations require that the appraisal be made by a qualified appraiser (someone other than the taxpayer, the donor or the recipient of the property) no more than 60 days before the gift and no later than the due date of the return, include specific information about the property and the appraisal fee charged most not be based on the appraised value of the property. Mr. Mohamed (who was both the donor and, as trustee of the CRUT, recipient of the property) was clearly not a qualified appraiser, and the statements attached to his returns did not contain all of the required information. The Court also rejected the Mohameds' claims that the relevant regulations were invalid.
In addition to the importance of obtaining a qualified appraisal, the Mohamed case highlights the need to consult qualified professionals when preparing Federal tax filings. Although the Court was sympathetic to the taxpayers' claim that the relevant forms were unclear, the decision emphasized that Federal tax law is governed statutes, regulations and judicial decisions, not by language contained in tax forms.