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Wednesday, May 30, 2012

California Entrepreneur Loses $18.5 Million Charitable Deduction

Tax Court Logo 2Joseph 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. Mohamed v. Commissioner, T.C. Memo. 2012-152 (May 29, 2012):

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.

For more, see here.  (Hat Tip: Bob Kamman.)

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Comments

Given the equities of their case, their counsel should seek a private bill from Congress to remedy their oversight.

Posted by: TS | May 30, 2012 7:02:43 AM

It is because of cases like this that we have executive discretion. The courts have to follow the letter of the law, but the IRS has discretion to enforce the spirit rather than the letter of the law, doesn't it?
If this were a criminal case, the President could issue a pardon. Can he do something similar here?

I know this is the kind of thing I criticize with respect to the Citigroup-AIG-GM IRS Notices, but what I'm thinking about here is not warping the law to fit what the executive thinks is good policy, but openly declaring that the law has reached an unjust result in a particular case.

Posted by: Eric Rasmusen | May 30, 2012 9:12:42 PM

Actually, having now viewed the Tax Court decision, I think the President should fire the Commissioner. The Tax Court made the right decision, but the Commissioner seems to think his job is to extract money from citizens by hook or by crook, so long as he can win in court. We do not pay the Commissioner to spend money on lawyers to win court battles on technicalities when such victories undermine the general purpose of the law--- to allow honest deduction and to disallow dishonest deductions.

Equally bad is that the Commissioner risked defeat in order to achieve his unjust (tho legally correct) result. The Court was strongly tempted to rule in the interests of justice instead of law in this particular case. Less wise judges would have succumbed, setting a precedent which would have cost the Commissioner a valuable tool in fighting deduction fraud.

Posted by: Eric Rasmusen | May 30, 2012 9:21:32 PM