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Judge rejects couple’s $18.5 million tax deduction for charity

By Dale Kasler, McClatchy Newspapers –

SACRAMENTO, Calif. — Talk about not reading the fine print.

By overlooking a crucial paperwork requirement, a Sacramento couple has forfeited an $18.5 million tax deduction stemming from a charitable donation.

The Internal Revenue Service denied the deduction claimed by real estate developer Joseph Mohamed Sr. and his wife, Shirley, who gave away millions of dollars worth of land. A judge in U.S. Tax Court confirmed the IRS’ decision this week.

The tax judge called his own ruling “harsh” but said he no choice under federal law.

The Mohameds’ case drew some national media attention and illustrated the importance of reading IRS forms, down to the last detail. Joseph Mohamed did his own tax returns and acknowledged he didn’t read all the instructions, according to the judge’s ruling.

“There’s a lot of traps for the unwary and they fell into one,” said Sacramento certified public accountant Greg Burke, a former IRS agent.

Burke, who wasn’t connected to the Mohameds’ case, said it was unusual for someone dealing in such large amounts to do their own taxes.

“Usually, when someone is making donations of this sort, they’re checking with someone … an accountant, a lawyer,” said Burke, an accountant with John Waddell & Co. and past chairman of the California Society of CPAs.

Joseph Mohamed declined comment on the ruling Thursday, as did his attorney, Douglas Youmans. The Mohameds have the right to appeal to the 9th U.S. Circuit Court of Appeals.

In 2003 and 2004, the Mohameds donated a series of real estate parcels, including a 40-acre lot, to their charitable remainder trust. In such a trust, taxpayers can claim an immediate deduction even though they’re collecting income on the assets. What’s left after they die — the remainder — then goes to the charity.

The couple claimed an $18.5 million deduction and submitted some paperwork buttressing the claim. But they failed to attach an actual “qualified appraisal” — written by an independent qualified appraiser, verifying the value of the properties.

After the IRS launched an audit, the Mohameds got a qualified appraisal. This showed the properties were worth $20.3 million, even more than what the couple claimed.

But by then, it was too late, and the IRS disallowed the deductions. The Mohameds took the case to Tax Court, a venue set up to referee IRS disputes, but their plea was rejected by Judge Mark Holmes.

“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,” Holmes wrote.

Holmes said the Mohameds were victims in part by IRS forms that “presented conflicting messages” about what was required, and have since been changed “to reduce confusion.”

But he said the law was clear, and “a taxpayer relies on his private interpretation of a tax form at his own risk.”

The donations were earmarked for three nonprofit organizations — the Shriners Hospitals for Children, the Sacramento Food Bank & Family Services and the Sacramento-based Pacific Legal Foundation.

Ironically, the legal foundation dedicates itself to anti-tax causes and other conservative principles.

“It’s a very unfortunate thing that happened with Joe and Shirley,” said foundation president Robin Rivett. “Their heart was in the right place — they were trying to fund some charities. These are very important charities in the community.”

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