California Entrepreneur Fills Out Form Himself-- Loses $18.5 Million Charitable Deduction

In what can be considered one of the harshest Tax Court cases of the year, the Tax Court denied a gigantic charitable deduction because admittedly "confusing" IRS forms were not filled out properly.

A prominent Sacramento real estate broker, certified real estate appraiser, and entrepreneur, donated six properties worth at least $18.5 million to a charitable remainder trust in 2003 and 2004, but failed to read and ultimately follow the instructions to Form 8283 (Noncash Charitable Contributions).  Although the Tax Court acknowledged that "the property was quite likely more valuable than the [broker] reported on [his] tax returns," the Tax Court denied the claimed charitable deduction for failure to comply with the substantiation requirements.  Ouch. 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.

The lesson here is that any time a person seeks a charitable deduction for real estate, a competent adviser should actually prepare the Form 8283 and ensure that any attached appraisal meets IRS requirements. 

(See more from Tax Prof)

Californa 9/11 Funds Raided By Politicians

In a move that is shocking, even by Sacramento standards, the Associated Press has revealed that a special account initially established to help fund scholarships for the California victims of 9/11 and their families has been raided for general government purposes.

After the 2001 terrorists attacked, Sacramento established a specialty memorial license plate emblazoned with the words, "We Will Never Forget."  Fifteen percent of funds raised were to fund scholarships for victims' families and the rest was to help fund anti-terrorism efforts. 

Since 2001, $15 million has been collected--of those funds raised, only $21,381 has reached the children and spouses of the three dozen California residents killed in the 9/11 attacks. 

On closer examination, it has been revealed that these funds are not being used to fund scholarships or anti-terrorism efforts but rather are being used as normal general funds dollars.  For instance, Gov. Schwarzenegger and Gov. Brown borrowed a combined $3 million dollars from the fund in order to fill budget deficits--loans which have yet to be repaid. 

California's Facebook Windfall Falters?

Before Facebook's IPO, many had speculated how the Facebook IPO could bring a tremendous amount of tax revenues to the state.  Gov. Brown even estimated that the IPO would generate between $1.4 billion and $1.9 billion  in income taxes over the next 13 months from sales of Facebook stock. 

This estimate was based on an IPO price of $35 per share.

On Friday when Facebook went public, it opened at $38, and then closed on Tuesday at $31. 

The Legislative Analyst's Office projected tax revenues of around $1.6 billion, but this was estimated at an IPO of $38, followed by a projected growth to $45 after six months. 

Regardless of Facebook's ultimate share price months from now, it is clear that one-time revenue increases or accounting tricks will not suffice to cure California's perennial budget woes. 

Will Smith Discovers France's Top Marginal Tax Rates--Shrieks

The video speaks for itself.

Brown Cites California's "Day of Reckoning" in Support of Temp Tax Hikes

With California's budget deficit now exceeding $16 billion, Governor Brown has released a proposed budget which seeks, in part, to raise revenues through temporary sales and income taxes.

Brown is asking voters to temporarily raise the statewide sales tax, already the highest in the U.S., to 7.5 percent from 7.25 percent and would also increase rates on income starting at $250,000. Millionaires, now taxed at 10.3 percent, would pay 13.3 percent, the highest in the nation.

“California has been living beyond its means,” Brown told reporters in Sacramento yesterday. “The United States of America and its federal government is living beyond its means. A lot of corporations have. A lot of people spend more money than they take in. Well, there has to be a balance and a day of reckoning.”

California Ranks at the Bottom of Tax Friendliness Survey

The Kauffman Foundation has released its United States Small Business Friendliness survey.  California gets an "F" in half the categories measured. Here is the Tax Friendliness map comparing all States:


The highest grades California received were two "C-", in Training Programs and Hiring Costs.  

(Hat Tip: Tax Prof)

$4 Billion in Annual Tax Fraud From Undocumented Workers

This local news report from Indiana is startling and uncovers a growing trend. 

Word has spread amongst the undocumented workers how they can easily claim (albeit improperly) child tax credits for numerous children and relatives in Mexico, with some claiming as many as 12 dependents. 

"One of the workers, who was interviewed at his home in southern Indiana, admitted his address was used this year to file tax returns by four other undocumented workers who don't even live there. Those four workers claimed 20 children live inside the one residence and, as a result, the IRS sent the illegal immigrants tax refunds totaling $29,608."

The U.S. Inspector General is well aware of the abuse and released a new report showing the problem now costs American tax payers more than $4.2 billion a year.

Formula Value Gifts--How to Make a Gift That is Essentially Audit Proof

"I hereby make a gift of a portion of my LLC interests worth $X to my son, BUT, if the IRS audits me and says that this gift is worth much more than $X, than I really gave much less of my LLC interests so that this gift will not incur gift tax."

While the above headline and gifting statement is an oversimplification, a recent Tax Court case, Wandry v. Commissioner, has opened up a realm of possibilities for those interested in making gifts of business interests to their children.  Normally, a person can make a tax free gift of $13,000 annually (for 2012) to as many recipients as they wish.  Thus, a business owner could give away large portions of his business piece-by-piece ($13,000 each year) without suffering any adverse gift tax consequences.  However, the hardest thing to determine when dealing with family businesses is how much of that ownership interest actually equals the tax free gift amount of $13,000.  While appraisals are normally acquired, the IRS can always challenge the appraised value and argue that the gifts of interests you made were really worth much more than $13,000, leaving you with a potential gift tax liability.

The Wandry case is promising because the Tax Court allowed the use of a formula value clause in a gift agreement which means that if there were ever an audit and the appraised value of the business were increased, then the percentage of ownership interests deemed gifted would be changed to ensure no gift tax would be incurred.  In short, while the IRS could audit you and challenge the value of the gift, there would be no incentive to do so as if the value increased, there would still be no increase in gifts.  Understandably, the IRS has challenged formula value clauses on public policy grounds as it creates a situation where taxpayers can make aggressive low-ball valuations without any fear of audit consequences if those valuations are disregarded.

Prior to Wandry, the best advice was for a family to designate a charity to receive any excess value after audit adjustments--no extra tax would be due but the family would lose some control.  Wandry really opens up possibilities for strategic giving, particularly for those families using FLPs or FLLCs to make gifts to their children.