Joseph and Shirley Mohamed tried to do some good. Between 2003 and 2004, they donated six real estate properties, collectively worth over $18 million, to a Charitable Remainder Unitrust (“CRUT”). A CRUT is a trust that pay the grantor, i.e., Joseph and Shirley Mohamed, an income stream during their lifetimes (or for a set period of years), and then upon their death, any remaining assets in the CRUT are given to the Mohamed’s selected charity or charities. Specifically, the Mohamed’s thought this CRUT would provide them with a charitable deduction, income from the property for life, and that it would allow them to significantly benefit charity, with the remainder of the CRUT going to Shriners Hospitals for Children, the Sacramento Food Bank & Family Services and the Pacific Legal Foundation. Unfortunately, this past May, the Tax Court ruled that the Mohameds’ could not claim a charitable deduction for the any portion of the property donated to the CRUT because of mistakes Mr. Mohamed made in completing IRS Form 8283 - Noncash Charitable Contributions. See Mohamed v. Commissioner, T.C. Memo 2012-152 (May 29, 2012).
Given the severity of the Court’s ruling, you might assume that Mr. Mohamed was trying to take a much larger deduction than deserved, but that was far from the case. Primarily, and among other missteps, Mr. Mohamed erred by not obtaining a “qualified appraisal,” executed by a qualified appraiser, of the real estate properties given to the CRUT within the required timeframe. Mr. Mohamed was the only individual who originally supplied information about the real estate properties on the IRS form. Although he was a real-estate broker and a certified real-estate appraiser, the Regulations explain that he was disqualified as an appraiser here because he was the taxpayer claiming the deduction, the donor claiming the deduction, or alternatively because he was, as trustee of the Charitable Remainder Unitrust, the donee of the real estate properties.
Mr. Mohamed’s errors cost him quite a bit. So what got him into this mess? The answer might surprise you: He did not read the tax form’s instructions. To him, the form itself “seemed so clear that he didn’t think he needed to . . . .” The Court acknowledged that Mr. Mohamed’s interpretation of the form (since revised) was not out of left field – it said the form was even “likely to mislead someone who didn’t read the instructions” – but the Court also highlighted the form’s clear indication that the preparer should look at the instructions. The Court understood that complete denial of the charitable deductions was a “harsh” consequence, especially when the Mohameds’ did not “overvalue, and may well have undervalued, their contributions . . . .” Ultimately, the Court reached its result because it did not want to let sympathetic facts “undermine” the established rules.
The Mohameds’ case is instructive for a whole host of reasons. First, it alerts those who may not know that, indeed, IRS tax forms come with instructions! You can find them, and the forms, on the government website, www.irs.gov . Those instructions are instrumental because the forms are often unclear; even those that appear self-explanatory, often are not. Second, as the Court noted in this case, “[a] taxpayer relies on his private interpretation of a tax form at his own risk.” Seeking guidance from a professional is more than worth it. Lastly, as we have discussed on this blog before, Charitable Remainder Trusts play a unique and important role in estate planning; Contact us for more on them, or on their effective creation, implementation and ongoing management.
- Gary Altman, Esq. and Coryn Rosenstock