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Volunteers who contribute their time — the most valuable asset of all — certainly aren’t motivated by tax breaks. Many of these MVPs — Most Valuable Philanthropists — probably are unaware that their unreimbursed expenses are deductible contributions for itemizers.
A recent Tax Court case, involving only $4,838 in income taxes is a virtual primer on the deductibility of unreimbursed volunteers expenses.
The long, detailed and scholarly court opinion shows that the busy courts take these issues seriously, regardless of the amounts involved.
Background. The IRS disallowed Donor’s claimed volunteer expenses. The Tax Court first lays out the rules for the types of expenses that are deductible. It then gives the requirements for substantiating the qualified expenses. The facts in this case are both fascinating and crucial to the court’s decision.
What happened. Donor cared for cats in her house. She volunteered for Fix Our Ferals (FOF) and deducted her out-of-pocket expenses for cat-care as contributions to FOF, an IRC §501(c)(3) charity.
FOF’s mission, through volunteers, is to engage in “trap-neuter-return” activities — trapping feral cats, neutering them, obtaining necessary medical treatments and vaccinations, and releasing them back into the wild.
Trap-neuter-return’s purpose is to humanely control feral cat populations and ensure that the cats live in an environment where people are not hostile to them.
After being neutered, the cats are temporarily housed in volunteers' homes while they recover before being returned to the wild. Cats that cannot be safely returned to the wild must be cared for domestically. FOF refers to all care for trapped cats, including temporary housing while cats are recuperating from neutering, as “foster care” and those cats are “foster cats.”
Some of the cats that cannot be returned to the wild are adopted or given to shelters; others remain in foster care indefinitely. More often these cats are sick, elderly, or have other problems requiring long-term care. FOF encourages volunteers to provide that care for the cats in their homes.
Important facts about FOF. It has no formal administrative office; it uses a post office box, a telephone hotline and website. The staff consists of a board of directors and a team of veterinarians. FOF relies mainly on volunteers who trap cats, transport cats, provide foster care, staff spay/neuter clinics, educate the public, screen phone calls, raise funds, and it doesn’t commonly reimburse volunteers for expenses.
Donor’s role with FOF. She trapped feral cats, had them neutered, obtained vaccinations and necessary medical treatments, housed them while they recuperated, and released them back into the wild. She also provided long-term foster care to cats in her home. Some foster cats stayed with her indefinitely.
In 2004, the tax year in question, Donor had between 70 and 80 cats, of which approximately 7 were pets. The pet cats had names, but the foster cats generally didn’t.
Donor devoted essentially her entire life outside of work to caring for the cats. Each day she fed, cleaned, and looked after them. She laundered the cats' bedding and sanitized the floors, household surfaces, and cages. Although FOF was her primary volunteer affiliation in 2004, Donor sometimes assisted other groups and was unable to trace all her foster cats in 2004 to FOF.
Donor’s cat-care expenses. Donor paid out-of-pocket for neuterings, other veterinary expenses including tests, treatment, vaccines, and surgery. She also expended significant amounts on in-home care — e.g., pet and cleaning supplies. She incurred higher electricity and gas bills because she laundered many loads of cat bedding and ran a special ventilation system to ensure fresh air. Her water and garbage bills were also increased.
Donor’s recordkeeping and reporting. At the trial, she introduced the following evidence as proof of her foster-cat expenses: check copies, bank account statements, credit card statements, a Thornhill Pet Hospital client account history, a Costco purchase history, Pacific Gas & Electric invoices, a Waste Management payment history (for garbage removal), and an East Bay Municipal Utility District billing history (for water). All the data in the documents was recorded contemporaneously in 2004.
Tax Court opinion. Caring for foster cats was a service to FOF. A typical charitable contribution is donating money or property directly to a charity. Another type of contribution is performing services for a charity and incurring unreimbursed expenses. No deduction is allowable for a contribution of services, but unreimbursed expenditures made incident to the rendition of services to a qualified charity may be deductible. Reg. §1.170A-1(g).
Donor maintained that her expenses were “expenditures made incident to the rendition of services” to FOF.
The IRS contended that Donor was an independent cat rescue worker whose services were unrelated to FOF and didn’t benefit the organization.
Tax Court finds Donor’s care for foster cats constituted services to FOF. In determining whether a taxpayer has provided services to a particular organization, courts consider the strength of the taxpayer's affiliation with the organization, the organization’s ability to initiate or request services from the taxpayer, the organization's supervision over the taxpayer's work, and the taxpayer's accountability to the organization. For example, in Smith, 60 T.C. 988 (1973), the Tax Court held that church members could deduct evangelical travel expenses even though their church never initiated, controlled, supervised, or assisted with the trips. The church encouraged missionary work in general; and before the taxpayers embarked on a trip, the church gave them letters of commendation, which evidenced the church's approval and served as introductions to intrafaith groups during the trip. By contrast, in Saltzman 54 T.C. 722 (1970), the taxpayer's activities had much looser ties to the charitable organization. The taxpayer was the leader of the Harvard-Radcliffe Hillel Folk Dance Group. Without the organization's asking him, he traveled alone to Europe and Pittsburgh to attend folk dance festivals that weren’t sponsored by the organization. The Tax Court held that the taxpayer didn’t provide services to the organization, partly because the organization hadn’t directed or encouraged him to attend the festivals.
In this case, Donor, said the court, has demonstrated a strong connection with FOF. She was a regular FOF volunteer who performed substantial services for the organization. She engaged in both trapping and foster care and worked closely with other FOF volunteers. FOF could initiate or request services from Donor through individual volunteers, who would contact her by phone or by internet. Like the church in Smith, FOF encouraged and indirectly oversaw Donor's work.
Non-deductible expenses: To be deductible, unreimbursed expenses must be directly connected with and solely attributable to the rendition of services to a charitable organization. In applying this standard, courts have considered whether the charitable work caused or necessitated the taxpayer's expenses. For example, in Orr, 343 F.2d 553 (5th Cir.1965), the court disallowed deductions for the expenses of insuring and repairing two vehicles because the expenses weren’t solely attributable to charitable use. The taxpayer had used the vehicles partly for personal use and would have incurred the expenses regardless of any charitable work.
Similarly, in McCollum, T.C. Memo.1978-435, the Tax Court denied National Ski Patrol volunteers' deductions for ski equipment because they owned the equipment and could use it for personal recreation.
Not deductible by Donor: Costco membership dues, pet-cat cremation expense, bar association dues, DMV fees, and wet/dry vacuum repair. Donor didn’t show those expenses were incurred for her charitable work.
One broad category of Donor's expenses — veterinary expenses, pet supplies, cleaning supplies, and utilities — was partly incidental to Donor’s services to FOF. If Donor had not fostered cats, she would have paid for fewer veterinary services, fewer pet supplies, and fewer cleaning supplies. Her utility bills would have been significantly lower because she would not have had to run a special ventilation system, do as much laundry, or dispose of as much cat waste. The Tax Court ruled that the portions of those expenses attributable to caring for foster cats were directly connected with and solely attributable to her services to FOF. So the Court allowed a deduction for a percentage of those expenses.
Donor has met the recordkeeping requirements for her foster-cat expenses of less than $250, holds the court. Unreimbursed volunteer expenses of less than $250 are governed by Reg. §1.170A-13(a). That regulation gives the recordkeeping rules for money contributions. And it has the relevant rules for determining whether unreimbursed volunteer expenses are deductible. Those rules, and not the rules for non-money contributions, apply to unreimbursed volunteer expenses for several reasons, held the court. First, the substantiation requirements for expenses of $250 or more, which are found in Reg. §1.170A-13(f)(10), implicitly categorize unreimbursed expenses as cash contributions by subjecting them to the requirements of Reg. §1.170A-13(a). Second, unreimbursed ex-penses are similar to money contributions because taxpayers who serve as volunteers usually use money to purchase goods or services.
Third, if the rules for non-money contributions in Reg. §1.170A-13(b), were interpreted to govern unreimbursed volunteer expenses, they would require information that would not be helpful in a subsequent audit or litigation about the propriety of a charitable deduction. See Bond, 100 T.C. 32, 41, 1993 WL 7551 (1993) (“the reporting requirements of [Reg. §1.170A-13], are helpful to * * * [the IRS] in the processing and auditing of returns on which charitable deductions are claimed”). The rules for non-money contributions require a taxpayer who lacks a donee receipt to keep written records of: the value of the property; the cost of the property; any previous contributions by the taxpayer of a partial interest in the contributed property; and any restrictions the taxpayer has placed on the use of the property. Reg. §1.170A-13(b)(2)(ii). These facts are generally irrelevant to the deductibility of unreimbursed volunteer expenses. Those expenses involve a monetary payment by the taxpayer for which the taxpayer seeks a deduction equal to the monetary outlay. The court concluded that the recordkeeping requirements for money contributions in Reg. §170A-13(a) govern Donor's foster-cat expenses.
Donor’s documentation meets the recordkeeping requirements of Reg. §1.170A-13(a). Reg. §1.170A-13(a)(1), requires the taxpayer to maintain one of the following:
(i) A canceled check.
(ii) A receipt from the donee charitable organization showing the name of the donee, the date of the contribution, and the amount of the contribution. A letter or other communication from the donee charitable organization acknowledging receipt of a contribution and showing the date and amount of the contribution constitutes a receipt * * *.
(iii) In the absence of a canceled check or receipt from the donee charitable organization, other reliable written records showing the name of the donee, the date of the contribution, and the amount of the contribution.
In determining whether Donor has substantiated her payments for veterinary services, pet supplies, cleaning supplies, and utilities, the court looked to the following records that Donor introduced into evidence: check copies, bank account statements, credit card statements, a Thornhill Pet Hospital client account history, a Costco purchase history, Pacific Gas & Electric invoices, a Waste Management payment history, and an East Bay Municipal Utility District billing history. Thus the Tax Court held that Donor’s records were sufficient to substantiate all her foster-cat expenses of less than $250.
Close enough. Although some of Donor’s documents didn’t strictly comply with Reg. §1.170A-13(a)(1), she substantially complied. The court analogized Donor’s situation to that of the taxpayer in Bond, 100 T.C. 32 (1993). In Bond, a taxpayer donated two blimps to a charitable organization. Reg. §1.170A-13(c)(2)(i), required that he obtain a document appraising the two blimps. The regulation required that the appraisal document contain specific items of information. The taxpayer failed to obtain a separate written appraisal. However, he attached a Form 8283, Noncash Charitable Contributions, on which an appraiser had recorded information about the value of the two blimps.
Bond distinguished between a regulatory requirement relating to “the substance or essence of the statute”, strict adherence to which is mandatory, and a requirement that is merely “procedural or directory”, which may be satisfied by substantial compliance. Bond held that the reporting requirements of Reg. §1.170A-13, are directory and require only substantial compliance. The court further held that because substantially all of the information required in an appraisal document was recorded on the Form 8283, the taxpayer had complied with the regulatory requirement to obtain an appraisal document.
The Tax Court concludes in this case that Donor had substantiated all the veterinary, pet supply, cleaning supply, and utility expenses of less than $250. As discussed earlier, these expenses were adjusted to exclude amounts not attributable to foster-cat care. After the adjustments, Donor could deduct 90 percent of her less-than-$250 veterinary and pet supply expenses and 50 percent of her less-than-$250 cleaning supply and utility expenses.
Donor did not meet the substantiation requirements for her foster-cat expenses of $250 or more. To claim a charitable deduction for those expenses, the taxpayer must substantiate the contribution with a contemporaneous written acknowledgment from the donee organization. IRC §170(f)(8)(a); Reg. §1.170A-13(f)(1). A taxpayer who incurs unreimbursed expenses “incident to the rendition of services” is treated as having obtained a contemporaneous written acknowledgment if the taxpayer: (1) “Has adequate records under *** [Reg. §1.170A-13(a)] to substantiate the amount of the expenditures”, and (2) acquires a contemporaneous statement from the donee organization containing: (A) A description of the services provided by the taxpayer; (B) A statement of whether or not the donee organization provides any goods or services in consideration, in whole or in part, for the unreimbursed expenditures; and (C) A description and good faith estimate of the value of any goods or services provided by the donee organization. Reg. §1.170A-13(f)(10).
For the statement to be contemporaneous, the taxpayer must obtain the donee's statement on or before the earlier of: (1) the date the return is filed, or (2) the due date (including extensions) for filing the return. Reg. §1.170A-13(f)(3).
Donor did not satisfy the contemporaneous written acknowledgment requirement. The due date for filing her 2004 return was April 15, 2005, and she filed her return on January 25, 2007. The earlier of the two dates is April 15, 2005. Donor had not obtained any written acknowledgment of her services from FOF by April 15, 2005. Even by the trial date, she had failed to obtain from FOF a statement with the information required by Reg. §1.170A-13(f)(10).
Since Donor lacked the appropriate written acknowledgment from FOF, she had not substantiated and cannot deduct any foster-cat expenses of $250 or more.
IRC §280(A)(a) provides that for individual taxpayers “no deduction otherwise allowable shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.” IRC §280A(b) contains an exception to section 280A(a). It provides: “Subsection (a) shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity).” The IRS argued that IRC §280A forbids Donor from claiming a charitable deduction for a portion of her household utility bills. The Tax Court held, however, that IRC §280A doesn’t affect the deductibility of Donor's expenses. Her expenses would be deductible without regard to any connection with a trade or business.
Let’s conclude with an arcane but important point. Rockefeller, 676 F.2d 35, 42 (2d Cir. 1982) held that unreimbursed volunteer expenses were contributions “to” a charitable organization and not “for the use” of a charity. The adjusted-gross-income deductibility ceiling is higher for gifts “to” a charity than it is “for the use of” a charity. See also Davis, 495 U.S. 472 (1990). Thus in this case, Donor’s unreimbursed volunteers expenses were gifts “to” FOF and not gifts for “the use of” FOF.
Van Dusen, 136 T.C. No. 25 (2011)
© Conrad Teitell 2011. This is not intended as legal, tax, financial or other advice. So, check with your adviser on how the rules apply to you.