Guest Post: I Got Dem Ol' Cathouse Blues Again Mama! (Part 3)

By B. Paul Husband

            One of the significant holdings in Van Dusen was that indirect supervision of the work by the 501(c)(3) charity can suffice to support deductibility of unreimbursed out of pocket expenses from volunteers. The Court stated:   “Nothing in Section 170 or [relevant] regulations suggests that, as a condition to the deductibility of unreimbursed service-related expenses, the services must be performed under the control or supervision of a charitable organization. . . .” 

            One of the keys to winning as much as she did was that some of the receipts were itemized. The itemized receipts were given substantial deference by the Court. 

Saved by The Yankee Doodle Dandy

            The Van Dusen Court utilized the Cohan Rule in a fair manner.   The Cohan Rule is named for the great American composer/lyricist, George M. Cohan, who wrote songs like “Give My Regards to Broadway,” “Over There,” “You’re a Grand Old Flag” and “The Yankee Doodle Boy.”   In addition to his contributions to American musical comedy and patriotism, he made his mark in American tax law in Cohan v. Commissioner, 39 F.2d 540 (2d. Cir. 1930). He challenged the stringent IRS substantiation requirements. Judge Learned Hand wrote the just and enduring opinion. The Cohan Rule provides that, even if the substantiation is incomplete, if some factual basis is provided for the Court to base a finding, a Court may make inferences to support granting of deductions. Ms. Van Dusen may not have kept the records exactly as she should have kept them, and she did not have everything she should have had, but she did prove what a bag of kitty litter cost, and she showed by receipts that she typically bought eight bags at a time. The Tax Court found that was enough to invoke the Cohan rule.

                Van Dusen successfully proved up the cost of kitty litter 

           The Court expressly found Van Dusen to be credible witness. The evidence reflected that Van Dusen had about seven pet cats and about 70 to 80 feral “foster” cats in 2004. She argued that the foster cats consumed a greater percentage of the veterinary care than her pet cats, on a pro rata basis. However, she did not have specific proof and therefore the Court only allowed a pro-rata portion of the veterinary expenses as deductions -- 90% with respect to the veterinary, pet food and pet supply expenses. Specific testimony would have helped.

            It is fair to infer that unreimbursed expenses incurred in volunteer work for qualified 501(c)(3) charities which benefit horses, dogs and other animals would be treated the same way by the Tax Court.

            The bottom line is: keep records, keep records, keep records, and for amounts in excess of $250 be sure you get a written acknowledgment from the charity before you file your tax return.

Related Posts:

Guest Post: I Got Dem Ol' Cathoues Blues Again Mama! (Part 1)

Guest Post: I Got Dem Ol' Cathouse Blues Again Mama! (Part 2)

©B. Paul Husband 2012

Guest Post: I Got Dem Ol' Cathouse Blues Again Mama! (Part 2)

By B. Paul Husband

            In June of 2011, the United States Tax Court decided Van Dusen v. Commissioner, which addresses the rules for deductions of unreimbursed out of pocket expenses incurred in charity work. 

            In Van Dusen, a cat-loving attorney worked on a volunteer basis in association with a Section 501(c)(3) charity called “Fix Our Ferals” with dozens of feral cats, for which Attorney Van Dusen provided food, shelter, veterinary care and pet supplies, including kitty litter.

            Ms. Van Dusen deducted a broad range of expenses which she associated with her volunteer work for Fix Our Ferals. The expenses deducted included cat food, kitty litter, veterinary care for cats, funeral expense for one cat, her bar association dues, Costco membership dues, Department of Motor Vehicle fees, electric bills, water bills, garbage collection charges, vacuum cleaner repair, and the costs of a custom air filtration system for her residence.

          Happy Mardi Gras:  Laissez les bons temps rouler!

  The significant holdings in Van Dusen are: 

            (1) Out of pocket expenses incurred in connection with providing services to a charity are considered under the set of rules applied to gifts of “money” (Tr. Reg. Section 1.170A-13(a)) rather than the rules applied to gifts of “property” (Tr. Reg. Section 1.170A-13(b). The “money” rules are simpler than the rules applied to gifts of property.

            (2) The Tax Court will allow some flexibility in accepting alternatives to “adequate records” as substitutes for the records required by the Treasury Regulations to substantiate expenses incurred in connection with gifts to charity, of less than $250. However, the flexibility only works for gifts which are less than $250; not the gifts greater than $250.

            (3) For amounts above $250, the Tax Court will enforce the technicalities of Treasury Regulations Section 1.170A-13.

            (4) The test of “relatedness” between the charitable purpose of the donee and the expenses which were sought to be deducted was applied in Van Dusen and as a result of the “relatedness rules” the bar association dues , the Costco membership dues, the Department of Motor Vehicles expenses, and the vacuum cleaner repair expenses were disallowed. Concerning the connection between the expenses deducted to the work done, the Van Dusen Court stated: “To be deductible, unreimbursed expenses must be directly connected with and solely attributable to the rendition of services to a charitable organization.”

            The Costco membership and vacuum cleaner repair deductions were rejected by the Court on the grounds that they were not exclusively for charitable purposes. 

            (5) Percentage deductions were allowed for the electric bill, the water bill, cat food, cat supplies and the air filtration system, based on the ratio of the taxpayers own pet cats (7) to the “foster” cats (70-80). Thus, deduction of 90% of the pet supplies and cat food were allowed, but only 50% of the cleaning supplies and utility expenses were allowed. 

            For the veterinary expenses, the pet supplies, the cleaning supplies, and the utilities, the Court showed some flexibility and allowed a percentage of the expenses, on the grounds that the taxpayer would have had fewer veterinary service expenses, purchased fewer pet supplies and fewer cleaning supplies if she had not been doing volunteer work for the charity. Similarly, her utility bills would have been significantly lower if she had not had to run a special ventilation system, due to the numbers of cats involved.

The Evidence

            At trial the donor, Ms. Van Dusen, introduced evidence:

            (1) Copies of checks;

            (2) Bank account statements;

            (3) Hospital account history;

            (4) Credit card statements;

            (5) Costco purchase history;

            (6) Gas and electric invoices;

            (7) Waste management payment list;

            (8) Water billing history;

            But all of the records were compiled for trial, well after the expenditures were made in 2004. No written statement from Fix Our Ferals, the donee charity, was obtained prior to the filing of Ms. Van Dusen’s tax return. She would have had better success if she had obtained the “contemporaneous” statement from Fix Our Ferals. For contributions of $250 or more, the Court held a taxpayer must satisfy not only the record keeping requirements, but also the requirements of Treasury Regulation § 1.170A-13(f)(1).

Related posts:

Guest Post:  I Got Dem Ol' Cathouse Blues Again Mama! (Part 1)

Guest Post:  I Got Dem Ol' Cathouse Blues Again Mama! (Part 3)

©B. Paul Husband 2012

Guest Post: I Got Dem Ol' Cathouse Blues Again Mama! (Part 1)

            Paul Husband, an equine tax attorney based in California, will be contributing a series of guest posts over the next few weeks on the 2011 tax opinion, Van Dusen v. Commissioner. There are many valuable lessons contained in this opinion from which equine charities might benefit. Enjoy!

            In the context of deductions claimed by a woman who kept 70 to 80 “foster” cats, in addition to her own seven pet cats, the U.S. Tax Court addressed the deductibility of out of pocket expenses incurred as a volunteer for a properly qualified IRC Section 501(c)(3) charity in Van Dusen v. Commissioner, (2011) 136 T.C. 515.

            There is no deduction whatsoever available for the value of labor or services provided when an individual volunteers to do work for a charity, even though a gift of money to the same organization would be deductible. Nonetheless, out of pocket expenses incurred during the course of performing services for a qualified charity may be deductible if the expenses are sufficiently related to the charitable purpose of the organization, and substantiation and record keeping requirements are met.

          Happy Valentine's Day!

            There are lengthy and complex Treasury Regulations concerning the deductibility of gifts to charity, with separate rules for gifts of property versus gifts of money. 

            Before getting deeper into Van Dusen, lets take a quick look at the requirements and limitations provided by the Treasury Regulations concerning the deductibility of out of pocket expenses incurred in the course of volunteer work for a § 501(c)(3) charity.

Less Than $250

            Generally, for expenses of less than $250, to justify a tax deduction for out of pocket expenses for a charitable work, the donor must maintain, as a record of the contribution, either:

            (a) a bank record; or

            (b) a written communication from the donee (the charity) showing:

                        (1) The name of the donee organization;

                        (2) The date of the contribution; and

                        (3) The amount of the contribution.

More Than $250

            For expenses which are incurred in the course of doing volunteer work for a charity which are more than $250, in addition to meeting the requirements for expenses less than $250, the donor must have a contemporaneous written acknowledgment from the donee, which must include:

            (a) The amount of cash and a description (but not the value) of any property other than cash which was contributed;

            (b) Whether the donee provided any goods or services in consideration for any part of the contribution; and

            (c) A description and a good faith estimate (by the donee) of the value of those goods or services.

Contemporaneous

            The term “contemporaneous” as used in the Treasury Regulations concerning a written acknowledgment of contributions of out of pocket expenses related to charitable work means a written acknowledgment prepared on or before the earlier of:

            (a) The due date of the donor’s tax return, including extensions; or

            (b) The date that the donor files his/her/its tax return.

Acknowledgment

            The acknowledgment requirement for unreimbursed out of pocket expenses can be met if:

            (a) The taxpayer has “adequate records” to substantiate the amount of the expenditures; and

            (b) The taxpayer obtains a statement prepared by the donee that, in addition to the required information listed above for contributions of less than $250, the statement must describe the services and expenses performed, incurred and/or received. See Treasury Regulation § 1.170A-13(f)(10). 

            The $250 level is an important line of demarcation. Above it, the contemporaneous written acknowledge from the donee must be obtained.

Multiple Gifts Under $250 Do Not Trigger Higher Standard

            On the bright side, if a particular donor makes several gifts of unreimbursed expenses incurred doing volunteer work for a charity in amounts less than $250 each, even if they add up to more than $250, they need not be aggregated for the purpose of triggering the contemporaneous written requirements set forth in Treasury Regulation 1.170A-13(f) for contributions of more than $250.

Related posts:  

Guest Post:  I Got Dem Ol' Cathouse Blues Again Mama! (Part 2)

Guest Post:  I Got Dem Ol' Cathouse Blues Again Mama! (Part 3)

©B. Paul Husband 2012