The recent victory of Jan Van Dusen in U.S. Tax Court was more than just a personal victory for Ms. Van Dusen over the IRS. It was a victory for all volunteer pet foster parents in that it allows the deduction of out-of-pocket expenses that can be demonstrably linked to volunteer work for 501(c)(3) organizations.
Jan Van Dusen volunteered and fostered cats for a charitable organization called Fix Our Ferals. Ms. Van Dusen had 70 to 80 cats in her home a handful of which were her personal pets. Most of the fostered cats were obtained through Fix Our Ferals, but some were from other charitable organizations. Ms. Van Dusen claimed a $12,068 charitable contribution deduction on her 2004 taxes for expenses she incurred in connection with the volunteer services she provided to Fix Our Ferals’ foster cats and the IRS disallowed the deduction on the basis that they were not incurred incident to the rendition of services to a charitable organization.
While volunteers cannot deduct the value of the services they provide, deductions are available when a taxpayer:
- Donates money or property directly to the charitable organization
- Places money or property in trust for the charitable organization
- Incurs unreimbursed expenses while performing volunteer services for a charitable organization
The Van Dusen case centered on whether Ms. Van Dusen’s deductions were permissible under the third type of deduction – expenses incurred incident to the performance of services on behalf of a charitable organization. The question was whether Ms. Van Dusen was properly deducting her unreimbursed expenses.
The Court reasoned that the most important consideration in determining deductibility of unreimbursed expenses is whether or not the volunteer work causes or necessitates the expense. If the expense is incurred solely in connection with one’s duties as a volunteer, such as buying food for a foster pet, the expense is deductible. If, however, the expense is one that would have been incurred regardless of one’s duties as a volunteer, such as repairs or insurance for a car that is used for personal transportation as well as transportation related to volunteer duties, the expense will be considered to have been incurred regardless of any volunteer service, thus it is not a deductible expense.
The Court held that four factors will be considered in determining whether services are “to or on behalf of” a charitable organization for purposes of determining whether incidental expenses incurred while volunteering are deductible (remember, services for the benefit of an organization such as time or professional expertise are not deductible), the Court considered the following factors:
- Strength Of Taxpayer’s Affiliation With Organization. If a taxpayer can demonstrate a strong affiliation with the organization, it is more likely that the unreimbursed expenses were incurred on behalf of the organization.
- Organization’s Ability to Request Volunteer Services From Taxpayer. If an organization is sufficiently able to request services from the taxpayer, the services will be considered to be provided to the organization.
- The Organization’s Supervision Of The Taxpayer’s Work. If the organization has ample ability to supervise and direct the taxpayer’s volunteer services, then it is evidence that the services are performed for the benefit of the organization.
- Taxpayer Accountability To The Organization. If it can be shown that the taxpayer is accountable to the organization, it is further evidence that the services are being provided for the benefit of the organization.
As with all deductible expenses, unreimbursed expenses must be substantiated. Contributions of less than $250 can be substantiated by retaining the records of purchases the taxpayer wishes to deduct (i.e. vet bills, receipts, etc). For contributions of more than $250, the same records must be maintained and the taxpayer must obtain a contemporaneous written acknowledgment from the donee organization. It is important to note that separate contributions of less than $250 each are not aggregated to determine whether a donor has reached the $250 threshold in a tax year.
Regardless of the amount of the expense, the taxpayer must always be able to show that the expenses were for volunteer and not personal purposes. The best practice is to keep all volunteer related expenses completely separate from personal expenses. This will protect the volunteer against any IRS claims that the expenses were personal and thus not deductible.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.