Recordkeeping for Charitable Services

Tax Court carefully reviews the requirements for deducting the value of expenses incurred in rendering services to a Section 501(c)(3) charitable organization in Jan Elizabeth Van Dusen 136 T.C. 25, released 6/2/11. This is a useful review, well worth the time it takes to read the 42 pages of Judge Morrison’s opinion.

Jan was an attorney who took care of feral (that is, wild) cats. She worked with several California charities, principally Fix Our Ferals, which took in wild cats, neutered them, and released them back into the wild. This was a Publication 78 organization, and Judge Morrison took judicial notice of that fact.

The sole issue remaining from the deficiency was a $12K charitable deduction Jan took for her unreimbursed out-of-pocket expenses incidental to her rendering services. Some of these out-of-pockets were expenditures of less than $250, and some were $250 or greater. Of course, the value of her time and labor are not deductible.

As to Jan’s recordkeeping, Judge Morrison said: “Van Dusen 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….Van Dusen states that she initially had more substantial records of her foster-cat expenses, namely itemized receipts, but that her tax preparer, Cary Cheng, told her they were unnecessary for preparing her original return. Those records have since disappeared. Van Dusen compiled the documents she introduced at trial by searching through other records and requesting records from third parties. “ 136 T.C. 25, at p. 11 [footnote omitted].

The “check copies” referred to were photocopies of the carbon copies from Jan’s checkbook; apparently she used checks that made carbon copies as a check was written, and these were acceptable to Tax Court as substitutes for canceled checks or copies thereof.

IRS first contended that Jan was an independent cat rescuer and not affiliated with Fix Our Ferals, which itself was a loose organization of volunteers. Judge Morrison rejected IRS’ position, saying:  “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.” 136 T.C. 25, at p. 15.  Jan passed the test.

To the extent any of Jan’s claimed deductible expenses served both charitable and personal functions, they were disallowed.

Because of the extensive services Jan rendered, Judge Morrison carefully examined the claimed expenses and apportioned them on a percentage basis between personal items and charitable items. Then Judge Morrison discusses the requisite substantiation requirements.

The money contribution regulations (1.170A-13(a)) apply to nonreimbursed out-of-pocket expenditures. The non-monetary contribution rules impose irrelevant requirements, and most unreimbursed expenses are paid with money. The regulations require that the taxpayer maintain, for monetary contributions less than $250, “(I)n 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.” Regulation 1.170A-13(a)(1)(iii).

Tax Court found Jan substantially complied with the requirements, even though her compliance was not strict compliance. The key here is that strict compliance with the Regulation is not required. See Bond v. Commissioner, 100 T.C. 32 (1993).

However, because Jan didn’t get contemporaneous written acknowledgments from Fix Our Ferals when she incurred the $250 and over expenses, she gets none of those deductions.

Note for preparers-Save every receipt for unreimbursed charitable contributions.

Note for volunteers- If you have a large unreimbursed expense, get a statement from the charity describing the services provided, whether or not the donee organization provides any goods or services in consideration, in whole or in part, for the unreimbursed expenditures; and a description and good faith estimate of the value of any goods or services provided by the donee organization.