Under Internal Revenue Code Section 170, a person who volunteers services to a charitable organization is not entitled to deduct the value of those services on his or her income tax return. However, if the person volunteering for the charity incurs expenses in rendering those services, the unreimbursed expenses are deductible up to $250 without any written acknowledgment from the charity.  To the extent the expenses exceed $250, the volunteer may deduct them if he or she obtains a letter from the charity that provides: (1) a description of the services provided by the volunteer;  (2) a statement of whether the charity provides any goods and services in return for the unreimbursed expenses; and (3) a description and  good faith estimate of the fair market value of those goods or services provided  by the charity.  In essence, the unreimbursed expenses must be properly substantiated by the volunteer  who incurred them in order for those expenses to be deductible. These basic rules set the stage for a recent Tax Court matter, Van Dusen v. Commissioner, 136 Tax Court 515 (2011), otherwise known as the case of the unlucky cat lady.

Jan Van Dusen, an attorney in California and a volunteer for the San Francisco-area charity known as Fix Our Ferals, claimed $12,068 in unreimbursed expense deductions on her 2004 income tax return for expenses she incurred while providing volunteer services to the charity. Fix Our Ferals engages in “trap-neuter-return” activities so that feral cats are captured, neutered, given medical treatment, fostered during recovery, and then released back into the wild.  In 2004, Ms. Van Dusen was an active volunteer for Fix Our Ferals and took care of approximately 70 to 80 cats in her home, including seven of her own cats.  Ms. Van Dusen’s unreimbursed expenses primarily included payments for veterinary services, pet supplies, cleaning supplies, and household utilities. On audit of her return, the IRS rejected all of Ms. Van Dusen’s cat-related expenses claiming that she was an “independent cat rescue worker” and that she was not incurring these expenses in connection with her volunteer work with the Fix Our Ferals charity.

The Tax Court disagreed with the IRS. It determined that Ms. Van Dusen regularly worked for the charity and the services that she provided for the cats in her home were encouraged and overseen by the charity.  As such, expenses incurred purely for the charity’s purpose could be deducted by Ms. Van Dusen on her income tax return. However, the Tax Court agreed with the IRS that the following expenses were not related to Ms. Van Dusen’s charitable services and were disallowed: cremation expenses for Ms. Van Dusen’s pet cat, DMV fees, Costco membership dues, California State Bar Association dues, and wet/dry vacuum repair costs. These expenses were not exclusively charitable expenses and were considered to be Ms. Van Dusen’s non-deductible personal expenses. Unfortunately for Ms. Van Dusen, the remaining allowable expenses that she incurred exclusively in connection with her charitable work for Fix Our Ferals that was in excess of $250 were disallowed. The Tax Court noted that Ms. Van Dusen failed to properly substantiate her expenses in excess of $250 by obtaining a contemporaneous letter from Fix Our Ferals acknowledging the expenses as proper in accordance with the requirements of the Internal Revenue Code.

If Ms. Van Dusen had obtained a letter from Fix Our Ferals acknowledging that the unreimbursed expenses she incurred were made on behalf of the charity, she would have been entitled to an income tax deduction in excess of $250. So, the moral of this story is don’t keep 70 to 80 cats in your house. The other moral of this story is to remember that if you incur expenses in excess of $250 in connection with any charitable volunteer work that you perform, do not forget to get a contemporaneous letter from the charity acknowledging those expenses so that you may properly deduct them on your income tax return.

If you would like to discuss this or other trusts and estates issues, please contact the attorneys at Drucker Law Offices, 468 North Camden Drive, 2nd Floor, Beverly Hills, CA 90210, 310.285.5375 Tel, 310.444.9754 Fax, www.druckerlaw.com