Article of the Month

In Elizabeth Van Dusen v. Commissioner; 136 T.C. No. 25; No. 20767-08 (1 Jun 2011), the taxpayer was a volunteer for a feline welfare organization. She helped approximately 70 to 80 foster cats during the year and sought to deduct the expenses involved. The IRS contested the deductions.

Jan Elizabeth Van Dusen (Van Dusen) was a volunteer for Fix Our Ferals (FOF), a qualified Sec. 501(c)(3) organization. FOF exists to locate and trap non-domesticated cats. They are then spayed or neutered and returned to the wild following a recovery period. As part of the process, FOF seeks volunteers like Van Dusen to provide foster homes for the cats during recovery. In addition, some of the cats are in poor health and therefore unable to be returned to the wild. These cats are either placed for adoption or are maintained in the foster homes.

FOF is in many respects a virtual organization. It has no formal office but does have a board of directors, a group of volunteer veterinarians, a website and an email discussion list. In 2004, Van Dusen had seven cats as pets. She also assisted between 70 and 80 cats through the FOF program. In serving the 70 to 80 foster cats, Van Dusen had various expenses that she attempted to deduct.

She claimed a deduction for foster cat expenses of $12,068. The IRS denied the deduction and determined a tax deficiency of $4,838. However, the Tax Court determined that a majority of her expenses did qualify because she met both the relationship test and the substantial compliance test. However, the gifts of $250 or more were not deductible because she did not have the Sec. 170(f)(8)(a) contemporaneous written acknowledgement.

Many organizations have volunteers with expenditures related to their charitable activities. How should these organizations create a receipt policy for unreimbursed expenses? In cases such as Van Dusen, the expenses may be significantly larger than the $250 limit. In order to permit volunteers to deduct these expenses, the organization will need a policy to understand when to issue a contemporaneous written acknowledgment and the required information for the unreimbursed expenses receipt.

Relationship Test

The first requirement in Van Dusen was the relationship test. An expenditure by an independent person is not deductible. Only if there is a sufficient level of relationship with the qualified exempt charity are the appropriately-receipted expenditures deductible. In the case of Van Dusen the Court determined that she qualified under the four part relationship test.

1. Close Relationship or Affiliation – Van Dusen was a regular volunteer for FOF. While the organization did not have a formal office, it did have a Board of Directors and a number of volunteers who trapped non-domesticated cats and placed them in foster homes. The cats were often in poor health and needed nutrition and medical treatment. After they were spayed or neutered and regained health, they were returned to the wild. Because Van Dusen was actively involved with FOF, there was the required close relationship or affiliation.
2. Nonprofit May Request Services – The second element of the test is for FOF to be able to request exempt purpose services. A purpose of the charity was to locate cats and provide foster homes. The actions of Van Dusen were consistent with the stated purposes of FOF to provide foster care and spray or neuter feral cats.
3. Organizational Supervision – While FOF did not have formal offices, the Board of Directors and volunteers acted as an effective network. Van Dusen regularly interacted with other volunteers and therefore was subject to peer supervision.
4. Accountability – In her contacts with the volunteer staff and other participants of FOF, there was a natural relationship that included the required level of accountability.

Because Van Dusen met all four elements of the relationship test, the charity then is permitted to consider the requirements under Reg.170A-13(f)(10) for a contemporaneous written acknowledgement.

Contemporaneous Written Acknowledgement Requirements

Sec. 170(f)(8) requires a contemporaneous written acknowledgement for gifts of $250 or more. Reg. 170A-13(f)(10) indicates that unreimbursed expenditures may qualify for a receipt based on specific parameters.

1. Adequate Descriptions – The receipt must describe the nature of services provided. It is helpful if location, time and specific actions are included. Van Dusen was very actively involved in the care of approximately 80 cats. She was able to document the specific dates of visits to the veterinarian and the amounts involved.
2. Charitable Goods or Services – The receipt must indicate that "no goods or services" were supplied if that is the case.
3. If Goods or Services Supplied – If the charitable organization supplies any portion of the goods or services described in the unreimbursed expenses category (except intangible religious benefits), then the services or goods supplied by the charity must be described and there must be a good faith valuation. This amount will reduce the charitable deduction.

In the case of Van Dusen and most other volunteers, the nature of unreimbursed expenses is that the charity has not provided any portion of those items. But if any goods or services had been provided by FOF, the receipt would need to specify and value those items.

A specific requirement of Sec. 170(f)(8) is that the contemporaneous written acknowledgement be received by the donor prior to filing his or her tax return. If the return is on extension, it is permitted to receive the receipt any time prior to the time when the donor files IRS Form 1040.

Nonprofit Receipt Policy

Charitable organizations commonly comply with Sec.170 (f)(8) by creating a standard receipt. Most receipts are issued with the "no goods or services provided" statement.

However, charitable organizations with large number of volunteers should prepare a more comprehensive receipt for unreimbursed expenses. That receipt should describe the four part relationship test and then the three portion contemporaneous written acknowledgement requirements test.

By creating a standard form for this receipt, the organization can encourage volunteer activities and exercise appropriate supervision to be certain that the receipts are appropriately granted.