Do you volunteer for a nonprofit organization which is exempt from paying income tax? For example, have you driven for Meals On Wheels, or perhaps you have dropped off some household goods to the local Salvation Army, hosted a student in your home, or headed up an usher team at Church? All of these activities most likely have legitimate tax deductions hidden from view of most American taxpayers due to the complexity of the IRS Code. I believe many of you involved with charitable organizations, whether it be the United Way, the American Cancer Society, or the Leukemia and Lymphoma Society, just to name a few, overlook a wonderful tax deduction explained in IRS Code Section 170(a) called Unreimbursed Volunteer Expense (UVE). I wager many of you have UVE which you are not deducting on your tax returns. Interested in learning more about this deduction and how you can save income tax this year? Stay with us on TaxView as we better understand the nature and history of UVE.
Taxpayers have been deducting cash and property donations to charities for almost 100 years. However, there is an obscure IRS regulation 26 CFR 1.170A-1(g), “contributions of services” that seems to generate many controversial US Tax Court case Opinions as to what constitutes UVE. We start with an easy case, so get ready for our journey to Washington DC where we can catch the opening arguments in Van Dusen vs IRS. VanDusen of Oakland California was an attorney who loved cats. As a volunteer for Fix Our Ferals VanDusen trapped feral cats, had them neutered, obtained vaccinations and necessary medical treatments, housed them while they recuperated, and released them back into the wild. She also provided long-term foster care to cats in her home. VanDusen deducted all the unreimbursed expense for this volunteered activity on her 2004 income tax return. The IRS audited her 2004 tax return and disallowed all her deductions, arguing that VanDusen was an independent cat rescue worker whose services were unrelated to Fix Our Ferals and did not benefit the organization. Proceeding Pro-Se VanDusen appealed to US Tax Court. Van Dusen vs IRS.
Judge Morrison’s Opinion recognizes that VanDusen is entitled to a charitable-contribution deduction only if her expenses were, in the words of section 1.170A–1(g), ‘‘expenditures made incident to the rendition of services’’ to Fix Our Ferals. The Court noted that in determining whether a taxpayer has provided the requisite service, 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 citing Smith v. IRS and Saltzman v. IRS.
Travis Smith attended nondenominational company of Christians called an “assembly” at Cuyahoga Falls, Ohio. Smith deducted on his 1967 and 1968 tax returns the costs of trips to the rural areas of Western and Northwestern Newfoundland each year since 1964 to carry out evangelistic activities as a minister of his church. The IRS audited and disallowed all deductions claiming Smith had either taken these trips as vacation, or more probably and primarily that the trips did not directly benefit the local Ohio church economically, religiously, or otherwise. Smith appealed to US Tax Court. Smith vs IRS Judge Featherston noted that one of the basic functions of Smith’s church is evangelism — spreading the faith through preaching, teaching, and personal persuasion. As a member of his local assembly, Smith was taught that it was his duty to do missionary work of the kind he performed, and he responded to that teaching by doing it. Smith wins IRS loses.
Not to be outdone by Smith, the Government pursued Saltzman during 1966. Salztman served without pay as the leader of the Harvard-Radcliffe Hillel Folk Dance Group. He taught folk dancing and related subject matter to a group which met once a week, 3 to 4 hours at a time. During 1966, Saltzman took four trips on which he led members of the Hillel group to folk dance festivals and conventions, at which these group members performed exhibitions as part of the convention. The IRS audited Salztman and disallowed all his expenses. Saltzman appealed to US Tax Court Saltzman v IRS. Salztman argued based on Rev. Rul. 55-4, 1955-1 C.B. 291, and Rev. Rul. 56-509, 1956-2 C.B. 129, that his expenses of his trips to Pittsburgh and Europe qualify for deduction under these rulings. Rev. Rul. 55-4 holds that a taxpayer who renders gratuitous service to a charitable organization may deduct certain unreimbursed traveling expenses incurred while away from home “in connection with the affairs of the association and at its direction.” Judge Simpson easily found for the IRS as Salztman offered no evidence that he was under the direction of the Hillel Folk Dance Group. IRS wins, Salztman loses.
Heading back to VanDusen, the Court noted that Van Dusen has demonstrated a strong connection with Fix Our Ferals. She was a regular Fix Our Ferals volunteer who performed substantial services for the organization in 2004 and clearly had the required “connection” necessary for the deduction to prevail in US Tax Court. Van Dusen wins, IRS loses.
In conclusion, the key to winning in an IRS audit for UVE is to prove that your activity has a strong enough “connection” to the exempt organization to prevail in Court. What this means is that if you are chief usher in your Church and travel with your usher team to various other cities and churches on training missions, and you want to deduct the cost of this trip on your tax return, make sure you establish the required “connection” with your home Church. Finally consult with your tax attorney to make sure you fully disclose to the Government the “connection” established. Get emails in writing from the Vestry commissioning your trip and include those documents in your tax return before filing. You will then have bullet proof UVE deductions when and if you are audited many years later by the IRS. Hope to see you again soon on TaxView with Chris Moss CPA.
Chris Moss, CPA