When Jan Van Dusen appeared before a U.S. Tax Court judge and a team of Internal Revenue Service lawyers more than a year ago, there was more at stake than her tax deduction for taking care of 70 stray cats.
Hanging in the balance were millions of dollars in annual tax deductions by animal-rescue volunteers across the nation—and some needed clarity on the treatment of volunteers' unreimbursed expenses for 1.55 million other IRS-recognized charities.
The Tax Court allowed her to take a charitable deduction for expenses she incurred while taking care of the cats in her home for an IRS-approved charity, Fix Our Ferals. Among the $12,068 in expenses she deducted: food, veterinarian bills, litter, a portion of utility bills, and other items such as paper towels and garbage bags.
The decision, in Van Dusen v. Commissioner, paves the way for volunteers of animal-rescue groups like the ASPCA and Humane Society of the U.S. to deduct unreimbursed expenses that further the groups' missions, such as fostering stray animals
It also clarifies rules for anybody deducting unreimbursed charitable expenses of $250 or more, especially if they involve use of a home. It affects donors to charities and religious groups, but not political organizations.
Previously, some accountants advised clients taking such deductions to be prepared for an IRS challenge. Now, "if you host and pay for a catered fund-raiser in your home, we know what to do," said Laura Peebles, a director with Deloitte Tax in Washington. Specifically, the taxpayer must keep records of pertinent expenses, and the charity must write a letter acknowledging the gift.
The IRS declined to comment on the case. It has 90 days to appeal to a federal appeals court.
Ms. Van Dusen, 59 years old, is a former family-law attorney living in Oakland, Calif., who lives alone in a 1,500-square-foot home in a modest neighborhood, with seven cats of her own. As a volunteer for Fix Our Ferals, whose mission is to trap stray cats, neuter them and care for them until they can be adopted by owners or released, Ms. Van Dusen provided foster care for about 70 feral cats. Some neighbors approved of her activities, while others didn't. One, she suspects, threw a chunk of concrete through her window.
Ms. Van Dusen tried to take the deductions on her 2004 tax return, but the IRS considered them nondeductible personal expenses and "wouldn't budge," said Ms. Van Dusen.
In 2009, the case wound up in Tax Court, a national venue for tax disputes of all sizes. Tax Court decisions set precedents, and taxpayers may argue their own cases. In December 2009, for example, a nurse won a decision helpful to many M.B.A. students seeking to deduct tuition.
Ms. Van Dusen knew little about tax law before the trial, but represented herself because she couldn't afford a lawyer. "If it came down to helping a cat with a medical problem or saving for retirement, I would spend on the cat's care—as will a lot of rescue workers," she said.
She said her pretrial encounters with IRS agents were "intimidating," and she felt that in court the agency's lawyers "tried to portray me as a crazy cat lady." She said she felt more comfortable with Judge Richard Morrison, who showed great patience: "He had to go through all these receipts from Costco and ask questions like, 'What were these paper towels used for?' "
She was also heartened when a friend told her court workers were sympathetic, saying, "Why is the IRS wasting taxpayer dollars to prosecute a Cat Lady?"
In his 42-page decision, Judge Morrison agreed with many of her arguments. He allowed her to deduct most of some bills and half of others for care of the feral cats, ruling they were unreimbursed expenses incurred to help a charitable group in its mission. He curtailed the total deduction somewhat—the amount isn't yet clear—because she didn't have a valid letter from the charity acknowledging her volunteer work for expenses of $250 or more. The judge declined to comment.
The Humane Society says it has "tens of thousands" of members out of 11 million nationwide who do volunteer work with local shelters and rescue groups. It estimates that many of these volunteers spend up to $2,000 of their own money a year to help animals in need, with some spending up to $15,000 a year when all expenses are counted.
"This is the first time the court has addressed these expenses," said Jonathan Lovvorn, chief counsel of the Humane Society. "Now we want to get the word out."