TAX COURT RULES ON UNREIMBURSED TRAVEL EXPENSES OF DONATING SERVICES TO CHARITY

By Peter Barton, MBA, CPA, JD, professor of accounting and Clayton Sager, PhD, associate professor of accounting University of Wisconsin-Whitewater

In Cavalaris v. Commissioner, the Tax Court made the following rulings on several issues affecting unreimbursed travel expenses of donating services to charity:

1. Satisfying the requirement that there be "no significant element of personal pleasure" in such travel is determined by the extent and duration of the charitable services performed;

2. Staying in deluxe hotels during such travel is deductible under certain
conditions;

3. Excessive tips for hotel employees are not deductible; and

4. Payment of the travel expenses of other volunteers
is not deductible.

Regs. Sec. 1.170A-1(g) specifies that although no deduction is allowed for a contribution of services to charity, unreimbursed expenses incurred while rendering charitable services are deductible. Included are reasonable and necessary expenses for transportation as well as for meals and lodging while away from one's tax home overnight. Regs. Sec. 1.170A-13(a)(1) requires written evidence for these deductions. However, IRC Sec. 170(j) prohibits deductions for charitable travel expenses "unless there is no significant element of personal pleasure, recreation, or vacation in such travel."

Harry Cavalaris, part owner of several real estate businesses, performed services for three charitable organizations involving Greek religion, education, and culture. During 1990-91, he served on the diocesan council, the national executive committee, and as district secretary-treasurer of these organizations. In these positions, he traveled to conferences, meetings, and events in the United States, the Bahamas, Greece, and Turkey. Included in his foreign travel were two trips to Turkey to attend the funeral of the Patriarch of the Greek Orthodox Church and the installation of a new Patriarch.

Cavalaris typically stayed at deluxe hotels and purchased expensive meals for himself and for several other volunteers. He stayed at the hotel hosting the meeting or at a comparable hotel nearby. Although detailed meal costs were not presented in Cavalaris, hotel rates were. For example, the rate for a three-day trip to Baltimore was $180 per night. In Florida, it was $145 per night for eleven days. Cavalaris also tipped hotel employees $100-$340 per trip.

Cavalaris deducted charitable contributions of $29,105 in 1990 and $40,603 in 1991, primarily for travel expenses. After concessions, the IRS contested $10,260 for 1990-91 combined,
claiming the expenses were unsubstantiated, extravagant, not necessary, and/or involved personal pleasure.

The Tax Court first ruled that Cavalaris' deluxe hotel accommodations were deductible because the hotels were convenient to the meetings' location, thereby reducing transportation costs. Also, the court gave two additional reasons for allowing this deduction:

1. Cavalaris held "relatively prestigious positions" in large charitable organizations, and

2. Reasonableness is a relative term.

However, the court ruled that the tips were unreasonably high and allowed $15 per day. Next, the Tax Court ruled that his payments of other volunteers' expenses were nondeductible gifts to those volunteers. The court pointed out that the charity must have control of its funds; therefore, the argument that the charity would have spent the funds in the same manner is irrelevant.

Perhaps most significantly, the Tax Court interpreted the personal pleasure statute to require the taxpayer to perform charitable services "in a genuine and substantial sense throughout the trip," whether or not he or she enjoys doing so. Performing nominal services is insufficient. Trips where Cavalaris spent full days attending meetings or performing other services qualified. However, the court disallowed the trips to Turkey because, although an official representative of the church, he provided no charitable services during these trips.

CPAs should advise clients that unreimbursed travel expenses of donating services to charity are deductible subject to the following conditions:

1. Taxpayers must prove they performed charitable services for several hours each day throughout the trip;

2. Deluxe hotels are deductible if the taxpayer has a relatively high position in the charity and the services are performed at or near the hotel; and

3. Taxpayer payments for the travel expenses of other volunteers are not deductible. *

Source: Cavalaris v. Commissioner, T.C. Memo 1996-308 (July 9, 1996).