Opinion ID: 514256
Heading Depth: 2
Heading Rank: 3

Heading: Unreimbursed Expenses

Text: 26 Regarding deductions that are claimed for unreimbursed expenses, we apply a primary benefit test: the expenditure is deductible only if the charity, rather than the taxpayer, receives the primary benefit of the expenditure. See Babilonia v. Commissioner, 681 F.2d 678, 679 (9th Cir.1982). We have not previously considered the deductibility of expenses incurred by an individual other than the taxpayer. The appellants argue that the district court erred in concluding that Treas.Reg. 1.170A-1(g) was applicable only to the individual actually performing the services. Rather, the appellants urge the panel to construe the statutes liberally and follow the White court, which declared, We see no rational basis for distinguishing the payment of the expenses of a dependent son from the payment of a taxpayer's own expenses to perform the same services. White, 725 F.2d at 1271. 27 The government responds that there is a legitimate basis for distinguishing between the individual who performs the services and the one who claims the deduction: while in theory there may be no difference between deducting amounts paid to a missionary for his Church-related expenses and paying the Church the same amount in the form of a deductible contribution, in practice a significant burden will be imposed on the Tax Service to prevent taxpayer abuses from this activity. Two specific types of abuses are feared by the government. First, parents in high tax brackets could contribute large amounts to their children, who they would be supporting anyway had they not undertaken a mission, and claim the amount was contributed to support charitable activity. The parents could then deduct an amount well in excess of what the charity would have paid the children for the same services. Moreover, deductions properly claimed by low tax bracket missionaries would shift to donees in higher tax brackets. These potential abuses would force the IRS to investigate the reasonableness of all direct contributions to missionaries. On the other hand, the government argues, if the money were required to first go to a charity, the possibility that excessive contributions would benefit the missionary rather than the charity would be greatly reduced. See Brinley v. Commissioner, 782 F.2d 1326, 1338 (5th Cir.1986) (Hill, J., dissenting). 28 Second, the government points out, double deductions could occur for the same expenditure: one by the donor and another by the missionary. While this specific wrongdoing is not alleged in the present case, it is a legitimate concern. We note, and find it troubling, that the Davises filed an amended United States individual income tax return, Form 1040X, for the years 1980 and 1981 claiming personal exemptions for their sons as dependents while at the same time claiming a charitable deduction for all the funds they paid to their sons for their support while serving as missionaries. When the IRS disallowed the claims, the Davises filed a suit for refund. Thereafter, the Davises filed a second set of amended returns limiting the amount of their claimed charitable deductions to the amounts the church established as the range of expenses for each mission and did not list Benjamin and Cecil as dependents. The first amended return illustrates the potential for double deductions that, while perhaps unintentional, nevertheless would deprive the government of revenue. 29 Other courts have concluded that in certain situations the taxpayer will be allowed a deduction for the unreimbursed expenses of a family member that are incurred in charitable work, and the Fifth Circuit has directly addressed the issue of unreimbursed expenses of Mormon missionaries. In Brinley v. Commissioner, 782 F.2d 1326 (5th Cir.1986), the court rejected the decisiveness of the White primary purpose test and applied a different test to allow a portion of the claimed deduction. The Brinley court chose to characterize the expenditures as unreimbursed expenses rather than charitable contributions, and applied a causation test, holding that [t]he charitable work must be the cause of the payment in order for the payment to be deductible. Id. at 1331 (quoting Orr v. United States, 343 F.2d 553, 557 (5th Cir.1965)). See also McCollum v. Commissioner, 37 T.C.M. (C.C.H.) 1817, 1819-21 (1978) (taxpayer allowed a deduction for the expenses that he and his family members incurred in connection with their services to the National Ski Patrol, a qualified charitable organization). 30 Significantly narrowing the scope of the deduction that was allowed in White, the Brinley court further determined that the missionary's tax home was where he was serving the Church, thereby precluding deductions for food and lodging expenses by either the parents or the missionary himself. A deduction was allowed only for those expenditures that primarily benefited the charity, i.e., proselytizing and out-of-pocket transportation expenses incurred by the missionary in the performance of his work. Id. at 1332. 1 31 We do not read Treas.Reg. 1.170A-1(g) as permitting a deduction for unreimbursed expenses by anyone other than the taxpayer that actually performs the charitable service. Congressional interpretations of this section of this regulation supports our conclusion. As part of the Tax Reform Act of 1986, the House Ways and Means Committee made the following observation regarding Treas.Reg. 1.170A-1(g): A taxpayer may deduct, as charitable deductions, unreimbursed out-of-pocket expenses incurred incident to the rendition of services provided by the taxpayer to a charitable organization. H.R.Rep. No. 99-426, 99th Cong., 1st Sess. 119 (1985) (emphasis added). Similarly, the Joint Committee on Taxation's General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, 98th Cong., 2d Sess. at 1133 (1984) (emphasis added) provides: Unreimbursed out-of-pocket expenses incurred by the taxpayer in rendering services to an organization ... are eligible for deduction as charitable contributions.... It is a fundamental principle of tax law that assignments of deductions are prohibited. See New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440-41, 54 S.Ct. 788, 791, 78 L.Ed. 1348 (1934) (taxpayer who sustain[s] the loss is the one to whom the deduction shall be allowed), yet this is exactly what the appellants are attempting. 32 The appellants rely primarily on McCollum v. Commissioner, 37 T.C.M. (C.C.H.) 1817 (1978) and Rockefeller v. Commissioner, 676 F.2d 35 (2d Cir.1982), for support for their contention that expenses need not always be incurred by the individual claiming the deduction, but their reliance is misplaced. InMcCollum the taxpayers, husband and wife, and two of their children served on the National Ski Patrol, and were allowed a charitable deduction for the expenses incurred by the family while rendering their services to the National Ski Patrol. In Rockefeller the taxpayers employed both their personal staffs and staff of the Rockefeller Family Joint Office in conducting their philanthropic affairs. The Rockefellers deducted as charitable contributions the salaries of the personal and Joint Office employees, as well as travel, entertainment and other expenses incurred by the taxpayers and their employees in connection with their philanthropic activities. Unlike the situation in the present case, the deductions claimed in McCollum and by the Rockefellers were for unreimbursed expenses incurred by the taxpayers in rendering services to charities. Rockefeller, 676 F.2d at 41-42. In this case the missionary sons were acting independently of their parents and the parents were not rendering their services to the church. We hold that the taxpayer appellants may not deduct the funds they paid to their sons as unreimbursed expenses because the taxpayers were not engaged in charitable service.