My last post talked about Indiana’s failed attempt to use tax evasion laws against owners of a puppy mill. One of the greatest weaknesses with the Indiana officials’ plan was that they sold the 240 seized dogs to the Humane Society of the United States for a mere $300. In a sting operation, Department of State Revenue officials had purchased two dogs from the puppy mill at $225 a piece, and the Department estimated the value of each dog at $300 when calculating what the owners owed in taxes, penalties and interest. Based on the tax court’s ruling, I doubt that a more realistic price tag would have helped the officials’ case, but at least it would have helped negate the argument that the Department wasn’t really looking for tax revenue to fill its coffers.
On a much more optimistic note, a federal jury recently awarded $330,000 in damages to Thomas Russell’s family, whose nine-year-old black lab named Lady was killed by police officers executing a search warrant. Two officers entered his house to search based on a search warrant in a drug investigation. Russell offered to lock Lady in a room, but the police refused. They entered the house with guns drawn and shot Lady as she rounded the corner wagging her tail. The police claimed they shot Lady in self-defense. The police found no drugs or other evidence during the search. The family sued the officers and the City of Chicago, alleging excessive force, false arrest, and infliction of emotional distress. On top of the $330,000 in damages, the jury awarded $2,000 in punitive damages against the officer who shot Lady and $1,000 in punitive damages against that officer’s supervisor.
As I’ve mentioned before, Virginia does not allow emotional distress damages for injury or harm to pets in negligence cases. But the word is still out on whether a Virginia plaintiff could recover damages for emotional distress to companion animals injured or killed by willful, intentional or outrageous torts. With the Russell case, Illinois joins the list of states – which include Florida, Idaho, Kentucky and Louisiana – that will allow damages in those situations. With each state that rules in favor of plaintiffs in these cases, Virginia and other states may just be getting that much closer to valuing companion animals beyond their mere “replacement value.”
Virginia and Kristin Garwood operated Breezy Valley Dairy Farm in Mauckport, Indiana, a family farm that had been in the Garwood family for thirty years. In 2007, the rising price of grain and falling price of milk put the farm in financial jeopardy. Virginia decided to supplement the family’s income by selling dogs. She started the dog breeding business by buying a pregnant Cocker Spaniel and selling her four puppies for a total of $400. She also sold two of her own Australian Shepherd’s puppies for $150. That same year, Virginia bought 34 more breeding dogs, but could not breed all of them immediately due to health issues.
In 2008, Virginia purchased even more breeding stock, and sold 52 dogs for a total of $4,144. Animal control received a complaint about the treatment and sale of one of Garwood’s dogs. When animal control officials investigated the Garwoods in October 2008, Virginia was uncooperative.
In late 2008 and early 2009, a friend of the Garwoods shut down his dog breeding business and gave the Garwoods dogs that were either “undesirable breeds” or incredibly unkempt. Virginia treated, groomed and sold the dogs, and gave most of the proceeds to her friend. Two more complaints trickled to animal control, and animal control reported the Garwoods as a possible puppy mill to the Office of the Attorney General (AG).
At the time, Indiana did not have a puppy mill statute and Indiana law did not define the term “puppy mill.” There were no laws that criminalized actions like the Garwood’s breeding and dog selling practices. Taking a page about Al Capone from the history books, the authorities looked to tax evasion laws as a way to go against the Garwoods.
In early 2009, the AG and the Indiana Department of State Revenue began investigating the Garwoods for state income and sales tax evasion. The authorities even went so far as to set up an undercover “sting operation” to buy two puppies from the Garwoods for $550. The Garwoods gave no receipts, but claimed orally that sales tax was included in the price.
The authorities now had what they needed to move in on the Garwoods. On May 29, 2008, the Department of State Revenue issued “jeopardy assessment” notices, demands, vouchers and warrants against the Garwoods. The officials concluded that Virginia and Kristin each owed over $142,000 in taxes, penalties and interest.
In the early morning hours of June 2, 2008, the authorities served the Garwoods with the jeopardy assessment documents, and demanded immediate payment in full of all tax, penalties and interest. Not surprisingly, the Garwoods were unable to pay in full.
The tax court began its analysis by pointing out that the state’s power to pursue a “jeopardy assessment” is very limited, and warranted in only four situations – when the taxpayer is about to: (1) quickly leave the state; (2) remove property from the state; (3) conceal property in the state; or (4) do any other act that would jeopardize collection of taxes.
The Indiana tax officials were not arguing the first two points – that the Garwoods were trying to leave the state or take property out of the state. Rather, they relied on the last two prongs – concealing property in the state and actions jeopardizing tax collection – to justify the jeopardy assessments.
Arguing that the Garwoods were concealing property, the officials pointed to Virginia’s refusal to cooperate with animal control officers, and the fact that the dogs could easily be sold in bulk or set free. The tax court dismissed these arguments out of hand, calling them “specious non sequiturs” (ouch!).
The officials relied heavily on the fourth prong to justify the jeopardy assessments. In deciding what kinds of actions could constitute “any other act that would jeopardize collection of taxes,” the officials consulted IRS publications and guidelines. The officials then pointed to several facts to justify seizing the dogs – the Garwoods advertised the dogs in local newspapers, bred and sold the dogs, failed to register as a retail merchant, failed to prepare and file sales tax returns, and failed to report the income on their tax returns.
Once again, the tax court ignored these arguments. In a dismissive footnote, the tax court gave no weight whatsoever to the IRS guidelines. The tax court concluded that these facts merely showed the Garwoods were not paying taxes, but not that they were jeopardizing collection efforts.
At the end of the opinion, the tax court gratuitously scolded the authorities for the media hype surrounding the case. The court also pointed out a serious flaw with the case – the officials sold the 240 dogs to HSUS for a mere $300. In the tax court’s mind, this showed that the state wasn’t actually motivated by filling its coffers with tax revenues, but instead wanted to shut down a puppy mill. The huge gap between the $300 price tag and the $142,000 tax bill against Virginia and Kristin Garwood didn’t help matters.
This case shows the incredible need for strong laws aimed at puppy mills. Fortunately, Indiana passed a puppy mill statute in 2009 that requires commercial dog breeders to register with the state and keep basic records, and imposes minimal standards of care on the breeders. But Indiana’s puppy mill statute still may not address most critical issue posed by the Garwood case – the need to give authorities the power to seize dogs caught up in abusive or neglectful circumstances.
Great news for employees and volunteers of rescues and shelters — thanks to the recent case of Van Dusen v. Commissioner, if you are an employee or volunteer for a legitimate 501(c)(3) charitable organization, you may be able to claim deductions for your unreimbursed expenses.
Fix Our Ferals is a 501(c)(3) organization specializing in trap-neuter-release (TNR) for cats living on the streets or in the wild. If any of the cats were tame, Fix Our Feral volunteers would try to find adopters for those cats. Some cats were released to their original locations or other safe locations. Some cats that were elderly, injured or feral stayed with the volunteers for extended times or indefinitely.
In 2004, Jan Van Dusen volunteered and fostered cats for Fix Our Ferals. Van Dusen had 70 to 80 cats in her 1500 square foot home. Seven of them were her personal pets. Most of the others were Fix Our Feral cats, but some were from other organizations that Van Dusen worked with.
Van Dusen claimed a $12,068 charitable contribution deduction on her 2004 taxes for expenses related to taking care of Fix Our Ferals’ foster cats. The IRS caught up with Van Dusen, claiming she underpaid her taxes. Van Dusen and the IRS worked out some matters, but the issue over the Fix Our Ferals deduction went to trial in the United States Tax Court.
Section 170(a) of the Tax Code allows three types of deductions for charitable contributions if a taxpayer:
Donates money or property directly to the charitable organization.
Places money or property in trust for the charitable organization.
Who performs services for a charitable organization incurs unreimbursed expenses.
Judge Morrison was confronted with whether Van Dusen’s deduction was proper as the third kind of deduction. There was no question Van Dusen provided services for Fix Our Ferals, and that Fix Our Ferals was a legitimate charitable organization. The question boiled down to whether Van Dusen was claiming proper unreimbursed expenses.
Van Dusen sought reimbursement for everything from vet bills, cat food, litter and utilities to reinstating her Costco card and repairing her wet/dry vacuum. As evidence, Van Dusen presented copies of checks, bank account statements, credit card statements, veterinary client account information, a Costco payment history and proof of payment for her water, gas, electricity and waste removal bills. She had thrown away some receipts, and had also intermingled expenses for her own cats, the Fix Our Ferals cats and the cats from other organizations.
In many ways, Judge Morrison was quite forgiving to Van Dusen for her record keeping. He found that her documentation substantially complied with the kinds of records a taxpayer is required to keep. Because Van Dusen had spent the vast majority of her resources on Fix Our Feral cats, he also was not overly distressed about the fact that she had co-mingled expenses with those cats, her own cats and other cats. Judge Morrison easily concluded that 90% of Van Dusen’s vet expenses and pet supplies and 50% of her cleaning supplies and utility bills were deductible foster cat expenses.
However, Judge Morrison went on to say that Van Dusen had to adequately substantiate her deductions. For contributions under $250, Judge Morrison held that Van Dusen had to comply with Tax Code Section 1.170A-13(a), which governs monetary contributions to a charitable organization. Proper substantiation would be:
A cancelled check with the name of the donee charitable organization; or
A receipt from the donee showing the donee’s name and the date and amount of the contribution; or
Other reliable written records showing the donee’s name and the date and amount of the contribution.
For the contributions under $250, Judge Morrison once again gave Van Dusen a break. Van Dusen’s records did not comply strictly with the Tax Code requirements because they did not show Fix Our Ferals’ name – only her name and the name of the store or payee. Nonetheless, Judge Morrison found that her documentation substantially complied with the requirements.
For contributions over $250, Judge Morrison held that Van Dusen also had to comply with Section 1.170A-13(f)(1). This Section requires a donor to produce a contemporaneous written acknowledgment from the donee that:
Describes the services provided by the taxpayer and
Explains whether the donee provided any goods or services in connection with the unreimbursed expenses.
If the donee provided goods or services, the letter must also describe those goods and services and provide a good faith estimate of the goods and services.
Van Dusen had no letters from Fix Our Ferals substantiating any of her expenses over $250, and Judge Morrison cut her no slack on these expenses.
If you think you may be eligible for deductions, here are the lessons to take from this case:
Make sure you are dealing with a legitimate 501(c)(3)! (More on this to come…)
If you work or volunteer with multiple organizations, keep separate records for each organization, and do not co-mingle those expenses with expenses you incur for your own pets.
Keep your receipts and records!
Watch the substantiation requirements, and be particularly careful with contributions over $250. If you make a contribution over $250, get a letter from the charity right away, and make sure it has all the necessary information.
Only deduct unreimbursed expenses. You still cannot take a deduction for services.
I cannot resist one obvious comment about this case. While I think it is wonderful that generous volunteers can now take deductions for animal welfare expenses, I would hate to see this ruling inadvertently encourage animal hoarding. Having 70 to 80 cats in one 1500 square foot residence smacks of a situation right here in Virginia, where Janet Hollins is being prosecuted for having had 77 cats and dogs in her Dale City townhouse. Hollins was found guilty of 77 counts of inadequate care of companion animals last year in General District Court. She she appealed to Circuit Court, and that case is currently set for a three-day jury trial starting on June 20.
Whether you are starting up a new pet care business, or you want to make sure you are covering your bases with your existing business, here’s a great checklist for you. Watch for more details on these steps in later posts.
2. Choose a business entity. The most common entities are a sole proprietorship, a partnership, a limited liability company (LLC) and a corporation. LLCs are a popular choice for businesses due to the LLC’s flexibility. It is often in your best interest to consult with a corporate attorney at this point.
4. Register any trade names and general partnerships. If you are using a trade name that is other than your entity’s official name, make sure that you register the trade name with your local Circuit Court Clerk’s Office. Note that general partnerships also need to register with the Circuit Court.
7. Get a local business license. Once you have registered your business and complied with your locality’s zoning and permitting requirements, you need to get a business license. This license must be renewed annually. When you apply for a license, this will also trigger the duty to estimate and pay your local business, professional and occupational license (BPOL) taxes.
8. Comply with tax requirements. Along with your BPOL taxes, make sure you have complied with other local tax requirements, such as business personal property taxes. Of course, you also need to comply with state and federal taxes. If you run a non-profit such as a rescue, make sure that you look into federal, state and local tax exemptions. This is another time when you may want to seek help from a tax attorney or accountant.
9. Get insurance. Look into the many different insurance policies designed to protect your business, including insurance for general liability, professional liability and malpractice, umbrella liability, business property, business income and extra expense, animal bailee, equipment and commercial automobile coverage. A good insurance broker can help you out here.
10. Keep accurate and complete business records. Generally, the privilege of obtaining a state or local license carries with it the state or locality’s right to audit your business and inspect your records. Additionally, as mentioned above, certain businesses such as commercial dog breeders, animal shelters, pounds and rescues have their own obligations to maintain records and report information. The importance of keeping accurate and complete records cannot be emphasized enough.
Too many people think that they can start out on their own with a business such as dog walking, dog training or animal rescue without following these steps. You can’t just wait until you have a solid clientele base before you worry about setting up and registering your business entity, getting insurance and a business license, and complying with these other requirements. If you lack the resources to comply with these requirements prior to taking on your very first client, you should work for an established company for a while first before you take that leap.
This post is not meant to be a full checklist of everything that is required for your particular business, but it is a great starting point to make sure that you have thought of the most important items to start up and protect your business. Another great resource in thinking through whether you are ready to start your own business is the Virginia Department of Business Assistance’s Business One Stop Service.