Some taxpayers apparently believe that the ability to claim a charitable deduction for donation of an automobile ended on Dec. 31, 2004. The advertisements on the radio would make one believe that nothing has changed, and that you can still claim a deduction for donated automobiles just as before Jan. 1.
As usual, the truth is somewhere between the two. Now the Internal Revenue Service has issued some additional guidance on vehicle donations to help clarify the situation.
American Jobs Creation Act
Concerned that many taxpayers were taking much larger tax deductions for donated automobiles than the amount that the charities were receiving when the cars were sold at auction, Congress changed the rules in the American Jobs Creation Act of 2004.
Under the new law, effective for contributions made after Dec. 31, 2004, the general rule is that the charitable contribution deduction to which a taxpayer is entitled for contribution of an automobile, boat or aircraft valued at more than $500 is limited to the gross sales proceeds obtained by the charity on the sale of the vehicle.
This amount is reported to the taxpayer by the charity in a contemporaneous written acknowledgement, generally no later than 30 days after the charity sells the vehicle.
The new law identified two circumstances in which the old rules for deducting the fair market value of the vehicle would apply. One occurs where the charity retains the vehicle for its own use. The other is where the charity makes significant modifications to the vehicle before sale.
In the former situation, there would be no gross sale proceeds to report. In the latter situation, the gross sales price obtained by the charity would have little relevance to the value of the vehicle in the hands of the donor.
Notice 2005-44
Notice 2005-44, issued June 3, 2005, is the latest guidance from the IRS in the area of charitable donations of vehicles, and the first guidance to try to address directly the new law changes. The guidance adds clarity to the rules in several significant respects.
The notice states that the new gross proceeds limitation is just that: a limitation on fair market value. If fair market value is less than the amount obtained by the charity, the donor is still to use fair market value. This requires the taxpayer to still make a determination of fair market value to ensure that the gross proceeds figure is the lower of the two values and can be claimed as a deduction on the return.
This is admittedly a technicality in most cases, but one that cautions that maintenance records and other evidence of condition should not be discarded immediately.
Notice 2005-44 also adds a new exception to the requirement to use the gross proceeds rather than the fair market value for the deduction. Following the same logic as the exceptions provided in the statute, the guidance adds that if the charity donates the vehicle or sells the vehicle at a nominal value in furtherance of its charitable purposes, the donor can also in that circumstance look to the fair market value, rather than the gross proceeds of sale, to determine the deduction.
While this exception may be of benefit to some particular charities, neither this exception nor the other two exceptions specified in the statute would affect the vast majority of vehicle donations, where the vehicles are sold at auction as rapidly as possible.
The notice discusses what is required for a contemporaneous written acknowledgment and each of the three exceptions, and provides several examples to help clarify the rules. A couple of examples are also included to help taxpayers determine when the value of a vehicle is $500 or less.
Of particular interest here is Example 4, which permits a deduction of $500, even though the gross proceeds of the sale were only $400, where the donor had determined that the fair market value was $800.
This example apparently recognizes that an auction may produce a fire-sale price in some situations that may not be representative of market value. For all but a junker, it also seems to guarantee a minimum charitable deduction of $500 for a vehicle.
Fair market value
The service also seems to be changing somewhat the guidance for determination of fair market value. In Information Release 2004-142, issued on Nov. 30, 2004, in guidance after the passage of the new law but focused on year-end donations before the new law was to become effective, the IRS stated that the donor had to consider a variety of factors in determining fair market value.
Used-car buying guide instructions for adjusting the value of a vehicle for accessories, mileage and other indicators of general condition were mentioned. The IRS stated that donors were too often using the highest value listed in the used-car buyer's guides, rather than considering these other factors.
This latest guidance, however, approaches the issue a little differently. It states that the service and the Treasury Department intend to issue regulations clarifying that the dealer retail value listed in a used-vehicle pricing guide for a particular vehicle is not an acceptable measure of fair market value.
However, it also states that the regulations will clarify that an acceptable measure of the fair market value, for contributions made after June 3, 2005, is an amount not in excess of the price listed in the used-vehicle pricing guide for a private-party sale of a similar vehicle.
The service appears to be almost creating a safe harbor that if the fair market value claimed for the deduction is not above the private-party transaction price for a similar vehicle, the fair market value determination will not be challenged.
The notice goes on to state that the service and the Treasury Department, in formulating regulations, will be looking at other values, such as the dealer trade-in value, but that, until those regulations are issued, the private-party sale value may be relied on.
For taxpayers who are seeking assurance of an acceptable fair market value figure, this latest guidance seems to be providing an easy way to determine that value.
For taxpayers seeking to maximize the fair market value of their particular vehicle, more rigorous proof through appraisals or other documentation will be required. Consistent with the general requirements for charitable contributions of property, qualified appraisals are required for valuations in excess of $5,000.
Transition rules
Until regulations are issued on the subject, donors and donee organizations may generally rely on Notice 2005-44 for guidance on contributions that are made after Jan. 1, 2005.
The requirements imposed on charities for the contemporaneous written acknowledgment document vary for acknowledgements obtained on or before July 3, 2005. Those obtained after that date are to comply with this notice. Those obtained on or before July 3, 2005, need only comply with the statute.
For contributions made on or before Sept. 1, 2005, a written acknowledgment will be considered contemporaneous if obtained by the later of the period specified in the statute or Oct. 1, 2005. Form 1098-C will be created for information reporting to the IRS by the charity, and the notice states that a copy of Form 1098-C may serve as contemporaneous written acknowledgment to the donor.
Tax practitioners should on the whole welcome this new guidance as a flexible interpretation of the new requirements created by the American Jobs Creation Act.
