By George G. Jones and Mark A. Luscombe
The Internal Revenue Service continues to step up its campaign against abuses in vehicle donation programs. At the same time, vehicle donations are at an all time high. What advice can be given to charities that want to get in on the profits and to individuals who want to donate in whole or in part to be entitled to a charitable deduction?
Aggressive positions by some donors and charities, unfortunately, have raised the chances of audits, assessments and penalties for all.
For donors, what this means is that, if audited, the taxpayer must be prepared to prove other than “clunker value.” For charities, it means performing due diligence in making certain that a vehicle donation program does not become an end in itself, rather than a means toward its charitable goals.
As the IRS diplomatically put it in IR-2004-84, “The number of car donation programs has increased dramatically. This growth, however, has taken place without taxpayers and charities always understanding their obligations under tax law.”
Caution. There is a major change in the wind. Both the House and Senate versions of the FCS/ETI bills, which likely will pass this year, include a provision designed to control overvaluation of donated vehicles.
The House bill would require a qualified appraisal for deductions of more than $250. The Senate bill applies to all deductions over $500 and limits the amount of the deduction to the eventual gross proceeds received and reported by the charity selling to vehicle.
The latter amount ordinarily would prove to be even less than fair market value. At present, the House provision would apply to donations made after June 3, 2004, while the Senate bill would apply to post-June 30, 2004, donations.
GAO report arouses suspicions
The General Accounting Office recently did an in-depth study of vehicle donation programs, “Vehicle Donations: Benefits to Charities and Donors, but Limited Program Oversight” (December 2003). That report has fueled much of the recent attention, both at the IRS and in Congress.
The GAO valued donations of used vehicles at $2.5 billion in 2000, the year studied by the report. They reduced 733,000 taxpayers’ total tax liability by about $650 million. Speculation is that those figures may have doubled over the past few years. The provisions before Congress on vehicle donations are conservatively estimated to save about $3.5 billion in revenues over the next 10 years.
The GAO report concluded that many taxpayers overstate the value of their used cars and trucks. Advertisements also contribute to the problem, fueling inflated expectations of the right to take “blue book” value for the deduction. Most charities take vehicles that don’t even run, towing all vehicles away for safety and liability reasons. “Blue book” value is not automatically the amount of a client’s deduction. The IRS will only allow a deduction for the fair market value of the vehicle.
The condition of the vehicle is just one component of calculating fair value. Taxpayers also need to consider mileage and the market for their vehicle. The price that the car or truck could fetch in a metropolitan area may be significantly higher than in a rural area.
IRS education and warnings
Late last month, the IRS announced the release of two new publications on car donations. IRS Publication 4302, A Charity’s Guide to Car Donations, and IRS Publication 4303, A Donor’s Guide to Car Donations. “We want people and charities to make sure they are taking the proper steps involving vehicle donations,” advised IRS Commissioner Mark W. Everson in an accompanying statement.
IRS Publication 4303. In this new publication, the IRS reminds individuals that their donations must be made to qualified organizations to be tax deductible. To verify that an organization is qualified to receive tax-deductible contributions, taxpayers are urged to review IRS Publication 78, Cumulative List of Organizations, which is available on the IRS’s Web site at www.irs.gov, or call the IRS Customer Account Service Division for Tax Exempt and Government Entities at (877) 829-5500 (toll free).
Pub. 4303 also issues on non-confrontational but firm statement on valuation: “A used car guide may be a good starting point to value [a vehicle], but you should exercise caution. The IRS will only allow a deduction for the fair market value of the car, which may be substantially less than the ‘blue book’ value.”
IRS Publication 4302. This publication describes four common charities with car donation programs:
- Charities that use donated cars in their charitable programs;
- Charities that sell donated cars and use the proceeds in their charitable programs;
- Charities that hire a private or for-profit entity as an agent to operate the care donation program; and,
- Charities that authorize a for-profit entity to use their name for the purpose of soliciting car donations.
In the fourth type of program, the publication explains that because there is no agency relationship between the charity and the for-profit entity, donors’ contributions are made to the for-profit entity and are not treated as having been made to the charity.Presumed a clunker?
Potential donors who are able to get close to full market value for their vehicle and have a tax advisor at hand should prefer getting that value from a dealer trade-in or a private sale. The cash proceeds can then be donated to the charity, removing the issue of overvaluation entirely.
However, three factors mitigate against the suspicion that no vehicle in decent shape is donated to charity:
- The potential donor may feel that the dealer is low-balling the trade-in price to make a better overall profit; and on principle, the donor would rather pass along any savings to a charity.
- A private sale involves “hassles” that some affluent individuals don’t want to deal with at any cost.
- A donor may see no need to consult with a tax advisor, innocently believing that no issue of deceit could be involved.
Nevertheless, the IRS seems to be figuring that there are too many car donations that are overvalued, especially considering the findings of the GAO report. Since the burden is on the taxpayer to prove the value of a charitable deduction, those who are audited likely will be held strictly to that burden.Marshalling proper proof
Keeping in mind the changes in the appraisal requirements now before Congress, the current rules for charitable deductions of property follow the following donation levels:
Any size: A taxpayer who contributes property to a charitable organization must maintain reliable written records for each item of property donated, specifying the donee organization’s name and address, the date and location of the contribution, the description of the property, its fair market value, and the method used to determine that value.
$250 to $500: No deduction is allowed for charitable contributions of property valued at $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment from the donee organization. However, the charity is not required to value the property it receives from the taxpayer.
Greater than $500 to $5,000: In addition to the information required for claimed deductions of property of $500 or less, a contribution of property valued at more than $500 requires the reporting of the manner and approximate date of acquisition of the property by the taxpayer and its adjusted basis. Form 8283, Noncash Charitable Contributions, which reports information satisfying the written record maintenance requirement, must be attached to the taxpayer’s return.
Greater than $5,000: In claiming a deduction for more than $5,000 for property, the donor must obtain a qualified appraisal and fill in the appraisal summary on Form 8283, Noncash Charitable Contributions, Part B. A “qualified appraiser” either holds himself out to the public as an appraiser or performs appraisals on a regular basis, and is qualified to make appraisals of the type of property being valued.
Caution. The claimed value of an item of property is the aggregate claimed or reported value of the item of property and all other similar items of property for which charitable deductions are claimed or reported by the same donor for the same tax year. Thus, the donor who contributes two used vehicles in the same tax year must get a qualified appraisal for each if the deduction claimed for both adds up to more than $5,000.
Special FMV considerations
Calculating the fair value will need to be a collaborative process with some clients, especially those with a pre-conceived value in their heads. Document all of the factors used in calculating FMV, such as condition, mileage, marketability and comparable sales.
If audited, the IRS is not going to accept without question the full “blue book” value. Maintenance records, verifiable photographs, vehicle inspection receipts and the like can help in the inevitable negotiations.
The abuses surrounding vehicle donations appear to be drawing to a close. Those taxpayers who have been generous to themselves in valuing vehicle donations in the past probably should not dispose of vehicle repair or inspection reports, or even photographs taken near the time of donation in which the vehicle appears. If those records indicate a valuation within the realm of reason, probably no amended return is needed.
For vehicle donations this year, a cautious approach may be advised. Getting a qualified appraisal now makes good sense, especially if the vehicle is in exceptionally good shape. Insurance agents usually can recommend a qualified adjuster who may do appraisals as a side business. Full-time valuation experts are also available.
The additional fee may be worthwhile, especially in light of the proposed retroactive valuation provisions now before Congress. While fees paid to an appraiser are not deductible as charitable contributions, they do qualify as deductible expenses paid in connection with the determination of the donor’s income tax liability.
George G. Jones, J.D., LL.M., is the managing editor of Federal and State Tax, and Mark A. Luscombe, J.D., LL.M., CPA, is the principal analyst of Federal and State Tax, at CCH Inc., in Riverwoods, Ill.
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