New Substantiation Rules for Donating Used Vehicles
Pollard, William B., The CPA Journal
Prior to 2005, taxpayers could donate used vehicles (cars and other motor vehicles, including boats and airplanes) to a qualified charity and generally deduct the fair market value of the vehicle donated. Congress found that many charities, however, sold the donated vehicles for considerably less than the values claimed by taxpayers on their tax returns. To remedy this, the American Jobs Creation Act of 2004 added sections 170(0(12) and 6720 to the Internal Revenue Code. The requirements of IRC section 170(f)(12) must be complied with by both the donor and the donee charity for charitable contributions of a used vehicle with a claimed value greater than $500. This new section generally limits the amount of the deduction to the vehicle's actual price when it is sold by the charitable organization.
IRC section 6720 imposes a penalty on charitable organizations that receive contributed vehicles and then either knowingly fail to furnish an acknowledgment at all, or furnish an acknowledgment that is false or fraudulent. Both of these new sections apply to contributions made on or after January 1, 2005. Clarification of these rules, however, was recently issued by the Treasury Department in Notice 2005-44.
IRC Section 170(12)
IRC section 170(f)(12)(A) provides, in part, that no deduction will be allowed for the contribution of a used vehicle, as well as boats and airplanes, but does not include any vehicle primarily held for sale to customers (i.e., inventory or dealer property) with a claimed value in excess of $500, unless the taxpayer substantiates the contribution by a "contemporaneous written acknowledgment of the contribution by the donee organization." [A used vehicle, as defined in section 170(f)(12)(E), is technically a motor vehicle manufactured for use primarily on public streets, roads, and highways, or an airplane or boat.] Furthermore, if the charitable organization then sells the vehicle "without significant intervening use or material improvement of such vehicle by the organization," the deduction cannot exceed the gross proceeds received from the sale.
IRC section 170(f)(12) also provides that the acknowledgment issued by the recipient charitable organization must include the name and taxpayer identification number of the donor and the vehicle identification (or similar) number. Also, if the vehicle is sold without significant intervening use or material improvement, the charitable organization must provide a "contemporaneous" (within 30 days of the sale) certification that the vehicle was sold in an arm's-length transaction between unrelated parties. The charitable organization must state the amount of the gross proceeds from the sale and also provide a statement that the taxpayer's deductible amount cannot exceed the amount of the gross proceeds from the sale. Section 170(f)(12)(B)(iv) specifies that if significant intervening use or material improvements are anticipated by the charitable organization, the organization must issue an acknowledgment that "contemporaneously" [within 30 days of the contribution, according to section 170(f)(12)(C)] certifies the intended use or material improvements as well as the intended duration of the use. The organization must also certify that the vehicle will not be transferred for money, other property, or services before completion of the stated use or improvement. Additionally, IRC sections 170(f)(12)(B)(v) and (vi) require that the acknowledgement state whether any goods or services were provided by the donee organization and that, if so, a description and good-faith estimate of the value of the goods and services provided must be disclosed, including, if appropriate, a statement to the effect that only "intangible religious benefits," as defined in section 170(f)(8)(B)(iii), were involved. IRC section 170(f)(12)(A) mentions that a copy of any acknowledgment furnished by the charitable organization to the taxpayer must be included with the tax return filed by the taxpayer that includes the deduction. …