New Tax Law Changes the Rules for Donations of Automobiles
Garrison, Larry R., Cummings, Richard, The CPA Journal
Due to the increasing number of programs that allow for the donation of used automobiles to charitable organizations, the IRS has become concerned about the misuse of this method of charitable giving. Citing a GAO study, the IRS noted that 733,000 tax returns took charitable contributions for vehicle donations, totaling about $2.5 billion. These deductions reduced the taxpayers' combined tax liability by approximately $654 million (IR-2003-139; Dec. 15,2003). The IRS is concerned about taxpayers deducting fair market values for used vehicles that do not represent the true fair market value of the donation as required by the tax laws. To address this concern, the IRS issued Publications 4302 and 4303, for the charity-donee and taxpayer-donor respectively. In addition, the American Jobs Creation Act of 2004 [P.L. 108-357; amended to IRC at section 170(f)(12)] limits the amount of the allowable deduction to the subsequent sale proceeds of the donated vehicle in certain situations.
Donations "to" a charity. IRC section 170(a)(1) allows for taxpayers to deduct contributions to IRS-recognized charitable organizations. section 170(c) states that a charitable contribution includes a contribution or gift to or for the use of:
* A state or possession of the United States or any subdivisions thereof;
* A corporation, trust, or community chest, fund, or foundation that is situated in the United States, and is organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals;
* A veterans' organization;
* A fraternal organization operating under a lodge system; or
* A cemetery company.
IRS Publication 78, Cumulative List of Organizations (2004), contains a list of organizations that have received tax-exempt status under IRC section 501. Although this publication does not include all qualified charities, particularly churches, synagogues, and other religious institutions, it can help taxpayers determine whether their donation is to a qualified charity.
Donations of used automobiles may seem to be a contribution "for the use of a charitable organization. However, as noted in Davis v. United States [495 US 472 (1990)], a contribution is considered "for the use of a qualified organization if the contribution is held in a legally enforceable trust or similar arrangement. Because the automobile donation will generally not fall under this definition, the donation must qualify under the term "to" the charity rather than "for the use of the charity. Charitable contributions are generally made directly "to" the charitable organizations. Most usedcar donations, however, are through an agent for the charitable organization. This use of agents to receive donations will satisfy the charitable contribution requirements of IRC section 170(c). [See IRC section 170(c)(2); Treasury Regulations section 1.170A-1(b); and Revenue Ruling 85-184, 1985-2 CB 84]
Valuation of the donation. Treasury Regulations section 1.170A-1(c)(1) states that if a charitable contribution is in the form of property rather than cash, the amount of the donation is the fair market value of the property at the time of the contribution. [See also IRC section 170(e)(1) and (e)(3) and Treasury Regulations section 1.170A-4(a) and 1.170A-4A(c) for possible reductions in value for certain property.] The general definition for fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts [Treasury Regulations section 1.170A-1(c)(2); see also IRS Publication 561, Determining the Value of Donated Property].
To determine the value of a used-car donation, common practice is to refer to a used-car pricing guide. The highest value in the pricing guide may not, however, be representative of the value of the taxpayer's automobile. …