|
Vehicle Donation Program
Reforms
Vehicle Donations Guidance
I. Introduction
On June 3, 2005, the IRS released a notice (2005-44) (PDF) explaining the new interim vehicle donation rules implementing changes enacted in October 2004 as part of the American Jobs Creation Act (AJCA). In general, the ACJA limits deductions for vehicle donations of over $500 to the sale price obtained by the charity. However, in some limited circumstances set out in the interim guidance, the donor may claim fair market value for which the interim guidance provides a method of determining. It also includes guidance on acknowledgements that charities must provide to donors, and on the new penalties imposed on organizations that provide false or inadequate acknowledgments.
|
|
|
The notice invites public comment and suggestions for future guidance. Specific comments are requested on which markets are appropriate for measuring the fair market value of vehicles. Comments are due by September 1, 2005. The rules provided in the interim guidance will apply until final regulations become effective. The IRS will be issuing a new Form 1098-C for charities to report to the IRS the same information they provide to donors in the acknowledgments. The IRS plans to issue separate guidance to address the time and manner of reporting.
II. Overview of the Vehicle Donations Law
Under the ACJA, claimed deductions for donated motor vehicles, boats, and airplanes of over $500 will be disallowed unless the taxpayer files with his/her tax return a written acknowledgement from the charity. If the charity sells the vehicle without any significant intervening use or material improvement, the taxpayer’s deductions will be limited to the gross proceeds from the sale. Within 30 days* of the sale, the charity must provide the taxpayer with an acknowledgment including:
• the name and taxpayer identification number of the donor;
• the vehicle identification number;
• the date of the sale;
• the sale price;
• certification that the vehicle was sold at “arms length” between unrelated parties; and,
• a statement that the deductible amount may not exceed the gross proceeds of the sale.
If the charity intends to use or improve the vehicle, it must also provide the donor with an acknowledgment within 30 days* of the donation including a detailed description of the intended use or improvement and a certification that the vehicle will not be sold before the use or improvement is completed.
In addition to mandating that the IRS issue regulations or other guidance, the law gave the IRS discretionary authority (which the Service exercised in the interim guidance) to issue regulations or other guidance to exempt sales which are in direct furtherance of an organization's charitable purpose from the requirements that limit the deduction to the gross proceeds from the sale.
III. Substantive Provisions of Interim Guidance
The interim guidance provides clarification on the three exceptions in which a donor may claim “fair market value” for the donation of a vehicle with a claimed value of over $500: 1) significant intervening use, 2) material improvement, and 3) “in furtherance of an organization’s charitable purpose.” For each of these exceptions, the donor must substantiate fair market value according to temporary rules described below. Further, the interim guidance provides a method for determining “fair market value.”
1) Significant Intervening Use
To constitute a significant intervening use, a charity must actually use the donated vehicle to substantially further the charity’s regularly conducted activities. The use must be more than incidental to qualify. The notice provides the following as acceptable examples: 1) use of a vehicle to deliver meals every day for one year; 2) driving the donated vehicle in charitable activities at least 10,000 miles over the course of a year.
2) Material Improvements
Material improvements include major repairs that significantly increase the value of a vehicle. The improvement may not be funded by the donor of the vehicle. Routine cleaning, painting and minor repairs will not be considered material improvements.
3) In Furtherance of Charitable Purpose
With this guidance, the IRS exercised its discretionary authority to exempt sales that are in direct furtherance of the organization’s charitable purpose. Relying on language from the Conference Report for the AJCA, the notice limits the exemption to sales to a needy individual at a price significantly below fair market value, or transferred for free, in direct furtherance of a charitable purpose of relieving the poor. The IRS guidance clarifies that merely applying the proceeds of a sale to any charitable purpose will not qualify the sale for the exemption.
Acknowledgement Requirements
The charity must provide the donor with an acknowledgment within 30 days* of the donation including the taxpayer’s name and tax identification number, the vehicle identification number, and a certification that the organization will sell the vehicle to a needy person, at a price significantly below market price, or transfer it for free, and, as appropriate, that it will be in direct furtherance of the organization’s charitable purpose of aiding the poor.
Penalties
The law provides two different penalties for organizations that knowingly provide false or fraudulent acknowledgments or knowingly fail to provide an acknowledgment, depending on whether the vehicle was sold or whether it was used or improved by the charity or sold to a needy person. For vehicles sold by the charity (except to needy persons) the applicable penalty is the greater of: 1) the product of the highest rate of income tax (currently 35%) and the sales price stated on the acknowledgment, or 2) the gross proceeds from the sale. For all other acknowledgments (e.g., for vehicles used by the charity or sold to needy persons), the applicable penalty is the greater of: 1) the product of the highest income tax rate and the claimed value of the vehicle, or 2) $5,000. The guidance adds that an acknowledgment will be presumed to be false or fraudulent in the latter case if it is sold to a buyer other than a needy individual, without a significant intervening use, or material improvement within six months of the donation.
Fair Market Value – Method of Determining
For donations made after June 3, 2005, and before the final regulations become effective, the IRS will consider an acceptable measure of fair market value an amount not in excess of the price listed in a used vehicle pricing guide for a private party sale of a similar vehicle. The IRS intends to issue regulations clarifying that the dealer retail value listed in a used vehicle pricing guide of a particular vehicle is not an acceptable measure of fair market value, for purposes of charitable deductions. The IRS is considering whether other values, such as the dealer trade-in value, are appropriate measures, and specifically requests comments on this issue.
Sale of Vehicle Yields Gross Proceeds of $500 or Less
If a donated vehicle is sold (other than to a needy person) for $500 or less, the donor may deduct the lesser of fair market value or $500. The donor must substantiate the fair market value following the temporary regulations described below. For a donated vehicle of a claimed value of more than $250 and less than $500, general substantiation rules requiring written acknowledgement apply. (See IRS Publication 1771 (PDF) for general rules on written acknowledgments for charitable gifts.)
*The IRS will initially allow an extension of time for charities to furnish and donors to obtain acknowledgments. For vehicle donations made on or before September 1, 2005, donors may obtain written acknowledgments on or before October 1, 2005.
Last updated:
June 10, 2005
-Top of Page-
|
Copyright ©
2004 Independent Sector. All Rights Reserved.
