In my last column, I wrote about contributing old clothes and household items to charity. Some people give away more than that: they give away cars. No, I’m not talking about Oprah Winfrey and her product-placement Pontiac publicity stunt. I’m talking old cars, what I call “vintage actormobiles” if I’m being polite.

Sooner or later, you have to get rid of an old car. With gas now over $3 a gallon, many people seem to be saying “sooner.” If the car still has significant value, people will typically sell it or use it as a trade-in. But these old cars often are very high mileage, or have beat-up bodies or shabby interiors, making them tough to sell. Those which still run well are often passed around within extended family, as the perfect first car for that college-age niece or nephew.

Maybe you don’t have that niece or nephew, or maybe the car is truly on its last legs, or maybe it’s okay but you have neither the time nor the shamelessness to advertise and sell it. That leaves two choices. You can call a junkyard, which will come get it and pay you a pittance. Or you can give it to charity.

Why Do It?

Many people choose the charity route. For some, there is an emotional component to the choice, a reluctance to face the reality that an old and faithful friend is scrap metal; the contribution allows at least the illusion it will be further used. But for most who give cars away, it is all about the charitable contribution deduction.

Until the beginning of this year, you were allowed a deduction merely based on the fair market value of the car at the time you made the contribution. Since you were not actually selling, the car’s fair market value would be estimated, typically using one of two well-known online databases to establish “blue book” value. These sites will give you a variety of values, depending on the car’s condition, and on whether you are looking for a private sale or the price on a used-car dealer’s lot. I just tested my own old car on one of these sites. The listed dealer retail value is exactly twice what the site shows for a private sale in my car’s actual condition.

Guess which price most people formerly used for their contribution deduction.

The Ugly Reality

Use of inflated values was an open secret for many years; I first wrote about it in PerformInk six years ago. Not quite as well-known was the fact that many charities with car donation programs were little more than fronts for used car wholesalers and junkyards. The charity’s share was, effectively, a small finder’s fee per vehicle.

Eventually there was enough publicity in major media that Congress took action last year to reform the process. Like many legislative efforts at correcting perceived abuses, it is complex, overly specific, requires lots of record keeping, and only partially works.

The new rules start by distinguishing contributions in which the car is going to be used by the charity from those in which it is to be sold as a fundraising device. In the former case, the fair market value deduction rule still applies. But if the vehicle is sold (and most are), the deduction is only the charity’s actual sale proceeds. That amount will almost certainly be less than the “blue book” value, if for no other reason because saleable cars are typically sent to the wholesale auction rather than being sold one-by-one.

And oh, the paperwork! Charities must already give any donor of $250 or more an acknowledgment letter, stating the amount of cash, a description (but not value) of non-cash contributions, whether the organization provided any goods or services in exchange for the contribution, and if so, the value of those goods or services.

Now, new elements are added for a car donation. The acknowledgment must include the donor’s name and Social Security number and the car’s vehicle identification number. If the organization is going to use the car, it must certify how it plans to use it and for how long, and certify that it will not be transferred for money or other consideration till the end of that use. If, instead, the car is sold, the charity must certify the amount it received and include a statement that the donor’s deduction cannot exceed that sum.

All these certifications have to be done within 30 days of the contribution, if kept, or 30 days of the sale, if sold. And the charity’s acknowledgment must be attached to the donor’s tax return.

Did Anything Change?

The goal of all this activity was to ensure that the donor’s contribution deduction really reflects the benefit to the charity, and to prevent gimmickry that would permit inflated values to creep through. There are complex provisions, for example, addressing the question of “just how long must a charity use the car to avoid the sales-price limit?” Similarly, the requirement that the sale be to an unrelated party in an “arms-length” transaction was intended to prevent friendly sales at inflated prices, with the excess returned though fees or other forms of quid pro quo.

I also suspect that many in Congress thought, or hoped, that the restrictions and rigmarole would put an end to car donation programs. That has not happened. Some of the smaller and marginal players are gone, but many other organizations still regularly advertise their programs on radio and in print. So obviously, something worthwhile is still there—at least for some donors and some charities.

Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He has also been known to produce theatre.

Home

Taxes Archives