he IRS is always on the lookout for areas in which taxpayers are involved in what it feels are questionable practices, where it believes that legitimate deductions are being abused. One such area that has come onto the service’s radar screen involves used-automobile donations. Many charitable organizations have made a practice of accepting donations of taxpayers’ used cars. Some taxpayers then have claimed deductions for the cars’ retail values, which is typically much more than their actual fair market value.
Section 170(f)(12). To combat this practice, in 2004 Congress added section 170(f)(12) to the Internal Revenue Code. For any used vehicle with a claimed value of more than $500 donated after January 1, 2005, the provision limits a donor’s deduction to the actual gross proceeds from the car’s sale by the charity. In addition, the charity must provide the donor with a written contemporaneous acknowledgment of the donation within 30 days of the date of donation or disposition of the vehicle (which the donor then must attach to his or her tax return). The acknowledgment must include the donor’s name and taxpayer identification number (typically, his or her Social Security number), the vehicle identification number, a statement certifying that the car was sold in an arm’s-length transaction, the amount of gross proceeds from the sale and a statement that the donor may not deduct more than the gross proceeds from the sale.
Exceptions. There are several exceptions to the “gross proceeds” limitation. A taxpayer may deduct the fair market value of an auto if the charity intends to make “significant intervening use of” or “material improvement to” the car. The significant intervening use must be considerable and must be for the purpose of substantially furthering the organization’s regularly conducted activities. Material improvement is defined as a major repair or improvement that improves the condition of the vehicle and significantly increases its value; cleaning, minor repairs and routine maintenance will not qualify.
Sales to needy individuals. There is one other exception to the gross proceeds limitation. Taxpayers may take a deduction for the fair market value of a vehicle if the charity sells it at a price significantly below fair market value, or gratuitously transfers the vehicle, to a needy individual in furtherance of the donee organization’s charitable purpose of relieving the poor and distressed or the underprivileged in need of transportation. This exception has led to another perceived abuse, however. Some charities have sold donated autos at auction and claimed that the sales were to needy individuals at prices significantly below fair market value, thereby providing the donor with a much higher donation amount.
The IRS has warned taxpayers that it will not recognize such deductions: Vehicles sold at auction will not qualify under this exception, and the IRS will not accept an acknowledgment from the charity stating that the vehicle was sold to a needy individual. Rather, in such cases, the donor may claim a deduction of more than $500 only to the extent that the gross proceeds from the sale exceed that amount and the donor substantiates the contribution with an acknowledgment from the charity that shows the gross proceeds from the sale. Any organization that provides acknowledgments showing anything other than gross proceeds from the sale may be subject to penalties.
For more information, see Tax Clinic, “IRS Tightens Vehicle Donation Rules,” by Jeffrey Hamm, PhD, in the June 2006 issue of The Tax Adviser.
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