New valuation rules apply to the charitable donations of vehicles.

Any charity which issues written acknowledgment of amounts greater than the actual auction price received will be subject to penalties under Sections 6701 and 6720. Generally, Section 6720 assesses penalties equal to the higher of (1) the product of the highest current individual tax rate (35%) times the stated sales price on the acknowledgment, or (2) the gross proceeds from the sale of the donated vehicle. For other vehicles, with a claimed value of higher than $500, which are not actually sold but where a false acknowledgement is issued by the donee charity, the penalty is the higher of (1) the product of the highest current individual tax rate (35%) times the claimed value or (2) $5000. (14)

Examples

The following examples illustrate application of the new rules:

Example 1 -- The C Charity uses a for-profit entity to solicit, process, and accept donated vehicles and act as its authorized agent. (15) Ted, an individual, donates his 2000 Toyota Camry CE sedan to the agent in October 2006. The Kelley blue book suggested retail value for a similar auto in the same condition and sold in the same area is listed at $8,400, and the Kelley blue book private party value is $5,400. The auto is auctioned in November 2006 for a gross amount of $4,000 by the for-profit agent, with a portion of the proceeds going to the agent. The agent issues Ted a written acknowledgment indicating the gross sales proceeds and date of sale within 30 days of the sale.

Since the donee clearly did not significantly use, materially improve, or sell or give the auto to a needy individual in furtherance of its charitable purpose, Ted is limited to a deduction of $4,000 for the 2006 tax year.

If, however, the charity had significantly used the auto for its charitable purpose, made material improvements to the auto that significantly increased its value, or gave or sold it for a price significantly below fair market value to a needy individual, Ted could have taken a deduction of $5,400 based on the FMV of the vehicle as determined by the private party value.

Example 2 -- Assume that in order to entice Ted to donate his auto, the agent promised to issue a written acknowledgement to Ted indicating a gross proceeds sales price equal to the blue book retail value of $8,400, instead of the actual auctioned price of $4,000. Under Section 6720, C Charity may be subject to a penalty of $4,000. The penalty is calculated as the higher of the claimed deduction times the highest individual rate (i.e., $8,400 x 35% = $2,940) or the gross proceeds ($4,000).

Example 3 -- Assume C Charity makes a false statement indicating that it will use the auto for its charitable needs for an extended period of time and Ted deducts the fair market value of $5,400. C Charity may be subject to a penalty of $5,000, the higher of the claimed deduction times the highest individual rate (i.e., $5,400 x 35% = $1,890) or the gross proceeds or $5,000.

Additional Considerations

It should be noted that trouble may arise if the donated vehicle is not sold in the year of contribution. Taxpayers are allowed a deduction only in the year of donation and only when written acknowledgment is attached to their return. Accordingly, where a donated vehicle is sold by the charity in a year subsequent to the year of donation, the taxpayer may have to file an amended return to properly claim the deduction. (16)

The IRS has released two publications to assist taxpayers: Publication 4302, A Charity's Guide to Car Donations, and Publication 4303, A Donor's Guide to Car Donations. As indicated above, a higher deduction will be available to taxpayers where any one of the three noted exceptions applies which will result in the fair market value of the donated vehicle to be utilized. Since most charities merely have their agent auction off donated vehicles, whenever a taxpayer has a fairly attractive vehicle to donate, it should be given on the condition that it will either be put to significant intervening use by the charity, materially improved, or sold or gratuitously transferred to a needy individual. This will allow for a charitable contribution deduction equal to the fair market value, which will normally be significantly higher than the gross proceeds from an auction. However, this fair market value may not be the retail value indicated in a pricing guide since it will be limited to no more than the private party value. Accordingly, a thorough search of potential charities should be made before donating your vehicle.

Endnotes

(1) American Jobs Creation Act of 2004, P.L. No. 108-357, [section] 884.

(2) Unless otherwise noted, all section references are to the Internal Revenue Code of 1986, as amended.

(3) Treas. Reg. [section] 1.170A-1(c)(1).

(4) IRC [section] 170(f)(12)(A)(ii).

(5) IRC [section] 170(f)(12)(C); Notice 2005-44, 2005-25 I.R.B. 1287, [section] 3.03.

(6) IRC [section] 170(f)(12)(B); Notice 2005-44, [section] 3.03(1).

(7) IRC [section] 170(f)(12)(B)(iii); Notice 2005-44, [section] 3.03(2).

(8) Notice 2005-44, [section] 7.01(1).

(9) Id. at [section] 7.01(2).

(10) Id. at [section][section] 7.01(3) and 3.02(3).

(11) IRS News Release, IR-2005-145, December 20, 2005.

(12) Treas. Reg. [section] 1.170A-1(c)(2).

(13) IRC [section] 170(f)(12)(B)(iv); Notice 2005-44, [section] 3.03(3).

(14) IRC [section] 6720; Notice 2005-44, [section] 7.03.

(15) Pursuant to Revenue Ruling 2002-67, a transfer to a charity's authorized agent may be treated as a transfer to the charity, who may provide contemporaneous written acknowledgements on behalf of the charity.

(16) IRS News Release, IR-2005-149, December 22, 2005.

Richard Lai, The Peter J. Tobin College of Business, St. John's University

Laura Lee Mannino, The Peter J. Tobin College of Business, St. John's University