IRS approves car-donation program.

In Letter Ruling 200230005, the IRS finally provided guidance on how to structure a car-donation program. In recent years, a deluge of radio and television advertisements from various organizations has pleaded for donations of used cars, boats, trailers and other items, typically claiming that taxpayers can deduct the item's "full market value." They even promise free towing if the item is not in operating condition.

This flood of advertising has not gone unnoticed. The IRS has issued a number of warnings in recent years (for example, to charities incorrectly implying that a donor can deduct "blue book" value for a car that is not running). It has also noted that in some charitable-giving programs, vehicles go directly to a car dealer; the charity never really takes title or bears any risk of loss. While many organizations have started programs, others may have shied away from the idea due to the Service's concerns.

Program Structure

The ruling was issued to a charity formed to find a cure for certain illnesses. The charity operates through local chapters, but the car-donation program is in the parent's name. It proposes to sign an agency agreement with a limited liability company (LLC) registered as a charitable fundraiser, which buys, stores, maintains, dismantles and sells used motor vehicles, vessels and other personality. An individual and his controlled corporation own the LLC. The charity has no other connection to these parties.

Under the agreement, the LLC will be the charity's agent, acting in the charity's name and subject to its review and approval. It will establish a toll-free telephone number, advertise for car donations, pick up the donated items, arrange for qualified appraisals (if needed), process, repair and sell the vehicles and do whatever necessary to accomplish transactions. It will pay all program costs, including repairing or maintaining the vehicles and selling or disposing of them under its own discretion (i.e., to sell, scrap or auction them).

The LLC will receive a percentage of the sales proceeds. The charity will be the equitable owner of the vehicles until sold, and will bear the risk of accidental loss, damage or destruction.

The LLC will provide the donor with a blue-book printout, along with a disclosure that "the printout does not in any way represent" the LLC's or the charity's opinion as to value. Donors will sign a certificate of donation and other paperwork needed to transfer title. The LLC will send the donor a thank-you letter and an official receipt from the charity.

The LLC will also process all required Department of Motor Vehicles paperwork under a power of attorney from the charity. If a donor needs an appraisal (i.e., if the value of the vehicle exceeds $5,000), the LLC will arrange for an unaffiliated appraiser at the donor's expense. The LLC will sign Form 8283, Noncash Charitable Contributions, acknowledging receipt of the property.

IRS Analysis

In the ruling, the IRS considered whether:

1. The donations would qualify as charitable contributions;

2. The program would adversely affect the charity's Sec. 501 (c)(3) status; and

3. The income would be subject to unrelated business income (UBI) tax.

The Service reached favorable determinations, noting that the donations qualify as charitable contributions and that the LLC is clearly acting as the charity's agent, as long as the program operates in accordance with the agreement. This would entail that (1) the charity direct and control the LLC's conduct, (2) the charity own the property until the LLC disposes of it, (3) the LLC provide regular reports to the charity on finances and advertising and (4) the charity has the right to audit and inspect the LLC's records.

The IRS concluded that the thank-you letter, subject to minor revisions, complied with the tax rules for substantiation of charitable contributions. It also held that the LLC could properly sign Form 8283 on the charity's behalf.

As structured, the program will not jeopardize the charity's Sec. 501(c)(3) status. This hinges on whether the LLC's contingent compensation "inured to the benefit of a private individual or shareholder" or constituted a substantial private benefit. Violation of either of these rules can cost the charity its exemption.

The IRS noted that contingent compensation could create a conflict of interest between an organization and a service provider. However, in this case, the agreement was negotiated at arm's length and serves as a real and discernable business for the charity. The compensation depends on accomplishment of the agreement's objectives, not on the charity's other incoming revenues. Finally, there was no evidence of abuse by the LLC or unwarranted benefits going to it or its owners. Thus, the Service found that there was no inurement to the LLC. In considering the private benefit, it focused again on the arm's-length negotiations and that no other relationships existed between the parties. Thus, any private benefit was incidental.

Finally, the ruling concluded that the program would not be an unrelated trade or business. Under Sec. 513(a)(3), a business that sells merchandise received as gifts is excluded from the definition of trade or business. As all of the vehicles sold are to be donated to the charity, the sales program will not generate UBI.

The IRS did not really comment on the valuation of the cars. The ruling mentions the disclaimer that the charity includes when it provides the bluebook valuation. Such a valuation assumes the vehicle is in good operating condition. If it is damaged or otherwise does not function well, the value should be less than the blue-book value. The IRS did not impose any requirement on the charity or the LLC to validate the valuation claimed.

Charities are required to file Form 8282, Donee Information Return (Sale, Exchange or Other Disposition of Donated Property), if they dispose of the property within two years and if the donation was valued at more than $5,000 and acknowledged on Form 8283. (This will always be the case with vehicle-donation programs.) The charity has to file Form 8282 within 125 days of disposing of the property, and send copies to the IRS Service Center (in Ogden, UT) and to the original donor, letting the IRS know how much the charity received for a car originally valued at more than $5,000. If the donor valued a car at less than that, and, thus, did not need an appraisal, the charity apparently has no burden to notify the donor of the sale price when it disposes of the vehicle.

FROM HARVEY BERGER, VIENNA, VA