IRS tightens vehicle donation rules.

Congress overhauled the vehicle donation rules in 2004 to curb potential taxpayer abuse as publicized in a study titled Vehicle Donations: Benefits to Charities and Donors (Government Accounting Office, 2003). Taxpayers often use the retail values listed in used-vehicle pricing guides to determine the fair market value (FMV) of their donations.

Section 884 of the American Jobs Creation Act of 2004 (AJCA) added Sec. 170(f)(12) to the Code, applicable to donations of used vehicles after Jan. 1, 2005. Sec. 170(f)(12) generally limits the donor's tax deduction for donations of used vehicles with a claimed value in excess of $500 to an amount equal to the actual gross proceeds from the sale of the vehicle by the donee organization. The donee organization has to provide the donor with a contemporaneous written acknowledgement of the donation within 30 days of the date of donation or disposition of the vehicle.

Example 1: On Oct. 1,2005,A contributes a qualified vehicle with a FMV of $1,300 to O, a Sec. 170(c) organization. On Dec. 1, 2005, the qualified vehicle is sold for $1,000. On or before Dec. 31, 2005, O must provide an acknowledgement to A, containing A's name and taxpayer identification number (TIN), the vehicle identification number (VIN), a statement that the date of the contribution was Oct. 1, 2005, a statement that the date of the sale was Dec. 1, 2005, a certification that the qualified vehicle was sold in an arm's-length transaction between unrelated parties, a statement that the gross proceeds of the sale were $1,000 and a statement that the amount of A's deduction may not exceed the gross proceeds.

To claim a charitable contribution, a donor must attach the written acknowledgement to his or her tax return. The AJCA also added Sec. 6720, which imposes penalties on the donee organization for furnishing false or fraudulent written acknowledgements or failing to furnish a written acknowledgement.

Notice 2005-44

Two exceptions to the gross proceeds limit are described in Notice 2005-44. Section 3.02(2) permits a taxpayer to claim a deduction not to exceed the vehicle's FMV if the charity intends to make "significant intervening use of or material improvement to" the vehicle. Section 7.01(1) defines significant intervening use as more than incidental use and for the purpose of furthering the organization's regularly conducted activities. Section 7.01(2) defines material improvement as a major repair or improvement that improves the condition of the vehicle and significantly increases its value; minor repairs and maintenance are not considered material improvements.

Example 2: On Oct. 1,2005, B contributes a qualified vehicle to O, a Sec. 170(c) organization. O intends to use the vehicle in its charitable activities, and the intended use is a significant intervening use within the meaning of Section 7.01(1). On or before Oct. 31,2005, O must provide an acknowledgement to B containing B's name and TIN, the VIN, a statement that the date of the contribution was Oct. 1,2005, a certification stating that 0 intends to make a significant intervening use of the qualified vehicle, and also stating the duration of the use, a detailed description of the significant intervening use and a certification that the qualified vehicle will not be transferred in exchange for money, other property or services before completion of the use by O.

Section 3.02(4) permits a deduction not to exceed the vehicle's FMV if the charity sells the vehicle at a price significantly below that value or gratuitously transfers the vehicle to a needy individual in direct furtherance of the donee organization's charitable purpose of relieving the poor and distressed or the underprivileged who are in need of transportation.

Example 3: On Oct. 1,2005, C contributes a qualified vehicle to O, a Sec. 170(c) organization. O's charitable purposes include helping needy individuals who are unemployed to develop new job skills, finding job placements for the individuals and providing transportation for these individuals who need a means of transportation to jobs in areas not served by public transportation. O determines that, in direct furtherance of its charitable purpose, it will sell the qualified vehicle at a price significantly below FMV to a trainee who needs transportation to a new workplace. On or before Oct. 31, 2005, O must provide an acknowledgement to C containing C's name and TIN, the VIN, a statement that the date of the contribution was Oct, 1,2005, a certification stating that O will sell the qualified vehicle to a needy individual at a price significantly below FMV, and a certification that the sale is in direct furtherance of O's charitable purpose.

Under these two exceptions, it is appropriate for the donated vehicle's FMV to be determined as described in Section 5 of Notice 2005-44. FMV is the price at which the used vehicle would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and each having reasonable knowledge of relevant facts. A reasonable method of determining the FMV of a used vehicle is through an established used-vehicle pricing guide, taking into account factors such as make, model, year, sales in the same area, vehicles in similar condition, similar options or accessories, and the same warranties or guarantees as the donated vehicle.

Section 6 requires a qualified appraisal for deductions for the donation of used vehicles whose value exceeds $5,000. As described in Section 8.03, Form 1098-C, Contribution of Motor Vehicles, Boats, and Airplanes, is to be used for reporting information to the IRS, and a copy of Form 1098-C may also be used to provide written acknowledgement to the donor.

The IRS intends to issue regulations effective for donations of used vehicles after June 3, 2005 that may impose less generous pricing guidelines for these two exceptions. The rules of Notice 2005-44 apply until regulations are effective.

IR-2005-145

According to News Release 2005-145, the IRS will not recognize certain deductions related to donated vehicles sold at auctions. A donee organization that sells a donated vehicle at auction and claims the sale was to a needy individual at a price significantly below FMV does not trigger an exception to the general rule that the deduction allowed is limited to the gross proceeds from the sale. The IRS's position is that vehicles sold at auction are sold at FMV. Donee organizations selling vehicles at auction and providing written acknowledgments to donors indicating anything other than the gross proceeds from the sale may be subject to penalties under Secs. 6701 and 6720.

Notice 2006-1

This notice complements Notice 2005-44 and provides guidance on reporting requirements that apply to donee organizations receiving a contribution of a qualified vehicle, after 2004, with a claimed value in excess of $500. Section 2 states that Form 1098-C will be revised for the technical amendment to Section 884 of the AJCA contained in the Gulf Opportunity Zone Act of 2005 (GO Zone Act). Section 403(gg) of the GO Zone Act added Sec. 170(f)(12)(B)(v) and (vi). Sec. 170(f) (12)(B)(v) requires the contemporaneous written acknowledgment to include information on whether the donee organization provided any goods or services in consideration for the vehicle. Sec. 170(f)(12)(B)(vi) requires the contemporaneous written acknowledgement to contain a description and estimate of the value of any goods and services provided in clause (v).

Section 3 requires donee organizations to report the information provided in the contemporaneous written acknowledgements to the IRS by February 28 of the year following the year in which the donee organization provided an acknowledgment to the donor. The deadline is extended to March 31 of the year following the year in which the donee organization provided an acknowledgment to the donor if the donee organization is filing electronically.

FROM JEFFREY L. HAMM, UNIVERSITY OF ARKANSAS AT LITTLE ROCK, LITTLE ROCK, AR (NOT AFFILIATED WITH KPMG LLP)