New Substantiation Rules for Donating Used Vehicles

By William B. Pollard

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IRC section 6720 imposes a penalty on charitable organizations that receive contributed vehicles and then either knowingly fail to furnish an acknowledgment at all, or furnish an acknowledgment that is false or fraudulent. Both of these new sections apply to contributions made on or after January 1, 2005. Clarification of these rules, however, was recently issued by the Treasury Department in Notice 2005-44.

IRC Section 170(f)(12)

IRC section 170(f)(12)(A) provides, in part, that no deduction will be allowed for the contribution of a used vehicle, as well as boats and airplanes, but does not include any vehicle primarily held for sale to customers (i.e., inventory or dealer property) with a claimed value in excess of $500, unless the taxpayer substantiates the contribution by a “contemporaneous written acknowledgment of the contribution by the donee organization.” [A used vehicle, as defined in section 170(f)(12)(E), is technically a motor vehicle manufactured for use primarily on public streets, roads, and highways, or an airplane or boat.] Furthermore, if the charitable organization then sells the vehicle “without significant intervening use or material improvement of such vehicle by the organization,” the deduction cannot exceed the gross proceeds received from the sale.

IRC section 170(f)(12) also provides that the acknowledgment issued by the recipient charitable organization must include the name and taxpayer identification number of the donor and the vehicle identification (or similar) number. Also, if the vehicle is sold without significant intervening use or material improvement, the charitable organization must provide a “contemporaneous” (within 30 days of the sale) certification that the vehicle was sold in an arm’s-length transaction between unrelated parties. The charitable organization must state the amount of the gross proceeds from the sale and also provide a statement that the taxpayer’s deductible amount cannot exceed the amount of the gross proceeds from the sale. Section 170(f)(12)(B)(iv) specifies that if significant intervening use or material improvements are anticipated by the charitable organization, the organization must issue an acknowledgment that “contemporaneously” [within 30 days of the contribution, according to section 170(f)(12)(C)] certifies the intended use or material improvements as well as the intended duration of the use. The organization must also certify that the vehicle will not be transferred for money, other property, or services before completion of the stated use or improvement. Additionally, IRC sections 170(f)(12)(B)(v) and (vi) require that the acknowledgement state whether any goods or services were provided by the donee organization and that, if so, a description and good-faith estimate of the value of the goods and services provided must be disclosed, including, if appropriate, a statement to the effect that only “intangible religious benefits,” as defined in section 170(f)(8)(B)(iii), were involved. IRC section 170(f)(12)(A) mentions that a copy of any acknowledgment furnished by the charitable organization to the taxpayer must be included with the tax return filed by the taxpayer that includes the deduction.

Notice 2005-44

The IRS’s recently issued Notice 2005-44 provides more detailed guidance on the implementation of IRC sections 170(f)(12) and 6720. Section 3 of the notice provides additional guidance regarding the substantiation requirements for a sale of a donated vehicle to a needy individual at a price significantly below the fair market value of the vehicle, or for a vehicle transferred gratuitously, in direct furtherance of the donee organization’s charitable purpose. In such a case, section 3.03 of this notice specifies that the contemporaneous acknowledgment must certify that such a sale or transfer was made and that providing transportation to the poor, distressed, or underprivileged directly furthered the purpose of the charitable organization. Section 4 of Notice 2005-44 provides guidance for any vehicle donated with a value of at least $250 but less than $500, and subsequently sold by the charitable organization. The value at the time of donation must be substantiated, and the taxpayer must receive a statement from the charitable organization pursuant to the requirements of IRC section 170(f)(8) that describes the property received and notes whether any goods or services (with a description thereof) were provided in consideration for the donation.

“Contemporaneous” for a donated vehicle within this $250–$500 range means the acknowledgment must be received on or before the date the donor files the tax return for the year in which the contribution was made (or the due date, including extensions, of the return, if earlier). The examples in this section show that, if properly substantiated and acknowledged, donation of a used vehicle that is subsequently sold by the recipient charitable organization for $400 may be allowed a deduction not to exceed $500 (if properly appraised for $800) or $450 (if properly appraised for $450).

Determining the fair market value of a vehicle is addressed in sections 5 and 6 of Notice 2005-44. Interestingly, section 5 states that used-vehicle pricing guides are a reasonable way to determine the fair market value of a donated vehicle. The notice also states that the Treasury Department, however, intends to issue regulations “clarifying that for purposes of section 170, the dealer retail value listed in a used vehicle pricing guide for a particular vehicle is not an acceptable measure of fair market value of a similar vehicle” (Notice 2005-44, section 5). To help resolve this dilemma, the conclusion in section 5 is that until further guidance is issued for contributions made after June 3, 2005, but before the date currently undeveloped future regulations become effective, an acceptable measure of fair market value for IRC section 170 is “an amount not in excess of the price listed in a used vehicle pricing guide for a private party sale of a similar vehicle.”

Section 6 relates to any vehicle that generates a deduction greater than $5,000, not limited to the gross proceeds from the sale of the vehicle. In such cases, a qualified appraisal in accordance with Treasury Regulations section 1.170A-13 is required.

Significant Intervening Use and Material Improvements

Significant intervening use. Determining significant intervening use and material improvements by a donee organization is discussed in section 7 of Notice 2005-44. “Significant intervening use” denotes that the receiving charitable organization actually uses the vehicle in a significant way to substantially further the organization’s regular activities. Significant intervening use is described in general terms as depending on the “nature, extent, frequency and duration” of the use of the vehicle by the organization and is basically illustrated in section 7 by an example in which an organization delivers meals to needy individuals as part of its regularly conducted activities and uses the vehicle every day for one year (10,000 miles during a one-year period).

Material improvements. In section 7, a “material improvement” must significantly increase the value of the donated vehicle and cannot be funded by a payment made by the donor to the charitable organization for such an improvement. Minor repairs and routine cleaning and maintenance are not considered material improvements. Nonqualifying items of this type include removing dents and scratches, painting or rustproofing/waxing, cleaning or repairing the upholstery, and installation of devices to deter theft.

Penalties

Penalties imposed when the recipient charitable organization knowingly fails to furnish proper acknowledgment, or provides a fraudulent or false acknowledgment, are addressed in section 7.03. The penalty for false or fraudulent activities relating to the vehicle being sold in an arm’s-length transaction to an unrelated party is 35% of the sale price or the gross proceeds from the sale of the vehicle, whichever is greater (the penalty is determined by the highest tax rate specified in section 1). The penalty for false or fraudulent activities related to significant intervening use or material improvements, or activities related to transferring the vehicle to a needy individual for a price significantly below market value, is the greater of 35% of the sales price of the vehicle, or $5,000.

Form 1098-C: Information Reporting

For 2006, the Treasury Department has provided Form 1098-C (available at www.irs.gov) to be used by donee charitable organizations to report information required to be reported by these organizations to the IRS. Notice 2005-44 provides that even though the donee organization can provide acknowledgment to the donor in any reasonable manner so long as it contains the information required in IRC section 170(f)(12), a copy of Form 1098-C can be used by the charitable organization to provide the required contemporaneous written acknowledgment to the donor. While copies B and C at the website can be used by recipient charitable organizations to provide written acknowledgment to donors, copy A is available only for information purposes, with acceptable forms for submission to the IRS available from several other sources, including 800-TAX-FORM.

Clarifying Notice 2005-44

Notice 2005-44 provides much-needed guidance in applying the recently changed rules for determining the deductible amount and substantiation requirements for donations of used vehicles to charitable organizations. Clarifying key determinants in the provisions for donated vehicles should better prepare taxpayers for the new requirements for substantiation and deductibility for donors, as well as prepare charitable organizations for their new reporting requirements.

Click here for the Exhibit.