IRS Changes Rules for Vehicle Gift Acknowledgement

Rawhide Boys Ranch, New London, Wis., has an extensive vehicle donation program that allows the facility to introduce young men to a challenging work environment in the evaluation and preparation of vehicles that are sold at auctions. Pictured is Nelson S. of Milwaukee.

As of January 2005¹, charities were required to confirm the disposition of donated vehicles by means of a new reporting form: Form 1098-C. You may already be aware of this change. However, reporting requirements were changed in mid-2006² as the IRS realized that the new Form 1098-C was not solving the problem of inflated gift schemes. I want to describe the changes so that your vehicle donation program will stay on track.

There is a deeper reason for my wanting to pay attention to this issue. As the IRS gets more and more electronically sophisticated, it will be requiring more electronic documentation for all donations, not just vehicles. As you know, a donor cannot claim a tax deduction for any single contribution of $500 or more unless he or she obtains a contemporaneous, written acknowledgment from you³, and it is clear to me that the new reporting requirements for vehicle donations are a vanguard of sorts as to what we can expect in the future.

Therefore, I suggest that you pay attention. This will eventually apply to you whether or not you presently accept donations of cars, boats, or airplanes.

New Form 1098-C

In 2006 you must use a new Form 1098-C that asks these additional questions:

• Did you provide any goods or services in return for the vehicle?
• Did you use this vehicle before selling it? If so, was it a substantial intervening use?
• Did you materially improve the vehicle before selling it? If so, how?⁴

You must certify that improvements were actually made. There will be no more appraisals accepted by the IRS for vehicle donations, and deductions may not exceed the gross proceeds received from the vehicle’s sale.

The only exceptions from the gross proceeds rule are the three circumstances noted in the bullet points: if you, as the party accepting the donation (1) make a significant intervening use of the vehicle, (2) materially improve the vehicle, or (3) sell the vehicle to a needy individual at a price significantly below market value, or if you give the vehicle to a needy person in furtherance of your charitable purpose (you must have a charitable purpose that includes relief of the poor and distressed).

There are also new rules about when to acknowledge the gift. You must furnish Form 1098-C to the donor within 30 days after the sale of the gift, regardless of when the vehicle is sold. This is a hard and fast rule that the IRS does not intend to break, at least for now.

For example, if the vehicle is donated in one year, but sold in the next (or even later), the year of the donation is the only year in which the donor may claim the deduction. Since the donor cannot take a deduction until the vehicle has been sold and a Form 1098-C issued, this means that a donor may have to file an amended return in order to claim the deduction retroactively⁵.

You must furnish Form 1098-C to the donor within 30 days of receiving the gift if your organization is making a significant intervening use or significant material improvement of the vehicle. Send all Forms 1098-C to the IRS by February 28, 2007 if your organization is filing fewer than 250 Forms 1098-C during a calendar year. If you file your Forms 990 electronically, the due date for 2006 filings is April 2, 2007. Organizations that file 250 or more Forms 1098-C during a calendar year will be especially impacted, since under the new regiment, they must file the forms either electronically or magnetically.

Hiring a For-Profit Agency to Sell Vehicles

If you hire a for-profit company to operate your vehicle donation program, you must establish an agency relationship with that company under state law. Generally, this means you must have a written agreement whereby they agree to act on your behalf and subject to your oversight.

The IRS provided guidance as to what is required to establish a viable agency agreement for car donations in a 2002 private ruling⁶. Basically, you should reserve the right to review all contracts, establish rules of conduct, choose or change program operators, approve of or change all advertising, and examine the for-profit’s books and records. If you follow these guidelines, the program should not have an adverse impact on your tax-exempt status.

You may not enter into an agreement with a for-profit wherein the agency agrees to give you either a flat fee or a percentage of the profits in exchange for the use of your name. If you have no control over the sale operations, you will not be able to offer the donor a gift acknowledgment of any kind. The IRS will see the gift as one that goes to the benefit of the for-profit entity. If you or the entity tell donors that this is tax-deductible, you may be charged with intentional violation of the tax law.

Penalties

If the IRS finds that your organization knowingly furnished a false or fraudulent acknowledgment, or knowingly failed to furnish the acknowledgment as required by the rules, you can be fined⁷. The penalty is based upon the value of the vehicle, and there is a formula that applies. My own expectation is that this is the beginning of a new level of reporting, one that will eventually require all charities to report all donations in a similar manner.

Donors who cannot produce a Form 1098-C will be unable to take a charitable deduction for any kind of donation, cash or inkind. Remember, I am making a prediction here—it has not yet happened.

The IRS is now computer enabled to allow for massive amounts of documentation that it used to be unable to capture. This is indeed a “brave new world” for fundraising. Your understanding of the system will be good for your donors and good for you.

ENDNOTES

1. In Section 884 of the American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (AJCA), added ''170(f)(12) and 6720 to the Internal Revenue Code effective for contributions of qualified vehicles made after December 31, 2004. Section 170(f)(12)(A) disallows a deduction under ' 170(a) for a contribution of a qualified vehicle the claimed value of which is more than $500 unless the donor substantiates the contribution by a contemporaneous written acknowledgement that meets the requirements of '170(f)(12)(B). Section 170(f)(12)(D) requires a donee organization to provide the Secretary of the Treasury or his delegate with the information contained in the acknowledgment furnished to the donor.

2. Form 1098-C will be revised to take account of the Gulf Opportunity Zone Act of 2005, Pub. L. No. 109-135, 119 Stat. 2577 (GO Zone Act), which was enacted on December 21, 2005. Section 403(gg) of the GO Zone Act contains a technical amendment to '884 of the AJCA. The technical amendment added clauses (v) and (vi) to '170(f)(12)(B), which together require donee organizations to provide the information described in this article. 

3. Although it is a donor's responsibility to obtain a written acknowledgment, you should be routinely providing donors with timely, written statements that containing the following information: (1) Name of your organization, (2) Date of the contri bution, (3) Amount of any cash contribution, (4) A description (but not the value) of non-cash con tributions, and (5) Either (a) a statement that no goods or services were provided in return for the contribution, if that is the case, or (b) a description and good faith estimate of the value of goods or services that your organization provided in return for the contribution. You incur no penalty if you fail to do this, but without a written acknowledgement the donor cannot claim a tax deduction. 

4. IRS officials changed this requirement after becoming aware of questionable practices whereby charities sold donated vehicles at auction and claimed that the sales were to needy individuals at prices significantly below fair market value. This would trigger an exception to the general rule that the deduction allowed to the donor is limited to the proceeds from the charity's sale. Cars sold at auction are not eligible for this exception. See IR-2005-145, Dec. 20, 2005.

5. See IR-2005-149, Dec. 22, 2005.

6. In PLR 200230005. In this ruling, the IRS identified the agency agreement provisions in great detail. It is quite clear that the Service intended the ruling to be used by others who might want to establish a similar program.

7. Section 6720 imposes penalties on any donee organization required under '170(f)(12)(A) to furnish an acknowledgment to a donor that knowingly furnishes a false or fraudulent acknowledgment, or knowingly fails to furnish an acknowledgment in the manner, at the time, and showing the information required under '170(f)(12) or regulations thereunder. 

Kathryn Vanden Berk practiced law for nine years before serving as the president of two residential treatment centers for children. Now practicing in Chicago, she focuses on nonprofit start-ups, corporate and tax law, and employment issues. She serves as adjunct faculty at several Chicago universities, and is a member of the Advisory Board of the Axelson Center for Nonprofit Management at North Park University. She authored a handbook on starting nonprofits that is available from the Nonprofit Financial Center, Chicago, and a chapter in the Illinois attorney’s handbook Not-for-Profit Corporations, 2004 Ed., Illinois Institute of Continuing Legal Education. In 2004 she authored Retooling Employment Standards for the Future, a publication of the First Nonprofit Educational Foundation, Chicago. She can be reached by e-mail or at 312-558-1690.

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