Dear Clients and Friends:

IRS OFFICES ALERTED TO QUESTIONABLE USED-CAR DONATION PRACTICES

The IRS Director of Exempt Organizations Division has sent a memo to Regional Chief Compliance Officers, District Directors, and Key District Offices (EP/EO) alerting them to the increasing number of problematical advertisements for used car donations to charity. These advertisements, placed by the charities themselves, or by for-profit-companies working under various kinds of contractual arrangements with them, promise a charitable contribution deduction in an amount equal to the full Blue Book value of a contribution of a used automobile.

The memo identifies two problem areas associated with used-car donation programs:

... In one instance, a charity is entering into what amounts to a royalty arrangement with a for-profit company. In return for a fee, perhaps even a flat monthly or annual fee, a for-profit company will conduct the entire campaign with little or no involvement by the charity, starting with the solicitation of used auto donations, followed by the vehicle pickup and the final disposition.

The memo reminds IRS personnel that to be deductible as a gift to charity, used cars must, in actuality be given to the charity or, at the least, an agent of the charity. The royalty arrangement does not amount to an agency agreement because it lacks the supervision that agency entails. Thus, the truthfulness of a statement that contributions are deductible may be challenged and, indeed, the donor would not be entitled to a charitable deduction in any amount.

... A second serious matter noted in the memo relates to the hyperbole that appears in some of the advertising. In some cases, full Blue Book value deductions are promised, even where used cars are in poor or inoperable condition. The term Blue Book ppears to describe many valuation lists prepared by many different companies. Generally, however, these lists only value used cars in running condition.

The memo states a concern that some of this advertising is misleading or, in some instances, false, and is being used inappropriately. It advises Key Districts to be alert to the advertising that is being conducted in their districts and to consider conducting examinations if the facts warrant. The memo also suggests that Key Districts consider using the tax shelter promotion penalties in appropriate cases. It also notes the possibility that some abusive contractual arrangements may result in excessive private benefit and thus jeopardize the exempt status of the charities involved. The memo also recommends that referrals of individual donors for examination should be considered in appropriate cases.

Observation: Charitable organizations should review their property contribution solicitation programs and promotions and keep sufficient control over them to ensure that the contributions can be said to be made to them, and not to private companies that run them. Charities also should have the right to approve advertising copy and to be sure that untrue promises aren't being made about the size of available deductions.

Recommendation: To avoid IRS scrutiny, individuals who donate used cars and other property to charities should document the propertyís condition, and not be overly aggressive in stating a value for the contributed property.

Observation: Detailed substantiation rules apply to property contributions values at more than $500, and appraisal requirements apply to most property contributions values at more than $5,000.

If you would like to find out more, please give me a call at (315) 363-3338.

Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner