IRS Gives Approval to Car-Donation Plans

By Elizabeth Schwinn

A pair of recent Internal Revenue Service rulings give a green light to two charities’ car-donation programs run by outside companies, raising concerns among some tax attorneys that the IRS is not doing enough to police the programs, despite tough rhetoric.

According to the rulings, the companies will advertise for donated vehicles, pick them up, and sell them. The charities will pay the companies a fee based on the profits the charities receive. The companies will require donors to pay for professional appraisals for vehicles for which the donor claims a deduction of more than $5,000.

In the past, the IRS has warned that charities that use outside companies may have too little connection to the process of soliciting, collecting, and reselling vehicles to consider the cars donations.

It also has warned that charities may be encouraging donors to take excessive deductions by telling them they can write off the full “Blue Book” value of cars in poor or inoperable condition. In the rulings, however, the IRS says that the written contracts between the charities and the companies show that the charities will have “the requisite degree of control and supervision.”

Bennett Weiner, chief operating officer of the BBB Wise Giving Alliance, a charity-watchdog group in Arlington, Va., says the rulings may help charities avoid a common abuse of car-donation programs: instances in which outside companies pay charities a small fraction of the value of donated cars.

In addition, requiring appraisals of vehicles for which donors deduct more than $5,000 limits the degree to which the deduction can be abused, Mr. Weiner says.

According to the contracts, the charities will hold title to the automobiles until they are sold. That will help donors who otherwise could find themselves liable for an accident or other mishap that occurs after they have given away a car. “We have seen instances where the donor still had liability for the car after they made the donation, since the outside firm didn’t change the title until the vehicle was resold,” Mr. Weiner says.

Paul Streckfus, a former revenue-service lawyer who is editor of the “EO Tax Journal,” says the rulings suggest to him that the IRS has given up on the issue. Despite the appraisal requirement, the IRS has no practical way to audit donations, he says. To do so “takes an army of agents, which the IRS doesn’t have,” he says.

As is its custom, the IRS did not identify the people or groups involved in the rulings (Letter Rulings 200230005, 200230007).