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Middlemen
drive vehicle donations industry
By
Joshua L. Kwan, SAN JOSE MERCURY NEWS
Apr.
18, 2004
The
ads are everywhere: Donate your car, help the needy,
get a tax break in return -- everybody wins.
Cynthia
Schwager heard one of those pitches from the California
Council of the Blind and decided it was the perfect
solution to her 1994 Ford Taurus with the bum engine.
So,
like hundreds of thousands of Americans each year, she
gave her car to a nonprofit group.
What
she didn't know is that most of the proceeds would go
to overhead expenses for the car-donation program --
and to the middleman company that runs it. In 2002,
the latest year for which figures are available, the
Council of the Blind received just 17 percent of the
proceeds from vehicles sold on its behalf.
"That's
all?" asked Schwager, who donated her car in February.
"That seems kind of low."
It's
not just the Council of the Blind. Charities across
California are increasingly using vehicle donations
to raise cash, but more than 260 are letting for-profit
middlemen handle the details, from advertising to towing
to sales. And while these middlemen must disclose their
revenues and profits to the state -- in 2002, they sold
$45.6 million worth of vehicles -- there are no rules
on how much they must return to the charities.
California
charities got back all of 26 percent of the money raised
from donated car sales in 2002, according to an analysis
of the state attorney general's latest figures. Ten
charities in the Bay Area took in 10 percent or less.
"Is
it moral? It is what it is," said Harvard "Pete"
Palmer, co-founder of the state's biggest car-donation
middleman, the Vehicle Donation Processing Center, which
handles donations for the Council of the Blind. "If
you don't have advertising, don't have the tow trucks,
don't have the auctions, there's no money.
"Nobody's
getting rich here."
But
critics say the system is ripe for abuse. A Knight Ridder
investigation found:
•
A look at the 29 middlemen that reported at least $1,000
in donated car sales in 2002 shows huge variations in
returns. Only one gave more than half of the money to
the charity -- 55 percent -- while two returned as little
as about 3 percent.
•
While most reputable middlemen generally split profits
with the charities they serve, Cars For Kids, an East
Bay company, has kept almost 10 times as much money
in commissions and employee benefits as it passed along
to a charity. And nothing prevents middlemen that double
as towing companies from taking an additional cut for
hauling away donated cars.
•
Donors also are taking advantage of the system. The
cars they contribute often are junkers: One Bay Area
middleman estimates that seven of 10 vehicles offered
for donation end up as scrap metal and spare parts.
•
The IRS believes the value of donated cars is often
wildly inflated on tax forms. Auditors seldom find out,
because it's difficult to determine the condition and
mileage of a donated vehicle. A bill in Congress would
require donors to claim only the amount for which their
car sold -- not their estimate of its market value.
Middlemen
are not unique to the car-donation business; they handle
the detail work for many types of charity fund raising,
from phone solicitations to auctions. And charities,
in general, benefit greatly: In 2002, California middlemen
returned almost half of the $211 million they raised
in those types of fundraising campaigns.
But
observers -- and even participants -- say car donation
campaigns raise especially troubling questions.
"It's
a dirty business on both ends," said Peter Lauber,
whose Redwood City company, Hansa Trading International,
returned 75 percent of the $15,300 it collected in donated
car sales in 2001 for Bay Area charities. Its numbers
weren't included in the 2002 report. Hansa Trading does
no advertising and accepts only cars in good condition,
a rarity among middlemen, Lauber contends.
"You've
got so-called donors with a piece of junk who would
like to cheat a charity out of towing expenses ... and
you've got fund-raisers who get good cars and don't
give anything to charities."
Still,
the system persists -- and it's easy to see why. Donors
get rid of their cars in exchange for a tax write-off,
charities get money they wouldn't otherwise see -- and
there's no hassle on either end.
Once
Schwager responded to the Council of the Blind's radio
ad, all she had to do was arrange a time for her Taurus
to be towed, then fill out some paperwork. "It
went like clockwork," said Schwager, a flight attendant
from San Carlos who will take her tax write-off on her
2004 return. "It was great."
The
Council of the Blind feels the same way. It received
$255,105 in car donations in 2002 -- money it uses to
fund scholarships and hardship grants.
State
records show that the Monrovia-based middleman for the
nonprofit, the Vehicle Donation Processing Center, kept
more than 11/2 times that amount for its commissions,
fees and salaries. And it spent even more on towing,
repairing and advertising.
But
Catherine Skivers, a volunteer and past president for
the Hayward-based Council of the Blind, said she had
no problem with those numbers. "You can't run a
business without expenses," she said. "We
don't have to do anything except to accept what they
give to us, and we allow them to use our name."
The
story is similar at other major charities. The Polly
Klaas Foundation in Petaluma raked in $1.2 million in
car donations in 2002 -- a quarter of the $4.9 million
worth of vehicles sold on its behalf. The Multiple Sclerosis
Foundation received just 13 percent of the $255,300
in donated car sales.
"It's
easy money," said Daniel Borochoff, president of
the American Institute of Philanthropy, a Chicago-based
watchdog group. Charities always say, "It's money
we wouldn't ordinarily have -- they love that line.
But they're completely violating the intentions of their
donors."
Just
how much money the charities receive depends on the
middleman. Last year, 35 for-profit middlemen registered
in California. They run the gamut, from towing companies
to used car dealers to auction houses.
Middlemen
argue that they are part of a high-overhead business,
and that it's harder than it might appear to return
big percentages to their charity clients. Cars need
to be registered; others need to be towed and repaired.
"If
we were to restrict donations to cars that only sell
for $5,000 or $6,000 each, we could give 80 percent
back to charity," said Palmer of the Vehicle Donation
Processing Center, which returned 21 percent of the
$10.8 million in donated cars it sold in 2002. "But
we'd be lucky to get a car or two a year."
Even
so, some of the returns are particularly paltry.
In
2002, Cars for Kids collected and sold $1.275 million
worth of cars and boats on behalf of Fuente de Vida,
a San Francisco church with 40 parishioners. The return
to the church: $42,200, or 3.3 percent.
Pastor
Saulo Villatoro said it wasn't his idea to solicit car
donations; Cars for Kids approached him, promising to
give 10 percent of the net proceeds to the church. Villatoro
said he is grateful for the money, which funds scholarships
for poor Bay Area children to attend summer camps and
church activities.
But
he acknowledged the percentage seems low.
"Probably
he is taking advantage of me," Villatoro said.
"But if I complain, he'll probably say, 'I can't
help you anymore.'"
Luis
Pallais, the owner of Cars for Kids, said he runs an
honest operation, and blames the low returns for Villatoro's
church on advertising costs, personnel costs and the
high number of worthless junkers that are donated.
According
to paperwork filed with the state Attorney General's
Office, Cars for Kids in 2001 kept $277,101 in commissions
and employee benefits, almost 10 times the amount it
gave to Villatoro's church that year.
In
2002, the middleman claimed a mere $25,668 in commissions
and employee benefits, much less than it gave Villatoro's
church. But a close look at the numbers reveals that
it took an additional $176,210 in management fees. It
expensed $5,064 for travel, $4,294 for Christmas and
$1,797 for uniforms. And its rent expenses in 2002 nearly
quadrupled from the year before, to $118,650, according
to state records.
When
asked to explain why the figures had changed so much,
Pallais said, "Just look at the papers. The numbers
are there."
The
company was suspended by the California Franchise Tax
Board in December for failing to pay $414 in taxes.
People
who question Pallais' company "don't know how this
business works," he said. "We want to help
the church and non-profits somehow," he added,
"but it's a business, like any U.S. company, but
we don't see the profit that we should be getting for
all the work we do."
The
attorney general can file civil cases against non-profits
and revoke a middleman's fundraising license, but Deputy
Attorney General Belinda Johns said her office has never
revoked a license. When consumers raise concerns, authorities
rarely have the time or resources to investigate.
"We
get complaints from all sorts of sources," said
Johns, who supervises 10 lawyers who investigate those
complaints and a single clerk who handles all the paperwork
submitted each year by about 85,000 charities.
The
office recently eliminated its auditor during budget
cuts, Johns said.
"Charities
have an obligation, too, to know what's happening to
donations that people are raising in their name,"
Johns said.
Philanthropy
experts urge donors to look beyond the advertising and
check out a non-profit's status and reputation before
giving away vehicles.
Schwager
doesn't regret donating her Ford Taurus, but she said
she'll do more homework in the future. "Next time,
I'll find a place that gives more money to the charity."
BEFORE
YOU DONATE
Here
are five steps to follow before donating your vehicle:
1.
Verify you're donating to a tax-exempt group. On the
Web, go to www.irs.gov/charities/index.html, then click
on "Search for Charities." You can also search
for a nonprofit's tax returns at www.guidestar.org.
2.
Make sure the charity and its middleman, known as a
commercial fund-raiser, are registered with the California
Attorney General's Office. On the Web, go to caag.state.ca.us/charities/index.htm.
Then click on "Charities Search" or "Commercial
Fundraiser."
3.
Check out the charity with the Better Business Bureau:
www.oakland.bbb.org for Alameda, San Francisco and Contra
Costa counties.
4.
Ask the charity how it financially benefits from the
resale of the car and how it splits the money with its
middleman, if it uses one.
5.
Make sure the title of the car is transferred to the
charity's name, and keep a copy of the record. For tax
records, take a photo of the car and keep copies of
current classified ads or guide value estimates for
similar vehicles. The IRS explains how to determine
the value of the vehicle at www.irs.gov/pub/irs-pdf/p561.pdf.
Source:
Better Business Bureau, IRS, California Attorney General's
Office
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