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Car-Donation
Programs Threatened by Legislation
By
Kathy M. Kristof, LA Times
July
4, 2004
You've
heard the ads on the radio: Donate your car to us, the
pitch goes, and in return you'll get a charitable deduction
for its full, fair-market value.
It
turns out that many donors appear to have gotten full
market value, and then some.
A
General Accounting Office study released in December
found a huge disparity between what taxpayers were deduct-
ing and what charities were receiving. Taxpayers wrote
off $654 million in auto donations for the 2000 tax
year, but charities received only about 5% of that value,
the GAO found.
The
implication, of course, is that motorists are exaggerating
the value of their gifts. And under current law, many
such fudges are tough to detect. Taxpayers who give
items worth less than $5,000 are simply supposed to
make a good-faith effort to put a fair value on the
property.
Taxpayers
who hope to claim bigger deductions for donated property
must get an appraisal. But if someone gives a junker
worth $2,000 and says it's worth $4,999, there is not
much — outside of launching an audit — that the Internal
Revenue Service can do.
Pending
in Congress
The
GAO report has prompted legislation in the House and
Senate aimed at curbing abuses. The measures, sandwiched
into national legislation on jobs and trade, have sparked
fierce opposition from charitable groups, who say it
would decimate their bank accounts and do little to
solve the taxpayer abuses.
"We
believe the government action would effectively close
down this whole area of fundraising," said Chuck
Gould, national president for Volunteers of America
in Alexandria, Va., which receives about $10 million
of its $700 million annual budget from auto donations.
"For
us, it's really scary," added Paula Skuratowicz,
executive director of the Polly Klaas Foundation in
Petaluma, Calif. "We would not have been able to
provide the critical services that we provide without
car donations."
At
the heart of the issue are tax laws that allow donors
to write off the fair market value of donated items
on their tax returns. While it is easy to determine
that value for donations of cash and publicly traded
stock, it can be tough to properly value artwork, collectibles
and used goods such as clothes, cars, boats and violins.
The
GAO study seemed to provide definitive evidence that
car donors were hyping the value of their vehicles.
But recent Senate Finance Committee hearings on the
proposed reforms raised questions about that conclusion.
One
witness testified to alleged abuses by car brokers,
who are hired by the charities to sell the donated vehicles.
Typically, these cars are sold at auctions. Some brokers
will disable a good car to ensure it won't start at
the auction, diminishing the odds that it will be sold,
the witness testified.
A
confederate, such as an affiliated company, then buys
the "non-working" car at a bargain price.
The charity gets its cut based on the discounted auction
price. The confederate then sells the "repaired"
car for a higher price, splitting the take with the
broker.
Additionally,
some brokers that solicit cars on behalf of charities
have flat-rate deals, this witness said. No matter the
value of the car, the charity gets a set price that
can amount to a minuscule portion of the car's market
value.
Tax
officials testified that they had discovered that deductions
for items as diverse as intellectual property and conservation
easements had been inflated as well.
The
House and Senate have backed separate bills that include
provisions to tighten the rules for valuing donated
automobiles, boats and airplanes.
The
House's American Jobs Creation Act of 2004 would require
anyone donating a car, boat or plane worth more than
$250 to get an appraisal, said Mark Luscombe, principal
tax analyst with CCH Inc., a Riverwoods, Ill.-based
publisher of tax information.
The
Senate's Jump Start Our Business Strength (JOBS) bill
would limit deductions for cars that are worth more
than $500 to the amount that the charity receives for
the vehicle when it is resold.
The
bills have passed the respective houses where they originated
and are headed to a conference committee to work out
differences
Some
limit on car donations is likely to be in the final
measure because such a provision appears in both bills,
Luscombe said. The bills are on a fast track to passage
because they fix tax glitches that are subjecting U.S.
companies to trade sanctions, he added.
Charities
are unhappy with the House and Senate approaches to
fixing the auto donation woe and are hoping to persuade
Congress to consider a third option: simply requiring
charities to give donors a detailed receipt, stating
the make, model and year of the car, as well as any
defects it might have that would affect its value.
Charities'
View
What's
wrong with the measures already proposed? A spokeswoman
for Charities Advocating Responsible Solutions — a coalition
of nonprofits that receive vehicle donations — said
the House measure, which it considers the less objectionable
of the two, would force donors spend money out of pocket.
Indeed, those giving away very old cars might spend
more on the appraisal than the car is worth. Appraisals
wouldn't necessarily eliminate cheating, either, because
appraisers could fabricate values just as easily as
taxpayers.
The
Senate measure, meanwhile, would create long delays
as well as uncertainty about the amount that donors
could deduct, Gould said.
Cars
that are donated are usually stored until the charity
or the charity's broker obtains enough of them to hold
an auction where the cars can be sold en masse. Sometimes
auctions bring in top dollar for vehicles, but sometimes
they don't, Skuratowicz said.
Because
donors would have to wait, often months, to find out
how much they could claim as a deduction — and because
they couldn't make their gifts contingent on getting
a reasonable price for the car — taxpayers would be
reluctant to give their cars away, Skuratowicz said.
"The
Senate legislation has the possibility of ending car-donation
programs," she said. "It's just not fair to
the donor."
No
other type of donated property faces the same restrictions
in determining fair market value, she added. Donors
don't have to wait until their donated clothing sells
at a thrift shop, for instance, to find out the selling
price and write off its value.
On
the other hand, she maintains that a detailed receipt
would give the IRS the information it needs to determine
whether the taxpayer was inflating the deduction, without
making auto donations inconvenient or costly.
Important
Stake
Notably,
Skuratowicz has a huge stake in the battle. The Polly
Klaas Foundation was on the verge of closing its doors
six years ago, before an auto broker came to it with
a proposal to solicit auto donations, she said. Now
these donations provide 85% of the Petaluma-based charity's
budget.
She
also disputes the idea that auto-donation programs are
riddled with abuse.
Though
the GAO study certainly looks troubling, part of what
it reflects is the high cost of marketing and selling
vehicles, Skuratowicz said. Between advertising, repairs,
towing costs, sales and commission expenses, the Polly
Klaas Foundation gets about 25 cents for each donated
car dollar, she acknowledged. But that's largely because
it's expensive and time consuming to sell a car — a
fact that inspires many donors to give their cars away.
Besides, she said, 25 cents on the dollar is better
than nothing — and not everybody has cash to give.
"These
are times that we need to be aggressive in all of our
fundraising strategies," added Gould. "If
there are concerns that people are abusing the program,
we would prefer to have a reasonable conversation about
what the abuses are and how we can address them without
deterring individuals from making contributions that
are commendable and valuable."
"We
don't condone tax fraud. We also don't believe that
tax fraud is significant in this program," he added.
"What we do know is that car donations are doing
a lot of good. This program is keeping services open."
Kathy
M. Kristof, author of "Investing 101" and
"Taming the Tuition Tiger," welcomes your
comments and suggestions but regrets that she cannot
respond individually to letters or phone calls. Write
to Personal Finance, Business Section, Los Angeles Times,
202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof
@latimes.com. For past columns, visit latimes.com/kristof.
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