This is the season when we often give thanks for our blessings and turn our thoughts to giving to those less fortunate. Studies conducted by the United Way suggest that the top reasons for making gifts are: 1) a commitment to a particular cause; 2) a desire to share with those less fortunate; and 3) the satisfaction of helping others in return for their heartfelt thanks.1 In addition to the intangible reasons that motivate many of us to make gifts, once we have made the decision to make a gift, many of us assume that we will also receive income and/or estate and gift tax savings from Uncle Sam.

The purpose of this article is to review gift recordkeeping requirements for Federal income tax purposes in order to receive the anticipated ancillary Federal income tax savings from our and our client’s generosity and avoid the proverbial “lump of coal” resulting from the disallowance of the Federal income tax deduction and resulting interest and penalties associated with the gift.

“Donate your vehicle, running or not”--too good to be true? By now we have all read or heard the ads urging us to donate that clunker car, RV, boat or airplane (“running or not”) to the sponsoring charity, and the charity will come and get the car, RV, boat or airplane and do all of the necessary paperwork.

Taxpayers are generally entitled to a charitable contribution equal to the fair market value of the car, RV, boat or airplane donated. For single gifts of $250 or more, taxpayers are required to obtain a receipt from the charity verifying the gift (but not the value) and setting forth whether any goods or services (and the estimate of the value of those goods or services) were provided to the taxpayer in return for the gift.

If the claimed value is $5,000 or more, then the taxpayer is required to substantiate the gift by obtaining a qualified appraisal and attaching the appraisal to the taxpayer’s tax return.2 Thus, for gifts of the clunker car, RV, boat or airplane there was significant opportunity for a taxpayer to claim a gift of up to $5,000 without obtaining and keeping records (other than the receipt from the charity that a gift of $250 or more had been made) substantiating the value of the donated vehicle. Taxpayers often referred to Kelly Blue Book values in order to substantiate the value of their gift. Charities, on the other hand, generally promptly sell the vehicle for an amount less than “Blue Book” value.

Congress steps in. Fair notice and fair warning: Congress is aware that in recent years charitable organizations increasingly solicit charitable contributions of vehicles, which are promptly sold by the charity or the charity’s agent at auction for prices far less than the value claimed by the taxpayer for purposes of taking a charitable contribution deduction.3

Addressing this abuse, Congress has added a new section to the Internal Revenue Code (170(f)(12)) as part of the American Jobs Creation Act of 2004 (the “Act”), which is effective October 22, 2004. The Act contains provisions requiring substantiation of the value of the clunker car, RV, boat or airplane where the claimed gift is more than $500. For gifts in excess of $5,000, the qualified appraisal requirement will still apply.

New recordkeeping requirements. Section 170(a) of the IRC provides that a charitable contribution deduction shall be allowed for any payment made within a taxable year only if verified under regulations prescribed by the Secretary. Additionally, reacting to a concern that taxpayers were not obtaining and maintaining adequate records documenting their charitable gifts, or inflating the value of donations,4 Congress enacted IRC ¤170(f)(8) which requires taxpayers to substantiate their charitable gifts.

Section 170(f)(8) provides that no deduction shall be allowed for any charitable contribution of $250 or more unless the taxpayer substantiates the contribution by contemporaneous written acknowledgment of the contribution by the charity that meets the following requirements:

1. The amount of cash and a description (but not the value) of the property contributed other than cash;
2. Whether the charity provided any goods or services in return for the contribution; and
3. If the charity did provide any goods or services in return for the donation, a description of the goods or services provided by the charity and a good faith estimate of the value of the goods and services, or a statement that the goods or services consisted solely of intangible religious benefits.

With certain exceptions for contributions reported by the charity, in order to satisfy the substantiation requirements, the taxpayer must obtain a receipt for the donation of $250 or more on or before the date the taxpayer files the taxpayer’s tax return claiming the deduction, or if earlier, by the due date of the taxpayer’s tax return for the year of the donation, including any applicable extensions of time to file the taxpayer’s return.

The Regulations clarify that receipts are only required for single gifts of $250 or more and are not required for multiple gifts to a single charity which total more than $250 during the year if each gift is less than $250. Reg. ¤ 1.170A-13(f).

Additionally, certain de minimis gifts provided by the charity to the taxpayer may be disregarded. For example, goods or services provided by the charity which generally have a value of no more than $80 (adjusted for inflation), and annual membership benefits, such as museum membership benefits, offered to a taxpayer in exchange for a payment of $75 or less per year.

Receipts for donated vehicles. For gifts of vehicles made after June 30, 2004, where the claimed value exceeds $500, the Act now requires that the taxpayer obtain a receipt from the charity setting forth additional information. If the charity intends to sell the vehicle without significantly using or materially modifying the vehicle, then the receipt from the charity must include: 1) the name and social security number or taxpayer identification number of the taxpayer making the gift; 2) the serial number of the vehicle; 3) if the charity sells the vehicle without significant intervening use or material improvement to the vehicle, the receipt must state that the vehicle was sold in an arm’s length transaction between unrelated parties, the amount of the gross proceeds from the sale, and contain a statement that the taxpayer’s charitable deduction is limited to the gross sale proceeds.

Alternatively, if the charity intends to use the vehicle or materially improve the vehicle, then the receipt must; 1) certify the charity’s intended use of, or improvement to, the vehicle; 2) the intended duration of such use by the charity; and 3) a certification that the charity will not transfer the vehicle for money, property or services before expiration of the stated period that the charity intends to use the vehicle. The taxpayer must include a copy of the receipt with the taxpayer’s return.

A new Section 170(f)(11) of the IRC requires further disclosures with a taxpayer’s tax return as set forth in yet-to-be-published regulations. Additionally, the Act requires the charity to notify the IRS of the information set forth in the receipt in a manner yet to be prescribed by Regulations. The Congressional Report to the Act clarifies that whether the charity significantly uses the vehicle is dependent upon the charity actually using the vehicle in furtherance of the charity’s charitable purpose, and such use must be significant. For example, regular use of the vehicle to transport the charity’s volunteers would constitute significant intervening use.

The Congressional Report to the Act clarifies that a material improvement would include major repairs to a vehicle, or other improvements that significantly increase the vehicle’s value. However, cleaning, minor repairs and routine maintenance are expressly excluded as material improvements.

Penalties. In order to compel charities to comply with the additional receipt requirements, the Act imposes a penalty upon a charity that fails to provide a taxpayer with a receipt within 30 days of sale of the vehicle, which is not significantly used or materially improved, by the charity equal to the greater of: 1) the gross proceeds from the sale of the vehicle; or 2) the highest applicable individual tax rate (currently 35%) multipled by the claimed deduction of the taxpayer.

Steps to protect yourself. The fallout from the Act may be a significant reduction in the number of charities that are willing to accept used vehicles. Whether the increased burden on charities, dependent upon the public’s generosity, is good tax policy is a discussion for another day. However, if you or one of your clients intends to donate that clunker car, RV, boat or airplane to charity, use this checklist in order to avoid receiving from Uncle Sam that proverbial lump of coal:

1. If the value is $250 or more, but less than $500, then a receipt from the charity describing the vehicle and an affirmative statement concerning whether goods or services were provided in return for the gift is required in order for the taxpayer to claim the gift for Federal income tax purposes;
2. Where the charity intends to sell the donated vehicle: If the value is more than $500, but less than $5,000, then the receipt must set forth: 1) the name and social security number (or TIN) of the taxpayer; 2) the vehicle’s identification number; and 3) a certification that the vehicle was sold in an arm’s length transaction between unrelated parties, the gross proceeds of the sale, and a statement that the taxpayer’s deduction for Federal income tax purposes is limited to the gross proceeds.
3. Where the charity intends to use or modify the vehicle: If the value is more than $500, but less than $5,000, then the receipt must set forth: 1) the name and social security number (or TIN) of the taxpayer; 2) the vehicle’s identification number; and 3) a certification that the charity intends to significantly use the vehicle or materially improve the vehicle, a statement of the duration of such intended use, and a certification that the vehicle will not be transferred for money, goods or services before expiration of the intended use period.
4. If the charity does not intend to sell the vehicle, and if the value of the vehicle is more than $5,000 then the taxpayer must obtain a qualified appraisal and attach the appraisal to the taxpayer’s return.

Representing a charity. If you represent a charity receiving donated vehicle, then in addition to the above requirements, note the following:

1. A certification meeting the requirements set forth in paragraphs 2 or 3, whichever is applicable, must be delivered to the donor within 30 days of the sale;
2. Hefty new penalties, equal to the greater of the gross proceeds of the sale of the vehicle, or the highest individual marginal tax rate multiplied by the claimed value of the vehicle by the donor, apply where the charity fails to supply the above certification to the donor; and
3. Stay tuned for regulatory guidance concerning reporting requirements that the charity must make to the IRS verifying its receipt and certification of donated vehicles. n