Donations: Taking Taxpayers for a Ride
Car donations to charities seem like
a win-win proposition. A donor gets a hassle-free way of disposing
of an old car and a fat tax deduction, a charity gets money that
it would not otherwise receive through cash contributions and a
middleman makes a tidy profit for soliciting, towing and selling
the car. Unfortunately, the loser is the rest of us. As taxpayers,
we are subsidizing tax deductions on car donations that are not
anywhere near commensurate with the benefits received by charity.
A November 2003 United States General
Accounting Office (GAO) study, for which AIP was interviewed and
listed as a resource, found that in two-thirds of 54 cases studied
the charity received 5% or less of the value of a donated car declared
on an individual's tax return. Why so little? The car is often sold
at auction for wholesale, then the cost for advertising in the newspaper
and on the radio and Internet is subtracted. After the costs of
towing and conditioning the car and processing the paperwork is
deducted, little may be left for charity. Additionally, some charities
may receive a flat fee for each car donated regardless of the value,
sometimes as little as $25 per vehicle. The GAO could not determine
whether donors were inflating the value of the used car. But it
would be easy for donors to do so due to the lack of available information
on the car's condition.
Car donations are a popular vehicle for
tax deductions. 733,000 of the 129 million forms filed in the tax
year studied (2000) claimed $654 million in deductions for used
cars valued over $500. About 4,300 charities with revenues over
$100,000 utilize car donations. The GAO study found wide ranging
valuations and percentages going to charity: a 1990 Mercury Station
Wagon was valued on an individual's tax return at $2,915, sold for
$30 gross and after expenses the charity lost $130; a 1991 Ford
Crown Victoria was valued on an individual's tax return at $3,100,
sold for $300 gross and after expenses the charity received $165;
and a 1995 Toyota ½ ton pickup was valued on an individual's tax
return at $4,999, sold for $1,800 gross and after expenses the charity
At a June 2004 Senate Finance Committee
hearing, a confidential witness who works in the auto sales industry
described ways in which middlemen can make a profit from donated
cars at the expense of the charity. In a practice the witness described
as "fixing cars," some middlemen purposely disable cars, by simple
techniques such as pulling a fuse or turning the distributor cap,
so that they can be purchased for very little at auctions or used
car lots and then resold for what the car was originally worth.
The donor is rarely contacted about the vehicle's condition, according
to the witness. The witness gave two examples in which a charity
received less than $300 for a car that was worth about $4,000.
Some state attorney general offices have
filed suits against car donation program operators, according to
the GAO report. A for-profit business was parading as a charity
that solicited cars before Massachusetts State officials shut it
down. In 2003 Connecticut's Attorney General filed suit against
the Animal Health Care Fund, a fake animal protection charity created
by the owner of a used car dealer, who kept nearly all of the car
donation proceeds and maintained one checking account for both entities.
The California Attorney General's office filed a suit against an
individual with a used car lot that incorporated a charity without
any charitable programs and estimates that it raised over $1 million.
In response to out-of-control donated
car programs, Congress in 2004 passed legislation to limit taxpayers'
deductions for donation of cars, trucks, boats or planes to the
gross proceeds received by the charity. People donating vehicles
worth $500 or more to charities that sell or auction the vehicles
need to receive a written notice from the charity with the gross
proceeds of the sale and stating that it was "sold in an arm's length
transaction between unrelated parties." If the charity uses the
donated car in its programs, the donor will need to receive written
certification from the charity of the intended use or improvements
related to use of the vehicle and the planned amount of time of
intended use. The charity must also certify that it will not sell
or exchange the vehicle before the planned period of time for its
intended use or improvement. See "Tips for
Donating a Car to Charity".
AIP regularly encourages donors to give
cars to charities that can utilize the car in its programs, e.g.
delivering meals to the homebound, taking elderly or blind people
to the doctor or on errands, training future auto mechanics, etc.
By doing this, vehicle donors can be confident that the full value
of their contribution is benefiting charity. We recommend that people
contact their local United Way, Goodwill, Salvation Army, community
college or vocational school to locate programs that need donated