Car 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 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 received $1,290.
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 vehicles.