Car-Donation Programs Threatened by Legislation

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."

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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.