Wednesday, July 15, 2009

"Cash For Clunkers" Hurts Charities Devoted to Providing Transportation for the Poor

A few years ago, there was a big brouhaha about vehicle donations.  People were donating old jalopies to charities and taking full blue book value charitable contribution deductions even though the cars were worth far less, usually as evidenced by the price the charity subsequently sold the car for.  In 2003 and again in 2008, the Government Accounting Office conducted several studies calling into question the legitimacy of the charitable contribution deduction claimed by taxpayers who made such donations. One study said the following:

An estimated 4,300 charities have vehicle donation programs, based on a GAO survey of 157,500 charities with revenue of $100,000 or more. Taxpayers claimed deductions for donated vehicles on about 733,000 of the 4.4 million tax year 2000 returns filed with noncash deductions over $500, lowering taxpayer liability by an estimated $654 million. For the charities surveyed, proceeds from vehicle donations ranged from $1,000 for one charity, to $8.8 million for another. However, proceeds generally constituted a small share of total charity revenue for the majority of charities GAO reviewed. In addition, for two-thirds of the 54 specific vehicle donations GAO examined, charities received 5 percent or less of the value donors claimed as deductions on their tax return. Differences in proceeds received by the charity and value claimed by a taxpayer were due in part, to vehicles being sold at auctions at wholesale prices, and proceeds being reduced by vehicle processing and fundraising costs. Due to a lack of available data on the condition of donated vehicles, GAO could not determine whether taxpayers appropriately valued their vehicles when claiming associated tax deductions. The IRS has some activities designed to detect noncompliant claims for noncash deductions, including vehicle donations. However, the IRS has not pursued potential leads from these activities because tax revenue yields are less than other potential noncompliance cases, such as abusive tax shelters. IRS's ongoing National Research Program study may provide information on how to deal with donated vehicle compliance issues. Also, an IRS task force drafted recommendations for improving IRS's oversight of charities' donated property programs. State officials have filed legal actions in a number of cases involving problems with vehicle donation programs, such as an individual soliciting vehicle donations for fictitious charities.

The Congress responded with legislation in the American Jobs Creation Act of 2004 that attempted to limit the extent to which taxpayers could claim inflated deductions based on vehicle donations.  The Act added IRC 170(f)(12), which generally limits the amount of the deduction to the price the charity later sells the car for.  The Service also issued Notices 2005-44 and  2006-1 both of which provide background details on 170(f)(12). 

The "Cash for Clunkers" Act is a stimulus bill of sorts for the auto industry and, at the same time, designed to get less fuel efficient cars off the road for good.  Its official name is the "Consumer Assistance to Recycle and Save Program.  The gist of it is this:

Under the program, consumers may trade in their older vehicles and receive vouchers worth up to $4,500 toward the purchase or qualified lease of a new, more fuel-efficient car or truck.  The program will be authorized from 7-1-09 to 11-1-09 and will provide for approximately 250,000 new car or truck purchases. 

According to the Drive America Forward Bill the below summarizes the terms of the program:

  • Be in drivable condition
  • Be continuously insured and registered to the same owner for at least one year
  • Have a combined fuel economy value of 18 mpg or less (Work trucks must be pre-2002 regardless of mpg)
  • Not be more than 25 years old with historic or aesthetic value. These vehicles are valued by hobbyists or are a valuable source of restoration parts.

The replacement vehicle must cost less than $45,000 and get at least 22 mpg, among other requirements.   According to this NPR report, though, (audio version) the program has had the unintended effect of hurting charities that actually rehabilitate old cars and give them to poor people who cannot afford to buy a car with which to drive to work.  Apparently, not all charities that buy old cars were knowingly, if not passively participating in a scheme to inflate taxpayer's charitable contribution deduction.  Some charities were actually putting old cars to good use -- getting transportation for poor people who just want a way to get to work!  Other charities are complaining because even with the tighter new rules enacted in 2004, people were still donating old cars to charities and those charities were selling the cars for needed cash. 

Some charities complain that the program will put a financial strain on them when donations have dropped because of the recession. Most donated cars aren't given away; they're sold. And the proceeds go to charities. "There's a whole industry that helps support the charities, including the auctions, tow truck drivers, telephone answering personnel; and all of those people are going to be hurt," says Pete Palmer, a co-founder of the Vehicle Donation Processing Center, which handles the sales of donated cars for 400 charities. Donors can take tax deductions for the small amount charities usually get for those sales. Somebody has to be pretty darn altruistic to do a car donation over the cash for clunkers program if they want the new car," Palmer says. Palmer and some charities are lobbying against an effort to extend the cash for clunkers program, which is scheduled to expire Nov. 1.

I guess it only goes to show that legislating completely good outcomes is a complicated endeavor.  The Cash for Clunkers program seems very limited in scope -- not many cars, for example, get less than 18 mpg these days -- but even so it is apparently hurting the ability of charities to help poor people get transportation and other needed goods and services.  I am sure nobody thought that would be the case -- automobile workers get rehired while other workers lose jobs for lack of transportation. 


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I've heard about all of the requirements but I have never heard about Work trucks having to be "Pre-2002"... and I am also not so sure that this government program is affecting charities as much as we think.

Posted by: Drive the Ford Difference Dealer | Jul 16, 2009 2:28:07 PM

It probably won't devastate car donation since most cars won't be eligible because they get more than 18 mpg. Also, most car donation centers will accept vehicles that aren't driveable. To qualify for a cash for clunker's voucher the vehicle has to be driveable.

Posted by: karenc | Jul 20, 2009 12:43:55 PM

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