Earl Copus Jr. of Charities Advocating Responsible Solutions Inc. and David I. Kempler and Stuart M. Lewis of Buchanan Ingersoll PC have urged Treasury to include a broad exemption for vehicle donations in situations where a charity acts in direct furtherance of its exempt purpose, in forthcoming guidance on the charitable donation of cars.
Mr. Eric Solomon
Acting Assistant Secretary for Tax Policy Department of the Treasury
Room 3120 MT
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Dear Mr. Solomon:
On behalf of Charities Advocating Responsible Solutions, Inc. ("CARS"), we would like to thank you for meeting with us on November 8, 2004 to discuss the new section 884 of the American Jobs Creation Act of 2004 and its impact on charities.
We are pleased to submit the following comments and recommendations on behalf of CARS with respect to proposed guidance to be issued by the United States Treasury concerning certain aspects of the new legislation. In particular, CARS recommends that Treasury issue broad regulations exempting vehicle donations from the new rules when a charity acts in direct furtherance of its exempt purposes. Since the express purpose of the new legislation was to prevent the over-valuation of vehicles by donors to charities and not to harm unnecessarily the charities themselves, we are requesting Treasury to take a well-reasoned view of the term "in direct furtherance" in such regulations. CARS is very concerned that there will be a substantial decrease in the number of automobiles donated after December 31, 2004 to many worthwhile charities that utilize such cars in the fulfillment of their exempt functions unless guidance is issued soon.
BACKGROUND
CARS is an organization composed of 54 charities that receive automobiles as charitable donations from individual contributors. The funds obtained from the sale of donated automobiles are a significant source of revenue for these worthy organizations that serve our communities and, in such cases, relieve the government of such obligations. CARS is concerned about the impact of the new legislation on the amount of funds available to these worthwhile organizations.
The new legislation provides exemptions for automobiles donated to charities, depending upon the use of the vehicle by the donee charitable organization. If the donee organization has either a significant intervening use for the automobile or materially improves such vehicle, the general rule of the statute that the charitable deduction not exceed the gross proceeds from the sale does not apply. Additionally, the new section 170(12) of the Internal Revenue Code (the "Code") states that the Secretary may prescribe such regulations or other guidance as necessary which exempts the "selling price rule" when the donee organization acts in direct furtherance of the organization's charitable purposes.
PROPOSALS
The legislative history of the statute gives little guidance as to what "sales by the donee organization are in direct furtherance of its exempt purposes." The Conference Report gives one example of "direct furtherance," namely, if an organization sells its donated automobiles to needy individuals at a price significantly below fair market value. Since a similar term ("substantially related") is utilized in section 513 dealing with unrelated business income, it would appear that Congress intended the rules of section 513 be utilized in connection with this definition.
Under Treas. Regs. § 1.513-1(d)(2) an activity is "substantially related" to the organization's "exempt purpose" if the activity contributes importantly to the accomplishment of its exempt purpose. The relationship must be a "causal" one between the activity and the achievement of the organization's exempt purposes. The size and extent of the activity in relation to the nature and extent of the exempt purpose will be considered.
The IRS has issued several rulings which state that training programs for various target populations conducted by certain charitable organizations are substantially related to the organization's exempt function.
For example, in Rev. Rul. 81-61, 1981-1 C.B. 355, the IRS held that the operation of a beauty shop and barber shop by a senior citizen's center contributed importantly to the center's exempt purpose of meeting the psychological and health needs of the elderly in personal grooming. Similarly, in Rev. Rul. 75-472, 1975-2 C.B. 208, the operation of a furniture shop by a halfway house for recovering alcoholics to provide transitional employment for residents contributed importantly to the organization's exempt purposes by affording the residents gainful employment and by enabling them to develop the ability to cope with emotional problems. Finally, in PLR 1999-20041 the organization of a mushroom growing and processing facility to employ low-income individuals and recovering drug addicts was substantially related to the charitable organization's exempt purpose of rehabilitating people in need and restoring them to a useful life in the community.
CARS proposes that Treasury include examples in its guidance to the effect that if a charity's exempt purposes include training programs for target populations1 that use automobiles as part of such programs, the newly enacted limitation on the amount of the charitable deduction does not apply. For example, if a charity's purposes are to train and assist military veterans or individuals with disabilities and the charity uses donated automobiles as part of its mission to train these individuals to become mechanics, technicians, or in related automotive occupations, the activities should be considered in furtherance of the organization's exempt purposes to help such individuals become contributing members of the community. The ultimate sale of such automobiles would be in furtherance of the organization's exempt purposes of rehabilitative training. The training constitutes both an intervening use and in furtherance of the organization's charitable mission.
Since the new legislation does not specify any particular method of valuation for donated vehicles that would be exempted from the "selling price rule," CARS proposes that Treasury issue regulations which require the charities to assign a fair market value for such vehicles based upon the private party sales calculation in conjunction with nationally published resource guides such as Edmunds or Kelley Blue Book. Furthermore, CARS recommends that Treasury require the donee organizations to state in writing to donors that their tax deduction is limited to such value. CARS considers the private party sales calculation to be the most fair and applicable standard for vehicle donors who claim a tax deduction under exempt provisions, and please note that this calculation is substantially lower than the dealer/retail valuation category also used by the resources cited above. CARS has consistently advocated a more precise interpretation of fair market value as a guidance to donors and a safeguard against overvaluation. While CARS believes that the adoption of a private party sales standard would have been a more-than-sufficient legislative reform in lieu of the bill that was eventually passed, in the very least, we would ask that this valuation standard be recognized as the proper calculation for fair market value of exempted vehicles under the new law.
The new legislation requires charities to obtain the name, address, and taxpayer identification number of the donor. CARS is concerned that this requirement would unnecessarily reduce the number of the automobiles contributed to charities because of security concerns on the part of the donor. Charities do not presently obtain and store such information and many charities have not adopted security systems that would prevent identify theft.
CARS proposes that charities accepting automobiles as donations obtain the last four digits of the donor's social security number for the acknowledgement form along with the entire Vehicle Identification Number (VIN). The donor can fill out the remaining numbers of the social security number on the copy the donor files with his or her income tax return. The charity can file the acknowledgement with the IRS with the name, address, partial social security number, and full VIN. The IRS should then be able to match the two documents.
We would be happy to discuss these issues with you further.
The elderly, the disabled, low-income individuals and recovering addicts are all examples of specific charitable classes.