Daily Tax Update - June 06, 2005

On June 3, the Treasury Department and IRS released guidance on charitable deductions for donated vehicles.  The American Jobs Creation Act (AJCA) generally limits the deduction for vehicles to the actual sales price of the vehicle when sold by the charity, and requires donors to get a timely acknowledgment from the charity in order to claim the deduction. The two exceptions to this rule under the AJCA were if there was a significant intervening use or material improvement by the donee organization.

  • The guidance explains what a "significant intervening use" and "material improvement" may include.
  • The guidance announced also provides an additional exception to the sale price limit that was not included in the AJCA.  This guidance permits a donor to claim a deduction for the fair market value of a donated vehicle if the charity gives or sells the vehicle at a significantly below-market price to a needy individual, as long as the transfer furthers the charitable purpose of helping a poor person in need of a means of transportation. 
  • The guidance also explains how to determine fair market value if one of these three exceptions applies (i.e., significant intervening use, material improvement, or needy individual).  Generally, vehicle pricing guidelines and publications differentiate between trade-in, private-party, and dealer retail prices.  The guidance provides that the fair market value for vehicle donation purposes will be no higher than the private-party price.
  • The AJCA also requires a donor to substantiate a deduction with an acknowledgement from the charity that the deduction either reflects the sale price or that one of the three exceptions applies. The AJCA imposes a penalty on the charity for failure to provide a proper acknowledgement. The guidance also explains the requirements for the content and the due dates for acknowledgements.
  • Additional information can be accessed here.

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

Steptoe & Johnson LLP has one of the largest and most diverse law firm tax practices in the country. The practice covers the entire spectrum of federal taxation, including representation of businesses before the Congress, Treasury and the national office of the IRS; transactional planning for domestic and multinational corporations; complex audit and controversy work for corporations and other business interests contesting IRS adjustments; litigation before the Tax Court, Court of Federal Claims, district courts, courts of appeals and the Supreme Court. The firm's tax practice also encompasses all aspects of employee benefits (ERISA), executive compensation, tax-exempt organizations and charitable giving.  Steptoe has an extensive state and local tax practice, representing an array of business clients on complex sales and use tax, corporate income tax and property tax matters, both advising those clients and handling audits, administrative appeals, and litigation for them.  Read  more information on Steptoe's tax practice