Wednesday February 1, 2023
Case of the Week
The Gas Guzzler's Deduction, Part 1
Case:Brandon Bigtop loves his truck, which he nicknamed "the Beast." It was a gift for Brandon's 18th birthday. It is painted bright red and is two tons of metal, muscle and noise. Indeed, many neighbors would grumble as Brandon drove by because the rumbling engine could be heard three blocks away. As you can imagine, 18-year-old Brandon was in truck heaven.
Brandon is now 20 years older and a university professor, but he never could part with his beloved truck. The truck now sits quietly in the driveway collecting dust and serving as merely an "eye sore" according to his wife. Occasionally, Brandon will take the truck out for a spin, but its low gas mileage makes it a costly joy ride. Plus, Brandon still receives glares from his neighbors as he passes through the neighborhood, something he does not relish anymore.
After much deliberation, Brandon decides to donate his truck to a local charity. Before deciding to contribute the truck to charity, Brandon checked with his tax advisor regarding the tax benefits of his gift. Brandon wanted to make sure he received the maximum tax benefit from his gift while at the same time not risking an IRS challenge.
Question:What are the tax rules for gifts of automobiles? The local charity plans to sell the truck immediately after receipt. Does this affect Brandon's charitable deduction in any way?
Solution:In general, a gift of a vehicle produces a charitable deduction equal to the fair market value of the vehicle. Because vehicles usually lose value over time, the traditional "reduction" rules for gifts of tangible personal property generally do not apply to gifts of vehicles. See GiftLaw Pro Chapter 1.1.4. So, for many years, donors would simply claim a charitable deduction equal to a vehicle's "Blue Book" value. However, research by the IRS showed that many donors claimed inflated values for their vehicle gifts. For instance, many donors claimed Blue Book value although their vehicle was in poor condition and actually sold for far less than Blue Book value.
As a result, the American Jobs Creation Act of 2004 created rules for charitable contributions of cars, boats, RVs and aircrafts. There are two categories for these rules, the "sale" category and the "hold" category. In the sale category, the deduction will be the lesser of the sales proceeds or the fair market value on the date of the contribution. If the vehicle's fair market value or sale proceeds are less than the vehicle's cost basis, the donor will take the lesser value as the deduction.
If the charity sells the vehicle within 30 days, the "sale" category rules apply. Under the sale category rules, the receipt to the donor must list the name and Social Security number of the donor, the vehicle identification number and must also state that the vehicle was sold "in an arms-length transaction between unrelated parties." The receipt must also show the gross proceeds of the sale and state that the charitable deduction may not exceed the gross proceeds.
This law basically provides that all gifts of vehicles that are sold will have a charitable deduction limited to the proceeds received by the charity. Since many charities sell vehicles at auctions where the prices are usually below Blue Book, the deduction for gifts of vehicles will be greatly reduced.
In this case, Brandon's truck has a Blue Book value of $4,000. However, at auction, the charity will likely receive between $2,000 to $2,200. Therefore, under the rules, Brandon's charitable deduction will be in the range of $2,000 to $2,200 equal to the gross proceeds from the charity's sale.
Editor's Note: In Part 2, we will address the second category of these rules – the "hold" category.