Wednesday June 7, 2023
Case of the Week
The Gas Guzzler's Deduction, Part 2
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 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 hold and use the truck for its exempt purpose. Does this affect Brandon's charitable deduction in any way?
Solution:In general, gifts of vehicles produce a charitable deduction equal to the vehicle's fair market value. 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. 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 a high Blue Book value although their vehicles were in poor condition and 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 aircraft. There are two categories for the rules. The first category, the "sale" category, was discussed in Part 1 of this series.
The second category is the "hold" category. If a charity plans to hold and use the vehicle in a manner related to its exempt status, then the charity must certify to the donor its intended use of the property and the intended duration of such use within 30 days of the gift being made. The charity must also promise that the vehicle will not be sold prior to the anticipated "completion of such use."
In addition to the certifications listed above, the charity's receipt to the donor must also list the donor's name, donor's Social Security number and the vehicle identification number.
Because the charity is holding the property, for a related charitable use, the sale category rules will not apply. As a result, Brandon will follow the traditional charitable deduction rules (i.e., the deduction is equal to fair market value).
In this case, Brandon's truck has a Blue Book value of $4,000. However, based upon its actual condition and mileage, a more accurate fair market value is $3,500. Therefore, Brandon will claim a charitable deduction for $3,500 and retain the charity's written acknowledgement and certification for substantiation purposes.
If the vehicle value is over $5,000, an appraisal by a qualified appraiser is required. However, for Brandon's gift deduction of $3,500, the condition of the car must be noted, and he will need to complete Part A of Form 8283 using an appropriate method for valuation. In many cases, donors like Brandon will obtain an appraisal even if the value is below $5,000.
The Gas Guzzler's Deduction, Part 1
Wild Bill Enjoys a "Russell" Art Deduction
Wild Bill Russell's "Artistic" Unitrust