The twisty trail of car donations

Got a used lemon to unload? For years, the federal government allowed owners of rundown vehicles to donate them to a charity and then declare them as tax write-offs -- often based on unrealistically high values -- and saddling many low-income buyers with defective cars while cheating the IRS on taxes.

After growing abuse of this little-understood system, Congress last year enacted legislation to stop the tax abuse and force major reforms in the nonprofit sector. The new rules apply beginning with last year’s donations filed on this year’s tax returns.

“Americans are generous and enjoy donating to charity. Unfortunately, a lack of clear guidance for taxpayers and poor oversight of car donations created a perfect storm for abuse,” Sen. Charles E. Grassley (R-Iowa), author of the reforms, said in a statement. “Some taxpayers were taking inflated deductions they didn’t deserve.”

Critics call the system a charity-lemon mill. It operates largely through an interstate auction system that seldom gets close to actual charities touted in big-budget ad campaigns. In many cases, charities get a relatively small percentage of the contributions from car donations.

Charity donations account for an estimated 733,000 vehicles in the used-car market every year, according to a 2004 investigation by the Government Accountability Office, an arm of Congress that monitors public funds. The numbers vastly exceeded previous estimates of the size and scope of the system. More than 4,000 charities have car-donation programs.

The toll-free phone numbers cited in advertising or on the Internet often go to large boiler rooms, operated not by the charities but by businesses, calls to several organizations found. They send privately operated tow trucks to pick up the car, take it to an auction lot in a nearby town and from there it eventually ends up on a used-car lot.

Half of the Internet come-ons for donations note that vehicles do not have to be running to qualify, according to the GAO investigation. The probe tracked 54 of these charity vehicles and the resulting tax write-offs.

In one example, a GMC Jimmy truck was given to a charity-donation program, operated by a third-party agent, that auctioned it for $375. After the agent deducted advertising and other expenses, $62 was left. Of that, the agent kept half and $31 went to the charity. Meanwhile, the taxpayer who donated the Jimmy took a $2,400 deduction, based on the market value of the vehicle listed in a guidebook.

In the vast majority of cases, charities received less than 50% of the proceeds of a vehicle donation. Keep in mind, those proceeds are generally less than an owner might raise by selling the vehicle privately and then donating the full amount to charity.

Many experts agree that taxpayers can ensure that more money goes to a charity by selling their own vehicles and donating the cash. Many people donate vehicles to avoid the bother of selling their own car.

At a June 2004 Senate hearing, witnesses from charity scams disclosed a laundry list of deceptive and fraudulent practices. In some cases, middlemen purposely disabled cars so they brought less at auction, further reducing what the charity got.

The other side of the scams -- the car buyers who end up with these vehicles -- was not addressed in the GAO study. But the investigations staff at the Senate Finance Committee, which conducted the hearing, is familiar with the problem.

“People are not taking their brand-new car and saying this should go to the poor,” said a committee attorney working for Grassley. “They are giving the car that only goes in reverse.”

The nonprofit sector has agreed that car donation programs have flaws, but said the reforms went too far.

“The criticism was fair,” said Diana Aviv, president of Independent Sector, a Washington, D.C.-based group that represents hundreds of major charities. “Too many taxpayers could inflate the value of their cars, and too little of the money was going to the charities.”

Aviv said many charities, such as Volunteers of America and Big Brothers Big Sisters, operate more independent programs and are able to avoid letting middlemen capture most of the value of a donated vehicle. Grassley’s reforms, however, “just about threw out the baby with the bath water” and have led to a “massive drop” in legitimate donations, based on anecdotal evidence, Aviv said.

The Grassley reforms clamp new curbs on the system. Before, taxpayers often used appraisal guidebooks to estimate the value of the vehicles they donated, including those that had collision damage or did not run. Under the new law, taxpayers can deduct only the actual amount the vehicle brings in when sold or auctioned. And to get the deduction, the taxpayer must supply a form from the seller that declares the sales amount.

Aviv said wholesale auction prices underestimate the retail value of vehicles. Instead, she proposes that taxpayers submit estimates from qualified appraisal services.

In Grassley’s mind, however, the reforms did not even solve all of the problems. “I’m worried that there still remains significant abuse in car donations where middlemen are still the ones making the big profits out of car donations and charities getting the pennies,” he said.

The reforms, moreover, do not prevent defective vehicles from being moved through the system. There is no inspection requirement for any used vehicles, of course, including donated ones. But because charities are involved, many say there should be a higher ethical standard.

“Charities should recognize that they have a responsibility to improve the integrity of the car-donation program across the board,” Grassley said. “They can’t sing from the hymn book that they care about hard-working, low-income families, but then sit idly by when the lemons they’ve received as donations are turned around and sold to those same struggling families.”

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Ralph Vartabedian can be reached at ralph.vartabedian @latimes.com.