Driving Through a Legal Loophole

For charities, it’s the perfect pitch, tapping into the goodwill of Americans and their greed, too: Donate your used car, truck, boat or motor home and help others while helping yourself to a juicy tax write-off.

The come-ons are everywhere: for abused children, the sick, the poor, the elderly. You’ll probably get more cash for your old rust bucket than if you sell it yourself, they say, and it’s all hassle free.

The practice of donating vehicles to charity--almost unheard of a few years ago--is booming in California and nationwide. Regulators freely acknowledge that they can’t keep track of all the groups trading tax breaks for cars, no less where all the money made is going.

One place it’s not going, in many cases, is to the charitable causes that donors think they’re helping.

Authorities in California say they believe as much as $10 million in donated vehicle proceeds to three groups never made it to the poor Jewish immigrants, abused children and other causes for which it was raised.

In addition, documents show that only a tiny fraction of the $20 million raised for the state’s most successful vehicle donation program, the Sierra Children’s Home, benefited abused children as pledged.

Even though an ambitious ad campaign still solicits donations for Sierra, the home in rural Vacaville no longer operates. The small facility was closed quietly in March and the dozen or so teenage residents sent elsewhere.

The majority of mainstream charities have benefited greatly from the vehicle donation craze.

But the growing practice has also attracted profit-minded--and often unscrupulous--operators who affiliate themselves with charities and rake in the cash.

Some work the field legally by exploiting loosely worded tax laws and regulations. Others hide deceptive scams under the cover provided by the sheer volume of charities and the practically nonexistent state and federal oversight.

“The potential for fraud is enormous,” said state Deputy Atty. Gen. Belinda Johns. “I can’t tell you how many millions of dollars are lost to the causes that the charity money is supposed to be raised for.”

Allegations of fraud are just one problem spawned by the vehicle donation trend, according to interviews and a review of hundreds of pages of state and federal documents.

Among the others:

* Many well-meaning donors are unwittingly falling prey to professional fund-raisers, used car dealers and scrap-yard operators who masquerade as legitimate charities or set up their own fronts with important-sounding names, then raise huge sums of money and keep almost all of it. Because of loopholes in state and federal law, it’s all legal.

* In many states, including California, virtually anyone can create a charity and hit the airwaves to offer lucrative tax breaks in exchange for vehicles--without scrutiny from government regulators for at least 18 months, and often much longer. Even then, authorities rely on an “honor system” and rarely audit the charities.

* The lack of government oversight puts donors and buyers of the vehicles at risk too. Some groups that accept donated vehicles don’t always transfer titles, sticking donors with liability for tickets, crashes and various problems caused by others. And because California charities are exempt from regulations policing car dealers, some sell unsafe cars without recourse for the buyers.

Donors and buyers are not the only victims.

The IRS is growing alarmed as many charities woo donors by offering highly inflated write-offs, often worth two or three times the value of their vehicles. That’s fraud, and it is costing the U.S. Treasury potentially hundreds of millions of dollars a year in tax revenue, experts say.

“The victim is taxpayers like you and me,” said Alan Feld, a professor of nonprofit tax law at Boston University.

It is especially troubling in California, where Johns and about a dozen other prosecutors and auditors have had to police 83,000 charitable organizations granted tax exempt status. There are also untold numbers of fly-by-night groups that regulators never hear about.

Some groups that ask for vehicle donations are so shadowy or deceptive it’s impossible to tell who is behind the toll-free number and bank of phone operators.

In the case of Sierra Children’s Home, its “Abused Children Need Your Help!” campaign features a smiling young boy who looks to be about 5. The ads do not tell donors that the ramshackle facility in Vacaville has been home to at most 13 emotionally disturbed teenagers at a time--none of them abused young children.

They do not mention that Sierra’s parent corporation, Agape Villages Inc., closed the home after social workers deemed the facility understaffed, filthy and “marginally operating,” or that the government was paying Sierra $4,688 a month for each youth’s board and care.

Donations solicited in Sierra’s name actually go to Car Program L.L.C.--a professional fund-raiser and auto dismantler near Sacramento--that sells the vehicles and has kept about 90% of the money raised in most years, according to reports filed with the state. They show that the firm turned over to Agape Villages less than $1.2 million of the $13 million it raised between 1995 and 1997.

And now there are questions about where even that money went.

Sierra’s manager told social workers probing poor conditions there that “nearly all of the car sale money was going to pay off corporate debt and not to the care of the children,” a memo from the state Department of Social Services said.

Agape President Richard Blythe denies that, and says that Sierra’s small share of vehicle donations went to care for the teenagers. He said the firm closed the home to concentrate on unrelated foster care programs.

“We are confident that our . . . business practices comply with all state laws and regulations, as they always have,” Blythe said, adding that Sierra’s current fund-raising efforts reflect the home’s closure.

The most recent radio ads, however, state only that “we are expanding the services of Sierra Children’s Home . . . to provide homes and services for more children than ever.”

Johns and other law enforcement and regulatory authorities had no comment on whether Sierra and its fund-raiser are engaging in deceptive tactics or doing anything illegal. The state is looking into the home’s compliance with the rules covering charities, she said.

Some donors certainly feel deceived.

Talerengsak Bodhiprasart, a salesman in Davis, has donated three cars to Sierra and says he was told that about 80% of the proceeds would go “for the kids.”

“I don’t feel cheated because I got the tax write-off,” he said. “But I feel disturbed about it. Morally, I feel they didn’t do the right thing.”

Tempting Write-Offs

In recent years, three California groups have been shut down after the state’s allegations of fraud and abuse of charity laws.

Orthodox Rabbi Bentzion Pil raised $8.5 million through his Jewish Educational Center from donors in San Francisco, Los Angeles and New York. Authorities contend that he and his wife, Mattie, took one of the best cars for themselves, spent car sale proceeds on a house down payment and their son’s $40,000 bar mitzvah, and had only $150,000 left in the bank when the center was closed.

Local, state and federal prosecutors shut down the nonprofit center two years ago and seized its assets. Pil’s lawyer said Pil has done nothing illegal.

Former used car dealer Ronald Higgerson, authorities allege, created the Foundation for Abused Children in Sacramento along a row of used car lots, set up his own cash-only lot and sold enough donated vehicles to deposit $780,000 in foundation accounts. Then, Johns said, he spent “not one penny of it” on abused kids and left just $11,000 in the bank for authorities to seize.

“Where did all the money go?” asked Johns. “I have no idea.”

Higgerson, 54, refused comment except to say authorities are maliciously targeting him and that he has done nothing wrong. A Sacramento judge ordered the foundation dissolved in February after Johns alleged that it was “a used car lot masquerading as a charity.”

Authorities moved against David Gainer for allegedly raising more than $1 million through his Community Services Foundation and a separate Northern California fund-raising group in the name of handicapped children, AIDS sufferers and other charitable causes. Officials said he pocketed much of it--including large sums after he was banned from charity fund-raising for his role in a fraud scheme.

A San Mateo County judge issued an injunction shutting down the fund-raising operation. Gainer’s lawyer says his client broke no laws.

No one knows for sure how much of the nation’s annual charitable giving comes from vehicle donations, or how many groups are out there soliciting. There are few mechanisms in place, regulators say, to allow them to keep track.

Authorities attribute the car donation boom to what they call the greed factor: Traditionally, most taxpayers are loath to part with big chunks of hard-earned cash, especially if they don’t know the charity.

But tempted by the prospects of easy and inflated tax write-offs for cars that may not even run and boats they can’t sell, donors cannot give them away fast enough.

Much of the problem stems from the way the system works: The donor sees an ad for a “charity,” calls a toll-free number and describes the vehicle’s condition to an operator. A tow truck picks up the vehicle in exchange for a receipt that usually tells the donor how much he or she can write off.

Often the donor isn’t told that the IRS will only accept a write-off based on the market value of the vehicle, in which its “Blue Book” value--an accepted industry standard based on the age and make of the car--is often diminished by poor condition or high mileage.

Higgerson’s Foundation for Abused Children promised donors “high Blue Book for max tax donation,” while the unrelated National Foundation for the Treatment of Abused Children provided donors with an official estimate “largely based on what the taxpayer says the vehicle is worth even before the organization has seen the vehicle,” according to one state memo.

Al Fink, IRS regional spokesman for Northern California, knows about such potentially fraudulent tactics firsthand. When he donated his 1985 Honda Civic, he said, a charity gave him a formal estimate suggesting that he could write off as much as $1,500--sight unseen. He knew the transmission-less “old clunker,” with 300,000 miles, was worth a few hundred dollars at best.

“When they do that,” Fink said, “they are misleading their clients.”

They are also making donors potentially liable for back taxes, interest and even penalties--though authorities concede that the risk is almost nonexistent.

The reason? The IRS doesn’t flag donors for audits even though it presumes they routinely inflate the value of their vehicles. Essentially, Owens said, the agency relies on the same “honor system” it uses to police the charities.

That troubles some experts.

“The [U.S.] Treasury is and ought to be very concerned about all of this . . . cheating,” said tax professor Feld. “But I have not seen that they are committing significant resources to this as a high-priority crime problem.”

In recent months, however, the IRS has taken steps to crack down on donors and deceptive charities. Some of those organizations are so profit-minded and “abusive” of charity laws that they could lose their nonprofit status and be subject to penalties usually reserved for fraudulent tax shelters, according to a May 27 memo from IRS director of exempt organizations Marcus Owens to top agency staff.

“Charitable services have to be their primary activity” for them to deserve tax-exempt status, Owens said in an interview. “They can’t be essentially a business.”

In the right hands, vehicle donations can be a godsend.

Car Donation Makes Strange Bedfellows

The Salvation Army brought in $17 million last year and spent only 15% on expenses. The L.A.-area American Cancer Society chapter raised $228,000 last year and put 81% of it into research and program services. The Boy Scouts of America’s San Gabriel Valley Council took in $300,000, mostly through the sale of donated boats--up from $116,000 in 1997. It too fared better than the 60% “return on the dollar” benchmark suggested by national charity watchdog organizations.

As competition heats up in the burgeoning vehicle donation business, it has created some unusual bedfellows.

After buying cars from other charities and fund-raisers, the giant Pick Your Part auto parts firm created its own fund-raising arm in September 1997 so it could stock its junkyards with donated cars and trucks, records show. Operating under the charitable-sounding name of WeCARE L.L.C., it now solicits donated vehicles for the Leukemia Society and other charities, and says it gives them half of its gross proceeds. “It’s a symbiotic relationship,” said the Leukemia Society’s Rosemary Evans.

Dozens of other groups turn over far less to charity, often because their own fund-raisers take almost all the money for themselves.

Records on file with the attorney general’s Registry of Charitable Trusts show that AIDS Project Los Angeles got only 20% of the $4.2 million that its fund-raiser took in during the last two years with the help of Brady Bunch mom Florence Henderson. That fund-raiser, the O.N.N.E. Corp., turned over an average of just 16% of $3.4 million it raised over the past two years for other charities, including Big Brothers of Los Angeles and youth and Jewish organizations.

One Maryland-based group, Help in Crisis International, hired a fund-raiser to help it cold-call residents in Los Angeles and 17 other major cities with its pleas to help “destitute” children around the world--even though it has never registered in California as required, despite two official demands that it do so.

The nonprofit was started about two years ago by Iwona Grodecki out of her house in Gaithersburg, she said. By last year, it had brought in $1.2 million in car donation proceeds, spent $725,000 on fund-raising and sent about 10%, or $119,000, to children’s groups--and not all of it cash, its records show.

The Greentree Shelter, also in Maryland, says it wasn’t aware that Help in Crisis was listing it as a major group it supports.

“They don’t have permission to do that,” said Greentree director Sheryl Brissett-Chapman, who said she received $600 from Help in Crisis over two years. “It gives the impression we have this great benefactor, which we don’t have. I’ve never even met this woman.”

For their part, charities and fund-raisers say their expenses are enormous, especially transporting and selling the vehicles.

Taron Reeves, who founded Car Program L.L.C. specifically to raise cash through the auspices of Sierra Children’s Home, says he spends half of the millions he raises on advertising just to compete with all the other fund-raisers seeking vehicles. Critics contend that such tactics force many smaller charities out of the fund-raising game.

Reeves’ contracts are boilerplate among profit-seeking fund-raisers: He typically splits the net proceeds with the charities, after taking out expenses, salaries, commissions and other costs.

On average, professional fund-raisers in California turn over only 20% to 25% of vehicle proceeds to charity, records show. They also show that some fund-raisers, such as Car Program L.L.C., have unusual administrative costs.

In one filing with the city of Los Angeles, Reeves said he raised $2.4 million in one 12-month period and claimed more than $2.2 million as overhead--including $72,000 for groceries and $17,000 for travel.

Reeves said he does not inflate his overhead to keep more profits than he should, and that the vehicle donation boom is “a win for the charities, it’s a win for the donors . . . the environment wins because we get rid of old, smoggy junkers, and we make a good living.”

Reeves has taken Car Program L.L.C. nationwide and now solicits donations on behalf of charities in 19 states, and on the Internet at the address www.donateacar.com.

Last year, Reeves said his firm raised $9 million for charities and passed along 35% of the proceeds, kept 9% of the gross and spent the rest on expenses.

High--and unaudited--overhead also appears to be common among small-time charities such as the SOS Boat/Auto Donation Program that Torye Davison operated out of the huge houseboat she had lived on in Wilmington, near the Port of Los Angeles, until it recently became unseaworthy.

SOS, or Save Our Source, was approved as a nonprofit organization even though it has no charitable functions except to raise money for other charities, records show. The “charity” runs ads offering the “highest tax deduction value” to boat owners eager to dump their expensive-to-maintain properties in a glutted commercial market.

It reported $101,721 in revenues in 1997--and $99,058 in expenses, including $16,119 Davison spent on the boat slip rental for the houseboat--which itself was donated to her organization. Other expenses included $9,773 for “supplies” and office expenses, $7,200 for “occupancy,” $3,545 for phone bills and $3,156 for a car. Davison denies any wrongdoing.

State authorities have never audited Car Program L.L.C. or Save Our Source. Deputy Atty. Gen. Johns said such high overhead costs are a “troubling” symptom of the state’s inability to keep tabs on charities. The IRS relies heavily on states to regulate charities and prosecute wrongdoing.

But state authorities’ hands are tied by several court decisions--including a landmark 1988 U.S. Supreme Court ruling--that say charities and fund-raisers do not have to spend even 1% of their donations on providing services.

Higgerson has escaped serious criminal inquiries even though he has told authorities that none of the $780,000 he reported raising went to help abused children. He was convicted in June on misdemeanor fraud charges--but only for selling defective used cars to unwitting buyers--and was sentenced to more than five years in county jail.

Critics cite Higgerson’s case as proof that authorities are hesitant to use general fraud statutes to pursue those suspected of abusing charity law to enrich themselves.

Authorities respond that they are hamstrung by holes in charity law “so big you can drive a truck through them,” in the words of Sacramento Deputy Dist. Atty. Susan C. Wilson, who prosecuted Higgerson.

Scanty Oversight

There has also been little coordination among regulators and authorities within California and among the 50 states over Internet-savvy operators, they concede.

Authorities also complain that the state lacks the investigators and auditors to ferret out mismanagement, theft, improper overhead costs and underreporting of income.

The attorney general’s office could not name one organization that has had its tax-exempt status revoked for noncompliance with disclosure laws. Only a handful, like Higgerson and Pil, have been shut down for suspicion of committing fraud or theft. And to Johns’ knowledge, not one charity operator or fund-raiser has been charged criminally in California with stealing funds raised through the sale of donated vehicles.

Oversight is just as sparse in many municipalities.

Los Angeles tries to regulate charities raising money in the city. But there are only three employees to approve and monitor 30,000 organizations whose thick files are crammed into 34 filing cabinets.

The Department of Motor Vehicles can investigate vehicle donation fraud too, but it rarely does, said John Parino, a DMV regional commander. “Charities have been kind of taboo at the DMV in the 25 years I’ve been here,” he said, because “they didn’t want to . . . cause a bunch of political trouble.”

But California has become one of the most aggressive states in combating vehicle donation fraud, with state Sen. Patrick Johnston (D-Stockton) securing several reforms and consumer protections. Atty. Gen. Bill Lockyer also has pledged to spend $1 million to beef up the charitable oversight apparatus.

Nevertheless, Johnston said, problems continue to jeopardize the efforts of legitimate charities.

“Ultimately, car donation programs will generate cynicism, and as they get more greedy, more extreme and run the limits of what is legal, people will say, ‘Better not to give money to . . . charities.’ ”

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Tips on Donations to Charities

Only a handful of regulators oversee the 83,000 charities granted tax-exempt status by the state, so authorities encourage potential donors to research groups soliciting their cars, trucks and boats. Here are some guidelines they provide:

* Make sure the group is registered with the state Attorney General’s Registry of Charitable Trusts, (916) 445-2021, which oversees charities. The IRS also oversees charities because it grants them tax-exempt status, and it can tell potential donors if the group is a legitimate nonprofit that can grant tax write-offs. The IRS can be reached at (213) 894-2289 or on its Web site at www.irs.ustreas.gov. Some groups give out their “tax identification number,” which has nothing to do with exempt status.

* If the charity is soliciting in Los Angeles, it must also register with the city’s Police Commission Investigation Division, Charitable Services Section at (213) 580-1001.

* State law requires professional fund-raisers to disclose their profit-making role in a vehicle-donation solicitation if asked. It also requires fund-raisers and the charities, if asked, to disclose how much of the sale proceeds are expected to go to charity.

* Ask specific questions, such as where the vehicle sale proceeds go and to which charities and programs. Try to visit the charity’s office and review financial-disclosure forms, which charities are required to make available to the public.

* Check with watchdog agencies such as the Better Business Bureau, at (213) 251-9696 or www.bbb.org, and the National Charities Information Bureau in New York at (212) 929-6300 or www.give.org.

* Get a detailed receipt from the charity that is in compliance with a new California law designed to prevent fraud. It should include the condition of the car and its sale price, if sold within 90 days of donation.

* If you are selling a vehicle, make sure the charity agrees to do all the required paperwork to take the registration out of your name. If you are buying a car from a charity, make sure it is in good working order.