Before Your Church Sells a Donated Car

In recent years Congress and the IRS have questioned the accuracy of values claimed by donors for contributions of vehicles to charity. These concerns prompted Congress to enact legislation in 2004 making the substantiation requirements for vehicle donations more stringent. The current substantiation rules are summarized below:

1. Church sells a donated vehicle with no significant use or alteration

The church must:

(a) Issue a written acknowledgment to the donor, within 30 days of the sale, containing the donor’s name and Social Security number, date of contribution, vehicle identification number, date of sale, certification that the vehicle was sold in an arm’s-length transaction, a statement of the gross proceeds from the sale, a statement that the deductible amount may not exceed the amount of the gross proceeds, and whether the church provided any goods or services in consideration of the donation (and a description and good faith estimate of the value of any such goods or services, or, if the goods or services consist solely of intangible religious benefits, a statement to that effect); and

(b) submit the same information to the IRS by February 28 of the following year. IRS Form 1098-C must be used to submit the information to the IRS and may be used to provide the required information to the donor.

2. Church sells vehicle at a price significantly below fair market value (or gratuitously transferred) to needy individual in direct furtherance of its exempt purpose

The church must:

(a) Issue a written acknowledgment to the donor, within 30 days of the date of contribution, containing the donor’s name and Social Security number, date of contribution, vehicle identification number, certification that the charity will sell the qualified vehicle to a needy individual at a price significantly below fair market value (or, if applicable, that it will gratuitously transfer the vehicle to a needy individual) and that the sale (or transfer) will be in direct furtherance of the charity’s exempt purpose of relieving the poor and distressed or the underprivileged who are in need of a means of transportation, and whether the church provided any goods or services in consideration of the donation (and a description and good faith estimate of the value of any such goods or services, or, if the goods or services consist solely of intangible religious benefits, a statement to that effect); and

(b) submit the same information to the IRS by February 28 of the following year. IRS Form 1098-C must be used to submit the information to the IRS and may be used to provide the required information to the donor.

3. The church “significantly uses or materially improves” the car

The church must:

(a) provide the donor with a written acknowledgment, within 30 days of the date of the contribution, containing the donor’s name and Social Security number, date of contribution, vehicle identification number, certification and detailed description of the intended significant intervening use by the charity and the intended duration of the use or the intended material improvement by the charity, and a certification that the qualified vehicle will not be sold before completion of the use or improvement, and whether the church provided any goods or services in consideration of the donation (and a description and good faith estimate of the value of any such goods or services, or, if the goods or services consist solely of intangible religious benefits, a statement to that effect); and

(b) submit the same information to the IRS by February 28 of the following year. IRS Form 1098-C must be used to submit the information to the IRS and may be used to provide the required information to the donor.

The level of noncompliance by charities with the Form 1098-C reporting requirement is stunning. Church leaders should familiarize themselves with the requirements summarized above whenever anyone wants to donate a vehicle to the church.