Uncle Sam's Christmas Special: Widows and orphans robbed in tax code switcheroo

[Troubleshooter]

Sometimes I wish the sun would take a giant dump on Washington so we could start over.

~~~~~~~~~~

New laws that take effect just after the holiday season allow Uncle Sam to take more money come tax time. The extra money comes from those who donate their cars to charity, but discover that the amount they can deduct has shrunk dramatically. The truly humbug twist is who will get hurt by the grab—charities that generate income from donated cars and the needy people they help. More than 4,000 organizations help everyone from battered women to single moms to disabled veterans, but Americans will soon have less incentive to support such efforts.

Whole thing here.

[richlevy]

It's too bad Haliburton didn't have some part of the charity resale business. That would have saved the deduction. :p

GWB wants tax breaks without any serious cuts to government spending. This means the money is going to come from people and organizations without effective lobbyists or friends in the White House. AARP has a lot of clout, so seniors are safe, and noone in Washington will touch home deductions, since most Americans get those. It's areas like this where a small group is affected that will feel the pain.

I'm not a tax professional or lawyer, but here is what I think the rules are:

The interesting question is if this policy will be claimed by people receiving cars as gifts. Previously, if you won golf clubs on a game show, you had to pay tax on the 'fair market value' of new golf clubs. If you donated new golf clubs, you could take a deduction on the same 'fair market value' of the same golf clubs.

Copy of the old rules here

IRS rules on Fair Market Value

Heres one link on taxes on game show prizes

Heres a nice link on various rules effecting churches Goods or services provided in exchange for gifts

If you are a good dealmaker, you could game the system by finding a bargain, donating it, and then claiming a higher fair market value than what you paid for it. Be prepared for a fight, but the IRS is supposed to use the same rules for FMV that they use for taxing as they do for deductions. So if you buy a load of bibles for $1 apiece at a liquidation sale, and donate them to a church, you deduction might be much higher if you can prove that the wholesale price of the bibles was $3 apiece. I heard a rumor about a case like this and I was searching the Internet for it when I found these other links.

The key is establishing that the low price you paid for the bibles was an unusual market condition and providing proof that the church would have had to pay $3 apiece for the bibles if they had purchased them from a wholesaler. The IRS already establishes that liquidation sales do not reflect fair market values.

From publication 561.

Problems in Determining Fair Market Value
There are a number of problems in determining the FMV of donated property.

Unusual Market Conditions
The sale price of the property itself in an arm's-length transaction in an open market is often the best evidence of its value. When you rely on sales of comparable property, the sales must have been made in an open market. If those sales were made in a market that was artificially supported or stimulated so as not to be truly representative, the prices at which the sales were made will not indicate the FMV.

For example, liquidation sale prices usually do not indicate the FMV. Also, sales of stock under unusual circumstances, such as sales of small lots, forced sales, and sales in a restricted market, may not represent the FMV.

Selection of Comparable Sales
Using sales of comparable property is an important method for determining the FMV of donated property. However, the amount of weight given to a sale depends on the degree of similarity between the comparable and the donated properties. The degree of similarity must be close enough so that this selling price would have been given consideration by reasonably well-informed buyers or sellers of the property.

[russotto]

If this puts a stop to those "donate your car" commercials, it's worth it.

[Beestie]

The Kelly Blue Book value is bogus and so they aren't allowed to use it anymore. I don't see the problem. Why should two people who donate the same make/model/year car get the same deduction when one car is in pristeen condition and the other is a piece of junk on blocks?

I donated a car a while back and don't think it was worth half of what I legally wrote it off for.