Donated Cars: a License for Abuse?

Programs invite tax fraud and profiteering, officials say

Every day, when state Sen. Patrick Johnston drives to and from the California State Capitol in Sacramento, his blood pressure rises as he listens to radio ads urging listeners to donate their old cars to charity and get a tax break.

He is irritated by ads and billboards suggesting that donors can take a much greater tax deduction than is legal — even for their worn-out clunkers.

And he gets particularly exasperated when he hears radio ads for the Sierra Children’s Home. Mr. Johnston knows from statistics kept by the state that the organization ends up with less than 10 per cent of the money generated by sales of donated vehicles. The rest of the money is kept by a for-profit company that pays for the statewide advertising and runs the car-donation operation.

“It’s appalling,” says Mr. Johnston, a Democrat who heads the powerful Senate Appropriations Committee. “It just amounts to a scam — perhaps a legal scam, but it’s taking advantage of people’s interest in helping children and manipulating it for their own profit.”

At a hearing in December, Senator Johnston grilled charities that operate car-donation programs. Soon after that, he began to push legis lation aimed at squelching cheating on tax deductions.

The Senator is one of a growing number of government officials who have become alarmed that state and federal laws governing donations of used cars — as well as old clothes, kitchen appliances, motorboats, and many other non-cash items — are so loose that they are an open invitation to tax and charitable-solicitation fraud that could be costing state and federal treasuries billions of dollars a year.

“Anytime you are giving the public at large the opportunity to value something they want to give away and you don’t set up a procedure to check it, they are going to overvalue what they give away, human nature being what it is,” says Frank J. Kelley, the Attorney General of Michigan, who has tracked the rapid growth of car-donation programs in that state. “It’s bad public policy, and Congress should look at it again and come up with something better.”

Senator Johnston, for his part, would also welcome federal action. “It’s a big issue,” he says.

Nobody knows how much the U.S. Treasury loses each year when taxpayers fudge the value of non-cash gifts. The Internal Revenue Service does not keep track of the deductions that taxpayers claim for gifts of cars, clothes, or other goods. Over all, government statistics show that Americans take about $14-billion in deductions each year for all kinds of property — including art, land, and stock, as well as automobiles and household goods.

That amount could soar much higher if Congress approves pending legislation that would extend the charitable deduction to the three-quarters of all taxpayers who do not itemize their deductions. Relatively few taxpayers may now be cheating the government of more than several hundred dollars by overstating the value of donated goods. But extending that opportunity to millions more people could result in much greater losses to the Treasury.

Many charities, however, see nothing but gains from donated-goods programs. From national charities like the Salvation Army and the American Red Cross to the small church on the corner, they are turning to such programs to tap new revenue sources.

The “Kidney Cars” program, for example, has become an immensely popular fund-raising stratagem for the National Kidney Foundation. Each of the foundation’s 50 state affiliates now runs some version of the program.

“Car sales are our largest single source of revenue,” bringing in nearly a quarter of the foundation’s income, says Ellie Schlam, a spokeswoman at the foundation’s national office in New York. Car programs raised $2-million overall in 1992, the first year the charity ran them. They brought in more than $9-million in the fiscal year that ended last June and are expected to earn more than $11-million this year.

No matter how great the dividends charities have reaped from non-cash contributions, there is no question that many groups wind up with only a small portion of the total revenues from such programs. That problem is widespread, but it seems especially likely to occur when for-profit companies offer to run vehicle-donation programs for charities.

In California, the Attorney General’s Office has released figures showing that in 1996, 11 for-profit companies took in about $11-million from sales of cars donated to charity, but only $2.1-million (about 20 per cent) of that amount went to charity.

In contrast, the Attorney General’s Office said that charities kept 37 per cent of the overall amount that commercial fund raisers collected for them that year.

Concern over reports of profiteering by some operators of vehicle-donation programs has led several organizations to consider taking steps to curb abuses.

“Guys in the car business are jumping into this who have no interest in charity,” says Larry Eisenberg, chief executive of Charitable Services, a Texas company that runs a car-donation program called MotorDonor. The program raised $648,000 last year for charities in five states, including local chapters of the American Red Cross, the Boy Scouts, the Make-a-Wish Foundation, and the YMCA.

Mr. Eisenberg says he is eager to distinguish his operation from those of competitors that he considers shady or amateurish. To that end, he hopes to start a trade association of organizations involved in charity-car donations that would draft guidelines, set ethical standards for such transactions, and serve as a national clearinghouse of information. He says he intends to float the idea next week at the annual conference of the National Society of Fund Raising Executives, of which he is a former board member.

Just how much Americans care about the charitable benefits of goods-donation programs is hard to judge. Many people like the programs simply because they allow them to clean out their attics and garages and get rid of their old clothing, appliances, and clunker cars while also taking tax deductions.

What’s more, donors are in the driver’s seat when it comes to figuring out just how much to deduct. Under federal law, donors — not the charities that receive the gifts — are required to determine the fair market value of their contributions.

Donors of clothing, for example, are supposed to set values based in part on prices of comparable items in area thrift stores or consignment shops. Some charities shower donors with blank receipts — or simply mail them to people who claim to have dropped off their contributions in unattended receptacles. The I.R.S. advises donors of used cars, boats, and aircraft to consult published price guides, such as the so-called Blue Books. Those guides list a range of values for an item, depending on its features and condition. The I.R.S. emphasizes that those books are not the final word.

In reality, many donors never see the I.R.S. guidelines. Charities frequently refer donors to the published commercial guides, but few of them point out that the highest Blue Book value — which applies only to a vehicle in excellent condition — is rarely the one that donors are entitled to use.

For example, a 1985 Toyota Tercel station wagon is valued at about $700 in fair condition, according to the Kelley Blue Book’s World-Wide Web site, and $1,200 in excellent condition. Its retail value — which a buyer could expect to pay at a used-car dealer — is listed as $2,500. But the Blue Book declines to value the car at all if it is not in running condition.

Donors of used cars are usually seeking to deduct top dollar for their exhausted vehicles, says Mr. Eisenberg of MotorDonor. “We get calls all the time from people who’ve taken their cars to repair places,” he says. After learning from a mechanic that their car would cost more to fix than it would sell for on the street, they decide to donate it through MotorDonor — and claim a “fair market value” tax deduction far in excess of the street price.

And, he says, “they ask, ‘Will you dispatch a tow truck to pick it up?’ ”

Moreover, advertising by some charities implies that donors may claim the highest Blue Book values even for vehicles that are not running or that require extensive repairs.

“Got a clunker that won’t start?” queries one advertisement for a commercial car-donation program. “Contributors receive a donation receipt for a tax deduction equal to the highest Kelley Blue Book value of the vehicle,” the ad promises.

Such aggressive come-ons by charities and their fund raisers are widespread, says Mr. Kelley, the Michigan Attorney General. “Many organizations, in their solicitations and advertising, give the impression that they can get you a higher valuation for the car that you want to dispose of if you deal with them,” he says. “It’s an invitation to the donor to overvalue the gift and thereby cheat the government and all of your fellow taxpayers.”

Senator Johnston’s proposed legislation is an attempt to make sure that donors have no illusions about how much their gifts are worth. It takes aim at California taxpayers who overvalue their gifts, especially those who take Blue Book values for donations of cars that are in such poor shape that they wind up being dismantled for parts.

Across the country, cars donated to charities sometimes are sold or auctioned to the public — whether by the charity itself or by a commercial operation — but more often they go to used-car dealers, salvage yards, or scrap dealers. A few charities refurbish the cars for use by needy people.

In California, as many as 80 per cent of donated cars are sold to dismantlers for parts, according to charities interviewed for a report written by Mr. Johnston’s Senate aides. The dismantlers typically pay charities only $30 to $250 per car — although the charities rarely volunteer that information to donors.

“We know that there are people that donate cars that have no wheels, no glass, the hood’s gone, the transmission’s in the trunk, and there’s grass growing out of the floorboard,” Steve Spriggs, director of development for the Sierra Vista Children’s Center, in Modesto, told Senator Johnston’s hearing. “We know they are claiming high Blue Book on this thing. They don’t tell us they do, but I know they are doing it. Everybody understands that there are people who will try to take advantage.”

Mr. Spriggs said that of the 900 people who gave cars to his charity last year, only about 50 called back to find out the eventual sale price of their vehicles — a step he encourages.

Senator Johnston’s bill would require a charity to notify a donor of the eventual sale price of his gift of property. The provision would apply when the donor originally paid $1,000 or more for the item.

Donors would not have to use the sales figure as the charitable-contribution deduction on federal and state tax returns. But Senator Johnston says donors should “factor in” that information in preparing their returns. (The text of the bill, SB 1836, can be found on the California Senate’s Web site at http://www.sen.ca.gov/.)

“Charity hustlers would be hard-pressed to imply a higher donation value for a vehicle if they have to report to the donor what the amount of money was that the car yielded upon sale,” he says.

The bill would also put a damper on taxpayers who take inflated deductions on purpose, he says. “While it may seem unlikely, it is possible that some day the Internal Revenue Service would pursue someone’s claim of a deduction for a vehicle and find that the scrap value of $100 was inconsistent with the donor’s claimed Blue Book value of several hundred or several thousand dollars,” says Senator Johnston.

The I.R.S. does not think vast numbers of donors cheat when they value their goods. “There is room for abuse, but I don’t think it’s widespread,” says Andre Re, the I.R.S.’s national director of compliance specialization, basing his view on government audits.

Yet the revenue service does not keep specific track of such donations and now audits only about 1 per cent of all individual returns — less than half the rate it once monitored. An overvalued car donation will not by itself lead to an audit of a taxpayer, says Mr. Re. But if a person’s total charitable deductions are higher than those typical for his or her income level, the service might see a potential problem and take a closer look.

Marc Owens, director of the I.R.S.’s Exempt Organizations Division, says that if the revenue service had more money, it could more closely scrutinize non-cash gifts and charity solicitations for them. But with limited funds, he says, the service sometimes must focus more on problems “that affect maybe fewer taxpayers, but ones with bigger tax bills.”

In the meantime, several of the charities that benefit from goods-donation programs — and the companies that run such efforts — have been subjected to some tough questions.

At his December hearing, California Senator Johnston attacked the Car Program, a Rancho Cordova company that raises money for the Sierra Children’s Home, in Vacaville. The company splits the net revenue with the home; in 1996, the charity ended up with about 8 per cent of the amount raised in its name.

“Why wouldn’t a donor be better off giving a car to one of these other charities that have a higher yield?” Senator Johnston asked.

Taron Reeves, who runs the Car Program in 15 states, explained that his company performs all the work and assumes all the risk in car-donation programs it conducts in behalf of more than a dozen charities, including Sierra Children’s Home. Moreover, he says, charities can cancel their contracts whenever they wish.

“In some states I’ve made money, in some states I’ve lost money,” he says.

The Sierra Children’s Home, for its part, sees the program as a windfall that has contributed significantly to its $3.5-million budget. Last year it received nearly $500,000 from the sale of donated cars.

“To charities, this is not money we would have had in any other way,” says Richard M. Blythe, president of Agape Villages, in Dublin, Cal., which operates Sierra Children’s Home. “This is found money.”

The children’s home, which serves 85 troubled girls and boys, has used the car revenue to add a full-time staff psychologist and a couple of extra therapists.

“My staff is counselors and therapists; we’re not car people,” says Mr. Blythe. “We made the decision to contract on 50 per cent of net. We have nothing to do with the program — not the phones, not the advertising. We just send a thank-you letter to people who send us a gift.

“All we have is an agreement with a fund-raising group. From a management standpoint, that’s the easiest thing for us to do.”

Mr. Blythe believes that getting half of the program’s net return is reasonable, even if the cost of running the operation consumes nearly 85 per cent of its gross revenue.

“If a program is honestly going to take all vehicles, running or not, and handle everything, the contractor probably isn’t going to show much more than 20-per-cent profit after all expenses,” Mr. Blythe says.

Furthermore, many of the people who donate their cars are not particularly interested in how much the charity receives, Mr. Blythe observes. “When we explain that to donors,” he says, “most of them ask, ‘Do you want the car or don’t you?’ ”

Small organizations are often most vulnerable to losing out in the car-donation business.

Some unsophisticated charities with low budgets start their own car-donation programs but have no idea what the undertaking will entail, says Mr. Eisenberg of MotorDonor. Other donation programs are run by car-auction dealers who have little or no interest in helping charities and who primarily are bent on drumming up trade, he says. Many have few contractual obligations to the charities they work with and may not provide them with liability insurance or other legal protections.

Mr. Eisenberg predicts that some charity will be sued in connection with a problem involving one of the vehicles sold in its behalf. “If they don’t have a hold-harmless agreement” with the company that sells the cars, he says, “if there’s not a $1-million-plus umbrella liability coverage, that charity could be wiped out.”

Some observers say charities have only themselves to blame if they end up in such trouble.

Sheldon Cohen, who was Internal Revenue Commissioner in the Johnson Administration, says charities must take responsibility for insuring that any deal they strike in connection with goods-donation programs can withstand legal and public scrutiny.

“Charities aren’t innocent,” Mr. Cohen says. When they hook up with operators who solicit donations in their behalf, he says, “they’re lending their name and the most valuable commodity they have — their tax exemption.”