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Tax-law change drives donors to other options: Vehicle auctions by not-for-profits are on the decline

December 4, 2006

The 1968 Volvo coupe may have been the ugliest car parked in the Marion County Auto Auction lot, with its worn sheepskin seat covers, duct-taped headlight and mustard-yellow paint scheme.

But someone liked it enough to bid $475 to take it off the hands of Goodwill Industries of Central Indiana Inc.

Goodwill has depended on thousands of used-and nearly useless-donated vehicles like the Volvo to bring in more than $1 million annually through its auctions. But it and other charities have seen their revenue streams shrink because of a 2005 tax law change that has turned off donors.

People no longer can claim an income tax deduction for the fair market value of the clunker they give up. Instead, they have to list the car's resale value, or the amount it fetches at auction-typically a much lower figure. The change took place in January 2005, and several local charities report an impact.

Volunteers of America Indiana had to close its own auction and began working with the Marion County Auto Auction. It used to collect as much as $1.5 million annually but now brings in less than $500,000.

"We've not been able to find a way to recapture that type of revenue," said Debi Marshall, division director of community development.

The Salvation Army, Indiana Division, has raised $13,374 so far this year. It used to collect more than $50,000 annually from vehicle sales.

"It's obviously hurt us," Capt. Joe Irvine said. "We have stepped up our advertisements and efforts to generate donations."

U.S. taxpayers claimed $2 billion in non-cash charitable contributions for vehicle donations on their 2003 federal returns, according to the latest IRS statistics.

Congress devised the change to curb abuses of that deduction. Politicians were concerned about donors inflating the value of the cars they donated in order to get more of a tax break, said Elaine Wilson, a partner with the Indianapolis law firm Barnes & Thornburg.

"Frankly, when we're talking about a $1,000 car, the IRS doesn't have the incentive to go out and look at any one particular vehicle, but when you multiply that by 50,000 vehicles, it has a tax impact," she said.

Iowa Sen. Chuck Grassley led the charge to implement the new rule, saying abuses were leading to inflated deductions.

However, charities say the new approach has hurt them in a number of ways. For starters, it makes the process more complicated for someone who just wants to move an old car, boat or motorcycle out of the garage.

Instead of knowing the fair market value and deduction immediately, the donor now has to wait until the charity sells the car. That means gambling the charity can fetch enough to make it worthwhile for the donor.

"I just don't think people want to deal with it," Marshall said. "They're finding that it's easier to dispose of [the vehicle] in other ways and maybe gain more money in their pocket."

Marshall's organization used to sell about 4,000 cars a year. It now sells fewer than 2,000.

Fewer donations mean more competition among charities for the battle-weary beaters that do make it to the auction block, Irvine noted.

Quality has taken a hit too. People are trading in or selling the higher-end cars they used to donate because they don't want to gamble on the vehicle's auction price, said Jim Hartman, vice president of vehicle donations for the national office of Alexandria, Va.-based Volunteers of America.

Nationally, Volunteers of America watched vehicle donations drop 40 percent in 2005 and then another 35 percent so far this year. It collected 80,000 vehicles in 2004, but expects to receive only about 31,000 this year.

Marshall said the Indiana chapter's drop in auction revenue has forced it to look for more grants and other funding to grow its programs, which provide housing for inmates doing work-release.

Some charities are still assessing the impact of the tax law. Goodwill saw an influx in car donations at the end of 2004, which skewed its inventory in 2005, said Kent Kramer, vice president of retail operations.

He thinks this year will show the true impact. Goodwill collected $1.6 million in revenue from its 2004 auctions and $1.3 million last year.

Through October, the central Indiana agency had racked up $853,125, before the typical year-end donation spree most charities see from deduction-seeking taxpayers.

Representatives of both Volunteers of America and Goodwill say they still have a stable base of donors to feed their auctions. Even so, Marshall said, "I don't think it's ever going to go back to what it had been."
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