Uncle Sam's Christmas Special

Widows and orphans robbed in tax code switcheroo

For most of us, this is the time of year we remember that it's better to give than to receive. Yet the federal government recently offered a less generous motto: Taking is best of all.

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.

Beginning January 1 those who donate a car worth over $500 will be able to deduct only the amount the charity gets in resale, not the previously accepted Kelley Blue Book value. So if your old Chevy's blue book value is $2000, but the charity you give it to sells it for $600, you can only claim a $600 deduction. And if repairs were necessary, their cost must also be subtracted, and the deduction shrinks again. Since most donated cars are sold at auctions, they already sell for less than if they were hawked on a used car lot. Faced with dwindling deductions, more would-be donors will likely opt to keep their cars, sell them or trade them in.

The Salvation Army expects income at some of its busiest programs to drop 25 percent, and Christian Auto Repairmen Serving (CARS) expects a 30 percent drop in income. CARS sells donated autos and uses the money to provide cars to single moms and others in need of reliable transportation.

The new laws also dump new costs onto charities, most of which already operate on shoestring budgets. Charities that accept cars must now contact the donor within 30 days after they resell it, providing a receipt which the donor uses to claim his deduction. To meet such requirements charities must maintain databases of cars, donors and sales. CARS worries that the new regulations will double its postage costs, and the Salvation Army predicts that the added paperwork will hamper its activities even more than the lower deductions.

So if these charities do so much good work, why the change in policy?

Amid the flurry of car giving, Uncle Sam simply felt shortchanged. The government found evidence that people who donate their cars to charity were inflating their cars' value and claiming larger deductions. But is it really news that taxpayers fudge on their deductions? Why single out this one?

We must assume that the government targeted this kind of giving precisely because Americans have given away so many cars. In 2000, 733,000 Americans claimed deductions for donated cars; even if some fudging was involved, that's nearly three quarters of a million cars going to good causes.

This puts the government in the strange but not unaccustomed position of punishing success. Automobile donation has been a tremendous boon to entrepreneurial charities who realized that many potential donors who were hesitant to write a check would be willing to donate a used car. It's highly probable that not all those donors are motivated by the most noble intentions (not that it's the government's job to be examining the motives of generous citizens), but so what if some of them are just looking for a tax break? People give to charities for all sorts of reasons (out of altruism, to avoid hassles like selling a car, to get a fat deduction, to see their names etched in a library wall, etc). Even if the motivation of the giver isn't as "pure" as some people would like, that is not a good reason to get in the way of a good result (more money going to the needy).

In any event, if the IRS is going to apply this tax standard to charitable donation of cars, why stop there? In the example of the $2,000 Chevy above, there may have been many reasons—not least of them an unsavvy resale by the charity itself—why the car only brought a $600 windfall. Given the inefficiencies that crop up in any organization (a topic about which the federal government knows a thing or two), shouldn't the same rules apply to cash donations? Suppose instead you gave the Salvation Army $2,000 in cash. Rather than being able to claim that money as a tax deduction, shouldn't you have to wait until the organization gets back to you with a full accounting of every penny? After accounting for all waste, inattention, and missed opportunities involved in trying to redeem sinners, it could well turn out the Salvation Army really only got about $1,500 worth of value out of your contribution. That's $500 you're trying to scam out of your government, you big Scrooge! And don't forget inflation: With the dollar plummeting around the world, we should probably knock another couple hundred dollars off your deduction; after all, that's value the charity didn't actually receive. And then there's the opportunity cost of giving to the Salvation Army, rather than some other organization that might be doing more valuable work for the nation (and come to think of it, shouldn't there be a federal bureaucracy that "weights" charitable donations according to how much good the respective charities actually do?); just to be fair, let's cut another few c-notes off this big "donation" you say you gave. And hold your horses there, Big Spender: Just why are you giving this money in December anyway, rather than, say, a nice round month like February? "Playing the float," are we—collecting interest on the Salvation Army's money all year long, only to throw a few shekels to charity at the end of the year? And then there's the whole feeling-good-about-yourself thing: Giving to charity provided you with a sense of well-being for which therapists charge $300 to $500 an hour; you should be paying for that happiness, not trying to write it off your taxes.

Heck, your donation's starting to look pretty paltry. Maybe we should just skip the tax deduction entirely. In fact, at the rate we're going, maybe you should be paying some additional tax to cover your "charitable" shenanigans.

Well, maybe that won't happen. But looking not just at charitable donations but at how those donations are redeemed, and even the motives of the donors, is a lousy precedent. The great used-car swindle may just be the tip of the iceberg. It places a higher value on the scraps of extra tax revenue the IRS will bring in than on the fortunes charities will lose in the process. The feds must be kicking themselves that they couldn't make this change in time for Christmas.