Newsletters Services Staff Home

Tax Newsletters


Exempt Organizations

Exempt Organizations
August 2002

Vehicle Donation Programs

Although vehicle donation programs have been the subject of controversy in recent years, a recent private letter ruling reveals that such programs can work when structured properly. Although private letter rulings may only be cited as authority by the taxpayers to whom they are issued, they may provide an indication of how the IRS may rule in similar circumstances.

PLR 200230005 involved a public charity (“Charity”) exempt under §501(c)(3) that proposed to enter into an agreement with a third party (“LLC”) to “solicit, process, and accept” property donations on behalf of the charity. The property would include automobiles and trucks, as well as boats and other personal property. The charity felt that it did not otherwise have the resources to solicit and process such property donations.

LLC is a for-profit charity fundraiser registered in the state to buy, store, maintain, dismantle and sell vehicles and other personal property. Key provisions of the agreement between the charity and LLC include the following:

  • The two entities entered into an “Agency Agreement.” Charity appoints LLC as its agent to solicit, accept, process and sell donated vehicles and other personal property.
  • Subject to review and approval of Charity, LLC will accept donations of property, and will pay all costs and expenses related to the sale of the property.
  • Charity is to remain the equitable owner of the property until a sale occurs. The chain of title passes from donor to the Charity, Charity to LLC, and finally from LLC to buyer.
  • Upon sale, proceeds become the property of Charity, net of a fee payable to LLC.
  • Until sale, risk of loss, damage or destruction of the donated property is borne by Charity, subject to LLC’s obligation to pay for insurance.
  • LLC will provide advertising on behalf of charity.
  • LLC will arrange for appraisals for property valued in excess of $5,000. Donors are responsible for the cost of such appraisals.
  • LLC will process DMV documents.
  • LLC will provide monthly accounting reports and weekly advertising reports to Charity.
  • LLC will receive a fee based on a specified percentage of gross proceeds received on the sale of donated property.

Receipt of property through agent. The IRS confirmed that a Charity could receive charitable contributions through its agent. All of the facts and circumstances must be considered in order to determine whether an agency relationship exists.

Private inurement; private benefit. The IRS also concluded that private inurement did not result from the arrangement. Private inurement arises when net earnings of the organization benefit a private shareholder or individual. Because the LLC was an agent of the charity, it was determined to be an insider or private individual. A contingent compensation agreement may create a conflict of interest between a service provider and Charity. However, inurement was determined not to exist because of certain factors:

  • The agreement was negotiated at arm’s length and the service provider had no participation in the management or control of Charity.
  • The agreement serves a real and discernible business purpose of Charity
  • Compensation was not dependent principally upon incoming revenue of Charity
  • There was no evidence of abuse or unwarranted benefits

The IRS also ruled that the arrangement did not involve unreasonable private benefit. An organization does not operate exclusively for exempt purposes if it operates for the benefit of private interests. If an organization provides more than incidental benefits to private individuals, exempt status may be jeopardized.

Unrelated business income. The arrangement did not result in unrelated business income to Charity. The service cited the exception from UBIT for trade or business activities that involve the selling of merchandise, substantially all of which have been received as donations.

Written acknowledgment; appraisal summaries. The IRS addressed the following issues: (1) whether “thank you” notes written by the LLC satisfied the requirements for written acknowledgments; and (2) whether appraisal summaries were properly furnished. The IRS concluded that the LLC could issue acknowledgments on behalf of Charity as long as the acknowledgments contained all of the information required by IRC §170(f)(8). Similarly, LLC could sign Form 8283 on behalf of Charity pursuant to a Power of Attorney.

Other Precautions. The IRS has previously acknowledged that vehicle donation programs may be effective fundraising tools. In a December, 2001 Consumer Alert, however, the IRS advised taxpayers to take certain precautions:

  • Check that the organization (the charity) is qualified to receive charitable contributions
  • Examine state filings re percentage of costs spent on administrative costs
  • Ask questions about how the donated vehicle will be used
  • Deduct only the car’s fair market value
  • Document the charitable deduction
  • Follow state law regarding car title and license plates

As reflected in the foregoing, in order to be effective, vehicle donation programs must be structured properly and comply with numerous legal and tax requirements. Once in place, however, they may become a beneficial fundraising tool for the exempt organization.

Should you have any questions regarding the foregoing, please contact John Kikuchi at (925) 944-7666 or by email.


The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

© 1998-2017 RK Taylor & Associates