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Exempt Organizations
November - December 2002

Your car isn’t running, it needs new brakes, paint, and tires. Your neighbor has offered you $500 to take it off your hands. You’re considering responding to one of those ads that suggests that you donate your old vehicle to charity. Who knows, its blue book value may be pretty high! Before you make that contribution, however, you may want to review Revenue Ruling 2002-67 in which the IRS discusses the valuation of vehicles.

Revenue Ruling 2002-67 doesn’t break new ground. It confirms that the starting point for determining the amount of the charitable contribution associated with a contribution of property is fair market value. Fair market value is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts.”

The ruling also explains that there is not a single correct way to value an item such as a car. Any reasonable method may be used. The Ruling is helpful in that it clearly illustrates the potential issue associated with the use of a car pricing guide:

One method of determining fair market value of a single donated car is by reference to an established used car pricing guide. However, a used car pricing guide establishes fair market value only if the guide lists the sales price for a car that is the same make, model, and year, sold in the same area, and in the same condition, as the donated car.

Situation 1. The established used car pricing guide lists $3,000 as the current sales price for a car that is the same make, model, and year as B’s car, sold in the same area, and in the same condition (i.e., average). Therefore, the fair market value of B’s car, and the amount treated as a charitable contribution under §170, is $3,000. B also could have determined the value of the car by any other reasonable method.

Situation 2. The established used car pricing guide does not list a sales price for a car of the same make, model, and year as B’s car, sold in the same area, and in the same condition (i.e., poor). Because the guide does not provide a value for a car in poor condition, the guide does not establish the fair market value of B’s car. B must establish the fair market value of the car using some other method that is reasonable under the circumstances.

Establishing fair market value can present a challenge. IRS Publication 561, “Determining the Value of Donated Property,” describes some of the relevant factors in arriving at a determination: (1) cost or selling price of the item; (2) sale of comparable properties; (3) replacement cost; (4) opinion of experts.

Publication 561 contains the following example involving the donation of a vehicle in poor condition:

You donate your car to a local high school for use by students studying automobile repair. Your credit union told you that the “blue book” value of a car like yours is $1,600 in good condition. However, your car needs extensive repairs. After checking with repair shops and used car dealers, you find that the car should sell for $750. You may use $750 as the FMV of the car.

The burden of establishing fair market value of a contribution is on the taxpayer making the contribution. Thus, it is critical that the donating taxpayer document how he or she arrived at fair market value for purposes of the deduction. Charities are not obligated to, and generally should not, provide an estimate of fair market value to the donor.

While fair market value is often the amount that may be claimed as a charitable deduction, IRS Publication 526, “Charitable Contributions” describes certain situations in which a taxpayer may be required to reduce the fair market value by the amount of appreciation (increase in value over original cost basis) when computing the contribution deduction. This reduction rule effectively limits the amount of contribution to the original cost of the property and generally applies to the following categories of assets:

  1. “Ordinary income” property. This is property that would have generated ordinary income or short term capital gain in the event of a sale. Examples of ordinary income property include inventory, works of art created by the donor, manuscripts prepared by the donor and capital assets held for one-year or less.
  2. “Capital gain” property. This is property that would have resulted in long-term capital gain in the event of a sale. In general, contributions of capital gain property may be deducted at fair market value. However, the amount of the contribution must be reduced by the capital gain element in the following situations:
    1. Certain contributions to private nonoperating foundations.
    2. The contribution is tangible personal property that is put to an unrelated use by the charity.
    3. The taxpayer elects to use a higher adjusted gross income threshold with respect to contributions of appreciated property (i.e., 50% of AGI as opposed to 30% for contributions to a public charity).

Revenue Ruling 2002-67 is helpful in that it makes clear that the use of pricing guides is not appropriate in all cases and that other reasonable methods must be used to arrive at the correct value. It is also a reminder that “other reasonable methods” are often challenging to come by, and that some legwork by the taxpayer may be required to arrive at and to document fair market value.

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.

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