newsnote

NewsNotes

Lesli S. Laffie, J.D., LL.M.

Donation to Charity’s Agents • OIC User Fee • 2003 Inflation Adjustments (Chart)

From the IRS

Rev. Rul. 2002-67 explains that individuals may claim a charitable deduction for automobiles donated to a charity’s agent. According to the ruling, the agent's written acknowledgment substantiates the gift and explains when a vehicle may be valued using an established pricing guide.

Many charities that solicit individuals to contribute vehicles for a tax deduction use a for-profit business to operate the program. Three potential questions arise:

1. Has the automobile been donated to the charity or to the for-profit business that runs the donation program?

2. Is the gift properly substantiated?

3. Is the vehicle valued at fair market value (FMV)?

Rev. Rul. 2002-67’s two situations illustrate the issues. Both involve a charity (C) and a for-profit business (B). These two organizations establish an agency relationship valid under applicable state law. The agreement provides that B, acting as C's authorized agent, will administer a fundraising program for C for a fee. C has the power to review and approve B's activities under the agreement.

Acting on C's behalf, B (1) solicits donations of used cars, (2) accepts, processes and sells the cars, (3) transfers the sales proceeds to C (less B's fee) and (4) gives each donor substantiation of the contribution, including an acknowledgment that contains the required Sec. 170(f)(8) information.

In the ruling’s first situation, a donor who itemizes transfers a used car to B and does not receive anything of value in exchange. A used-car guide values the donation at $4,500 for a car of the same make, model and year as the donor's car and sold in his area, if the car is in excellent condition ($3,000 if in average condition; no value is listed if in poor condition).

According to the guide, a car is in (1) excellent condition if it has no defects; (2) average condition if it has some defects, but is safe to drive; and (3) poor condition if it needs substantial mechanical or body repairs or is unsafe to drive. The donor's car is in average condition. The facts are the same in the second situation, except that the donor's car is in poor condition.

Rev. Rul. 2002-67 concludes that the donor’s transfer of the car to B as C's authorized agent is treated as a transfer to C. However, the determination of whether an agency relationship exists is based on local law (not all contractual relationships result in an agency relationship under local law).

Because C has authorized B to act as its agent in administering the fundraising program, B's written acknowledgment to the donor meets Sec. 170(f)(8)'s requirements.

In the first situation, $3,000 is the FMV of the donor’s car (and the charitable donation). The FMV of a single donated car may be established by using an established used-car pricing guide, but only if it lists the sales price for a car of the same make, model and year, sold in the same area and is in the same condition as the donated car. A donor may also value a car “by another reasonable method.”

In the second situation, because the used-car pricing guide does not list a sales price for vehicles in poor condition, the donor cannot use it to value his car. He must establish the car's FMV using some other reasonable method (perhaps a written valuation at a used-car lot).

Regulations

OIC User Fee

Proposed regulations (REG-103777-02) would require a $150 user fee for some offers-in-compromise (OICs), effective 30 days after the rules are finalized.

Sec. 7122 gives the IRS the authority to compromise any civil or criminal case arising under the Code, before referring the case to the Department of Justice. Regs. Sec. 301.7122-1 provides officer and employee guidelines to determine whether an OIC is adequate and should be accepted. Under Regs. Sec. 301.7122-1(b), an offer may be accepted if there is doubt as to liability or collectibility, or if acceptance will promote effective tax ad-ministration.

The IRS initially determines whether an OIC is processable. An OIC would be returned as nonprocessable if the taxpayer is in bankruptcy, has not filed required returns or has not perfected the offer by properly preparing the form and submitting other required documents. Otherwise, the OIC is accepted for processing and cannot be rejected without an independent administrative review of the decision to reject (and an independent review by the Office of Appeals (Appeals) if the taxpayer chooses to appeal the rejection).

When the IRS accepts an offer, the taxpayer receives the benefit of resolving tax liabilities for a compromised amount. Even if an OIC is rejected, the IRS has processed it and determined the adequacy of the amount offered. The IRS must value assets, verify income-earning potential and compute allowable expenses.

The taxpayer also receives the benefit of certain deferred collection activities. The Service generally does not make any levies to collect liabilities while evaluating the offer, for 30 days immediately following the rejection of an offer and during any period when a timely appeal from the rejection is being considered by Appeals.

The IRS is proposing a $150 user fee to process an OIC. The fee would be paid out of the amount determined to be collectible and would be taken into account when considering whether the offer is acceptable. The fee would not change the net amount paid by the taxpayer to compromise.

The fee would not apply to offers based on:

1. Doubt as to liability.

2. OICs made by certain low-income taxpayers.

3. OICs accepted to promote effective tax administration.

4. OICs accepted based on doubt as to collectibility when there has also been a determination that, although an amount greater than the amount offered could be collected, collection of more than the amount offered would create economic hardship.

In most of these circumstances, the fees would be waived before being collected. However, if the fee is collected from the taxpayer, but the offer is accepted to promote effective tax administration or is based on considerations of economic hardship, the fee would either be refunded or applied to the offer.

OICs are also discussed in Taylor, Tax Practice & Procedures: “OIC Final Regs. Issued,” this issue.