Section 884 of the American Jobs Creation Act of 2004 changed the rules for the amount taxpayers could claim as a deduction on their tax returns for donating a qualified vehicle to a charity. The new rules were effective for all vehicle donations made after December 31, 2004. Prior to this change, eligible taxpayers could claim up to the fair market value of the donated vehicle as a deduction on their tax returns. For any vehicles donated to a charity on January 1, 2005, or later with a claimed value that exceeds $500, taxpayers can only claim the lesser of the vehicle’s fair market value or gross proceeds of the sale as a deduction on their tax returns unless the charity’s intended use of the donated vehicle meets one of the three exceptions to the gross proceeds of the sale rule. If one of the exceptions is met, the taxpayer may be eligible to claim the fair market value of the vehicle as a deduction. The three exceptions are the charity intends to make a significant intervening use of the vehicle; the charity intends to make a material improvement to the vehicle; or the charity intends to give or sell the vehicle to a needy individual at a price significantly below fair market value in direct furtherance of the charity’s charitable purpose. If the charity sells the vehicle for $500 or less and the exceptions do not apply, the taxpayer can deduct the lesser of $500 or the vehicle’s fair market value on the date of the contribution. Table 1 summarizes the amount donors could deduct for charitable contributions of vehicles before and after the changes in the rules for such deductions. The vehicle donation process generally consists of six steps: (1) solicitation/donor contact, (2) vehicle pickup, (3) vehicle sale, (4) distribution of proceeds, (5) charity provides donor with written acknowledgment, and (6) charity and donor file required forms with IRS. The vehicle donation process is depicted in figure 1. Step 1 – Solicitation/donor contact. The vehicle donation process generally begins with solicitations for donated vehicles through advertisements. Vehicle donations may be solicited directly by charities, third-party agents, or both, depending on the agreement between the charities and third-party agents. Vehicle donations are solicited through advertisements on the radio, in newspapers, on the Internet, on truck banners, on television, and on billboards. Also during this step, donors initiate contact with the charity and or third-party agent to donate their vehicles. Either a charity or third-party agent may take the initial call from a potential donor, asking the donor questions that may be used to screen vehicles, such as the vehicle’s make, year, and condition and if the donor has the title to the vehicle. Step 2 – Vehicle pickup. After the donor makes the initial call to donate a vehicle, arrangements are made to pick up the vehicle and deliver it to wherever it will be stored until it is sold. Once vehicles are picked up, the charity or third-party agent also obtains the title of the vehicle from the donor. Step 3 – Vehicle sale. Once collected, donated vehicles are most often sold. Charities or third-party agents typically sell donated vehicles through auctions to auto dealers, to the public, or to vehicle salvagers. Step 4 – Distribution of proceeds. After vehicles have been liquidated, the proceeds are distributed. Charities with in-house vehicle donation programs keep proceeds that remain after deducting costs associated with processing the vehicles. When charities use third-party agents, the financial agreement between the charity and the third-party agent dictates the proceeds that the charity and fund-raiser will receive from the sale. Step 5 – Charity provides donor with written acknowledgment. Charities are required to provide a contemporaneous written acknowledgment to the taxpayer for any contribution of a vehicle with a claimed value that exceeds $500. The charity can either create its own acknowledgment, or it can use Copy B of Form 1098-C (Contributions of Motor Vehicles, Boats, and Airplanes) as the contemporaneous written acknowledgment. For details about the information that must be included in the written acknowledgment, including contributions with a claimed value of $500 or less, see appendix IV. Step 6 – Charity and donor filing requirements. The charity must file a Form 1098-C if a donor contributes a qualified vehicle to a charity with a claimed value of more than $500. Charities are not to file Form 1098-C for contributions of qualified vehicles with a claimed value of $500 or less. Donors must attach Copy B of Form 1098-C, or a copy of the acknowledgment if the charity does not use Copy B for this purpose, to their returns if they are claiming a deduction of more than $500. A donor must also file Form 8283 (Noncash Charitable Contributions) if the deduction he/she is claiming for a donated vehicle is greater than $500 and attach it to the Form 1040 (U.S. Individual Income Tax Return). For more information on the filing requirements for charities and donors, see appendix V. We contacted 58 charities during August 2007 and found that almost all of them still operated their vehicle donation programs. We conducted in- depth interviews with officials from 10 of these charities and learned that changes in the number of donated vehicles did not appear to correspond with changes in the quality of vehicles donated or with changes in overall fund-raising. Also, some charities have developed innovative ideas to increase revenue from vehicle donations. Almost all of the charities contacted still operated their vehicle donation programs as of August 2007. In 2003, we interviewed officials from 65 charities when collecting data for our previous report. We attempted to contact all of these charities and successfully reached 58 of them. Through these contacts, we learned that all but 5 of the 58 charities still operated vehicle donation programs. During these contacts, we asked about changes in the numbers of vehicles being donated before and after the rule changes. Not all of the charities in our screening interviews provided information about the number of donated vehicles; 30 charities gave us this information and 21 of them said that they had seen a decrease, and the rest said that they saw increases or no change. Some of these changes were large, while others were fairly small. We conducted an in-depth interview with an official from one of the five charities that no longer operates a vehicle donation program. According to the official, charity managers decided to discontinue the vehicle donation program before the rules were changed, choosing instead to focus their fund-raising activities on a large fund-raising campaign that lasted for a few years. The official said that by reallocating the resources that had been devoted to the vehicle program, the charity could raise more money by focusing on obtaining large donations from selected donors for its fund- raising campaign. At the remaining four charities that no longer had vehicle donation programs, officials told us either that the employees who used to operate the vehicle donation program no longer worked for the charity and no other program officials could speak about the decision to discontinue the program or that the charity has not received any vehicles for the past 2 to 3 years. For the 10 charities covered in our in-depth interviews, 6 reported decreases from 2003 to 2006 in the number of vehicles donated, 3 reported increases and 1 did not provide data, as shown in table 2; however, the latter reported that the number of donated vehicles is about the same since the rule change. One charity’s donations declined by over 37,000 vehicles, while others realized much smaller decreases ranging from about 350 to 600 vehicles when comparing 2003 and 2006 data. However, when comparing years 2005 to 2006, 4 of the 5 charities that reported using one of the exceptions to the gross proceeds of sale rule reported an increase in the number of vehicles donated. It is important to note that not all of the vehicles donated to a charity that can use one of the exceptions to the gross proceeds of sale rule are eligible for the exception. For example, a charity that gives donated vehicles to needy individuals in direct furtherance of its charitable purpose may sell some of the donated vehicles it receives. The vehicles given to needy individuals are eligible for the exception, but the vehicles that are sold to non-needy individuals are not. All of the six officials who reported a decrease in the number of vehicles donated to their charities attributed this decrease, at least in part, to the change in the rules. Some charity officials noted other factors that also may have affected the number of vehicles donated. For example, officials at two charities noted that there is more competition in the marketplace for donated vehicles. An official at another charity noted that vehicle donations often follow the trends in new vehicle sales, and if people are not buying as many new vehicles, they are less likely to donate vehicles. An official at a different charity said that she could not attribute reduced donations fully to the rule changes because the charity had decreased its advertising of the vehicle donation program over the past few years. Charity experiences with the quality of donated vehicles also varied. Three of the 10 charities reported an increase in quality, 3 charities reported a decrease in quality, and 4 charities reported no change in the quality of vehicles donated. One of the charities that uses one of the exceptions to the gross proceeds of sale rule reported that the quality of donated vehicles generally increased and more of these vehicles could be refurbished and given to needy individuals. The official said that in 2002 the charity was only able to refurbish about 75 vehicles to give to clients while the charity gave away about 200 vehicles to clients in 2006. An official at another charity noted that the quality of the vehicles may be related to the demographics of the areas where the charity operates. In one area of the state, the charity tends to receive higher-quality vehicles because many of the area residents are retirees who are financially comfortable and able to donate their old vehicles, which are still in good condition, while donors in less-affluent parts of the state tend to donate vehicles that need to go straight to salvage yards.