SECTION 7. ACKNOWLEDGMENTS

BY DONEE ORGANIZATIONS

7.01 Requirements of significant intervening use; material improvement; sale or gratuitous transfer to needy individual in direct furtherance of donee organization’s charitable purpose

As described in section 3.03 of this notice, the contents of the acknowledgment required under § 170(f)(12) depend upon whether the donee organization sells a qualified vehicle without any significant intervening use or material improvement,

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intends to make a significant intervening use of or material improvement to a qualified vehicle prior to sale, or, in direct furtherance of a charitable purpose of the organization of relieving the poor and distressed or the underprivileged who are in need of a means of transportation, intends to sell a qualified vehicle to a needy individual at a price significantly below fair market value, or gratuitously transfer a qualified vehicle to a needy individual. This section provides rules for donee organizations to use in determining the contents of the acknowledgments required under § 170(f)(12).

(1) Significant intervening use

To constitute a significant intervening use, a donee organization must actually use the qualified vehicle to substantially further the organization’s regularly conducted activities, and the use must be significant. Incidental use by an organization is not a significant intervening use. Whether a use is a significant intervening use depends on its nature, extent, frequency, and duration. See H.R. Conf. Rep. No. 755, 108 ^th

Cong., 2d Sess. 750–751 (2004). For this purpose, use by the donee organization includes use of the qualified vehicle to provide transportation on a regular basis for a significant period of time or significant use directly related to instruction in vehicle repair. However, use by the donee organization does not include use of the qualified vehicle to provide training in general business skills, such as marketing and sales.

Example 6 . E contributes a qualified vehicle to O, an organization that is described in § 170(c). As part of its regularly conducted activities, O delivers meals to needy individuals. O uses the qualified vehicle only a few times to deliver meals and then sells the qualified vehicle. Because O ’s use is infrequent and incidental, there is no significant intervening use.

Example 7 . The facts are the same as in Exam- ple 6, except that O uses the qualified vehicle to deliver meals every day for one year. Because O ’s use is significant and substantially furthers a regularly conducted activity of O, there is a significant intervening use.

Example 8 . The facts are the same as in Exam- ple 6, except that O does not use the qualified vehicle to deliver meals every day. However, O drives the qualified vehicle a total of 10,000 miles over a 1-year period while delivering meals. Because O ’s use is significant and substantially furthers a regularly conducted activity of O, there is a significant intervening use.

(2) Material improvement

Material improvement includes a major repair or improvement that improves the condition of the qualified vehicle in a manner that significantly increases the value. Cleaning, minor repairs, and routine maintenance are not considered material improvements. See H.R. Conf. Rep. No. 755, 108 ^th Cong., 2d Sess. 751 (2004). To be a material improvement of a qualified vehicle, the improvement may not be funded by an additional payment to the donee organization from the donor of the qualified vehicle.

For purposes of § 170(f)(12), services that are not considered material improvements include: 1) application of paint or other types of finishes (such as rustproofing or wax); 2) removal of dents and scratches; 3) cleaning or repair of upholstery; and 4) installation of theft deterrent devices.

(3) Sale or gratuitous transfer to needy individual in direct furtherance of donee organization’s charitable purpose

As provided in section 3.02(3) of this notice, the gross proceeds limitation does not apply to a sale of a qualified vehicle at a price significantly below fair market value (as described in section 5 of this notice), or a gratuitous transfer of a qualified vehicle, to a needy individual if supplying a vehicle to a needy individual is in direct furtherance of a charitable purpose of the donee organization of relieving the poor and distressed or the underprivileged who are in need of a means of transportation.

7.02 Information reporting by donee organizations

Section 170(f)(12)(D) requires a donee organization to provide to the Secretary the information given to the donor in the acknowledgment required under § 170(f)(12). The time and manner rules for information reporting required under § 170(f)(12)(D) will be addressed in separate guidance. See section 3.03 of this notice for guidance on the content of the acknowledgment.

7.03 Penalties for false or fraudulent acknowledgments and for knowing failure to furnish proper acknowledgment

Section 6720 imposes penalties on any donee organization required under § 170(f)(12)(A) to furnish an acknowledgment to a donor that knowingly furnishes a false or fraudulent acknowledgment, or knowingly fails to furnish an acknowledgment in the manner, at the time, and showing the information required under § 170(f)(12) or regulations thereunder. An acknowledgment containing a certification described in section 3.03(3) or (4) of this notice shall be presumed to be false or fraudulent, and therefore subject to a penalty under § 6720, if the qualified vehicle is sold to a buyer, other than a needy individual as described in section 7.01(3) of this notice, without a significant intervening use or material improvement within six months of the date of the contribution. The penalty applicable to an acknowledgment relating to a qualified vehicle described in section 3.02(1) of this notice is the greater of (1) the product of the highest rate of tax specified in § 1 (currently 35%) and the sales price stated on the acknowledgment, or (2) the gross proceeds from the sale of the qualified vehicle. The penalty applicable to an acknowledgment relating to any other qualified vehicle the claimed value of which is more than $500 is the greater of (1) the product of the highest rate of tax specified in § 1 and the claimed value of the qualified vehicle, or (2) $5,000.

Example 9 . O, an organization that is described in § 170(c), receives a contribution of a qualified vehicle that is a subcompact car that has been driven more than 100,000 miles. The substance of O ’s charitable activities involves regularly delivering food and other needed goods to the rural poor at remote locations. For this purpose, O needs three large vehicles suitable for delivering heavy loads across rugged terrain. Among many contributed qualified vehicles, O has identified three suitable vehicles that O intends to use for this purpose. The subcompact car is not suitable for O ’s use. O provides an acknowledgment to the donor of the subcompact car in which O knowingly makes a false certification of the intended use of the qualified vehicle and the duration of such intended use. The donor of the qualified vehicle claims a deduction of $2,300. O is subject to a penalty under § 6720 for knowingly furnishing a false or fraudulent acknowledgment to the donor. The amount of the penalty is $5,000, because that amount is greater than $805, the product of the claimed value ($2,300) and 35%.

Example 10 . O, an organization that is described in § 170(c), receives a contribution of a qualified ve

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market value of vehicles for purposes of § 170, and for determining whether a sale was at a price significantly below fair market value for purposes of sections 3.02(3) and 7.01(3) of this notice. Commentators already have suggested that the most appropriate market for measuring the fair market value of vehicles is the market either for private party sales or for dealer trade-in transactions. Comments should address the factors that distinguish private party sales and dealer trade-in transactions, and which type of transaction is most similar to a charitable contribution. As discussed in section 5 of this notice, any regulations limiting the fair market value of a qualified vehicle for purposes of § 170 will not require use of a value less than the private party sale value for contributions made before the date the regulations become effective, but may require use of a value less than the private party sale value after that date. Comments should refer to Notice 2005–44 and be submitted by September 1, 2005, to:

Internal Revenue Service P.O. Box 7604 Ben Franklin Station Washington, D.C. 20044 Attn: CC:PA:LPD:PR Room 5203

Alternatively, comments may be submitted electronically via e-mail to the following address: Notice.Comments@irscoun- sel.treas.gov . All comments will be available for public inspection and copying.