The Legal Side of "Cash For Clunkers" Program

On June 24, 2009, President Obama signed into law the Consumer Assistance to Recyle and Save ("CARS") Act of 2009, commonly referred to as the "cash for clunkers" program. CARS Act encourages consumers to trade in their older (8 to 25 year old) vehicles, for newer more fuel efficient models. CARS Act required the U.S. Department of Transportation, National Highway Trasportation Safety Administration ("NHTSA") to issue final regulations and implement the CARS by July 24, 2009.

Those consumers whose trade in vehicle qualifies can receive credits ranging from $3,500 to $4,500. The qualifying transactions need to take place between July 1 and November 1, 2009, to the extent the government allocated funds remain available. To check whether your vehicle will qualify for trade in under CARS Act you may visit the official web site.

Under Section 61 of the Internal Revenue Code, "gross income" includes income from whatever source. However, CARS Act specifically states CARS credit is not income to the purchasers. So, for example, if a consumer's transaction qualifies for $4,500 credit, that consumer will truly offset the cost of new vehicle's purchase by $4,500, without having to consider the individual's deductions and tax bracket.

Prior to CARS Act's enactment, other bills were presented and considered at the Congress. One was H.R. 385, the Consumer Auto Relief Act of 2009, which sought to amend the the Internal Revenue Code to (1) allow consumers to deduct up to $7,500 of the purchase price of a new passenger car or light truck; (2) allow deduction of interest paid on purchase loan for such vehicles; and (3) allow deduction of state and local sales taxes on the vehicle purchase. Notice that Auto Relief Act would have provided income tax deductions, whereas CARS Act excludes the credits from purchasers income altogether.

Information for this blog were obtained from StateSurge.com, Consumer Reports, and NHTSA's web site and publication.

Robin Mashal is a partner at the law firm of Hong & Mashal, LLP, and can be reached at (310) 286-2000. His practice focuses on business law, real estate law and civil litigation. Hong & Mashal LLP is a California business law firm.