TAX INFORMATION · Payment of the winning bid made through this auction may be tax deductible. We make no representations as to tax treatment. Consult with your tax advisor for more information, as we do not provide tax consulting.
Probably the most common misconception bidders have about charitable auctions is that any payment they make for items purchased constitutes a charitable contribution to the sponsoring charity. In fact, a charitable contribution results only if the amount paid for the item exceeds its fair market value. The fact that the item was donated to the charity does not change the result. The buyers have entered into a quid pro quo transaction in which they received value for the payment they made. A quid pro quo transaction is not a gift.
The Internal Revenue Service addressed this issue as early as 1967 in Revenue Ruling 67-246.20 The following paragraphs, taken from that ruling are instructive. (Emphasis has been added.)
"As a general rule, where a transaction involving a payment is in the form of a purchase of an item of value, the presumption arises that no gift has been made for charitable contribution purposes, the presumption being that the payment in such case is the purchase price.
Thus, where consideration in the form of admissions or other privileges or benefits is received in connection with payments by patrons of fund raising affairs of the type in question, the presumption is that the payments are not gifts. In such case, therefore, if a charitable contribution deduction is claimed with respect to the payment, the burden is on the taxpayer to establish that the amount paid is not the purchase price of the privileges or benefits and that part of the payment, in fact, does qualify as a gift.
In showing that a gift has been made, an essential element is proof that the portion of the payment claimed as a gift represents the excess of the total amount paid over the value of the consideration received therefor. This may be established by evidence that the payment exceeds the fair market value of the privileges or other benefits received by the amount claimed to have been paid as a gift.
Another element that is important in establishing that a gift was made in such circumstances, is evidence that the payment in excess of the value received was made with the intention of making a gift. While proof of such intention may not be an essential requirement under all circumstances and may sometimes be inferred from surrounding circumstances, the intention to make a gift is, nevertheless, highly relevant in overcoming doubt in those cases in which there is a question whether an amount was in fact paid as a purchase price or as a gift.
Regardless of the intention of the parties, however, a payment of the type in question can in any event qualify as a deductible gift only to the extent that it is shown to exceed the fair market value of any consideration received in the form of privileges or other benefits."
It seems clear then, that only to the extent the amount paid exceeds the fair market value of an auction item will the successful bidder be entitled to a charitable contribution deduction. While this Revenue Ruling does not use the word "auction," the 12 examples in the ruling are broad enough to cover today's charity auctions. The following is example nine.
"The X Charity sponsors a fund raising bazaar, the articles offered for sale at the bazaar having been contributed to X by persons desiring to support X' s charitable programs. The prices for the articles sold at the bazaar are set by a committee of X with a view to charging the full fair market value of the articles.
A taxpayer that purchases articles at the bazaar is not entitled to a charitable contribution deduction for any portion of the amount paid to X for such articles. This is true even though the articles sold at the bazaar are acquired and sold without cost to X and the total proceeds of the sale of the articles are used by X exclusively for charitable purposes."
The 1967 Revenue Ruling did not keep the lid on excess deductions for quid pro quo transactions for very long. In 1988, the Internal Revenue Service mailed Publication 1391, Deductibility of Payments Made to Charities Conducting Fund-Raising Events, to over 400,000 tax exempt charities "asking their help in informing contributors more accurately about the deductibility of contributions made in connection with fund raising events." In this publication, auctions were specifically mentioned as a type of event in which payments made to the sponsoring organization may be totally nondeductible. Others mentioned included charity balls, bazaars, banquets, concerts, athletic events, and solicitations for membership. Other events that have attracted the Service's attention over the years include religious education courses and marriage enrichment seminars, all with the same result: no deduction to the extent of the fair market value of the property received in return.
Consider three examples as to the deductibility of payments by successful bidders for charitable auction items.
Example 1. On the evening of its auction, Royale Museum has a roomful of tables with various auction items. This is to be a silent auction in which patrons place written bids on each item. The items are numbered and the bid list is placed beside each item. A card beside each item on the tables states the estimated fair market value of the item as determined by the auction committee, generally based on representations made by the item donor.
Each patron who bids places his or her name below the name of the previous bidder and is required to raise the previous bid by a specified amount. The last name on the list at the close of the auction (should represent the highest bid) is the successful bidder.
At $150,Tiffany is the successful bidder on a bottle of rare Cabernet Sauvignon. The fair market value as evidenced by the card is represented to be $300.
Tiffany is not entitled to a charitable contribution deduction because she received an item of value in excess of the payment she made. There is no gift and no deduction is allowable.
Example 2. The facts are the same as in the example above except that Tiffany's mother, Vicki, was the successful bidder on a painting of Mount Vernon. The frame was made by the craftsmen who maintain the home from trees actually grown on the plantation. Vicki's bid was $750. The fair market value of the item was represented to be $750.
Vicki is not entitled to a charitable contribution deduction because she received an item of value equal to the payment she made. There is no gift and no deduction is allowable.
Example 3. The facts are the same as in the example above, except that Vicki's friend, Cheryl, was the successful bidder on a football autographed in 1985 by Joe Montana. The contributor of the item was a local sports memorabilia dealer who was an expert in valuing items of this nature. He represented to the Museum that the item had a fair market value of $1,250. Cheryl was buying the football for her 15-year-old son for whom Montana is his idol. Cheryl paid $1,925 for the item.
Cheryl is entitled to a charitable contribution deduction in the amount of $675 because she paid more for the item than the value she received in return. The excess payment is a gift and a deduction is allowable but only to the extent of the excess.
So I guess there would have to be a valuation done by a reputable appraiser as to the “fair market value” of the letter and only the amount that exceeds that valuation would be tax deductible. Although I find it hard to see how they could appraise it very easy, as their has to be very few comparables. I think the best analogy is again that of a famous baseball, like Mark McGwire’s 70th homerun baseball that was sold for $3 million clam shells. Granted a league approved baseball isn’t worth more than $3 bucks, however if you were to donate that McGwire baseball to a charity it wouldn’t be valued at $3 bucks. Logically since there are numerous bidders who have bid the price of the letter up to over $130,000, the letter is worth more than the price of 4 pieces of paper and the ink. It would be a huge hassle to try and take a deduction on the bidders side, Rush has it easy, he just donates whatever he gets, and it’s deductible.