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Oops! I bid (on) it again … Can I at least get a tax deduction?
By Trusts & Estates Practice Group on April 6, 2018 at 9:50 AM

Four hands raising bidding paddles in the air at an auction“Any other bids? And….sold to No. 45 for $1,500!”

Yes! You have outbid the other contenders at the local humane society’s charity auction to win a five-night stay at a condo in Destin, Florida, in August. You think, “Not only did I get a great vacation, I also get a tax deduction for my donation!” Or do you?

It turns out that the fair rental value of the Destin condo is $300 a night or $1,500 for a five-night stay. It says so in the humane society’s auction catalog and you have no reason to doubt the humane society’s valuation. Therefore, you cannot claim a deduction because you are receiving a benefit equal to the amount of your payment. If, however, your winning bid had been $1,800, you would have been able to take a $300 charitable deduction for the excess you paid over the fair rental value.

Bummer … you only get a vacation after all.

If your only win at the auction that night was your $20 bid on a 12-foot inflatable Santa Claus valued in the catalog for $50, that winning bid (while a great deal that will win you the respect and admiration of your neighbors) is not deductible since the fair market value of Santa exceeds the amount you paid. 

So does the person who donated the five-night rental get a charitable deduction? When a person owns a rental property and donates a period of time to use the rental as an auction item, a charitable deduction will not be available because the donor has contributed less than his or her entire interest in the property. This is known as the partial interest rule.

What about Santa? Does the donor get a $50 charitable deduction? Again, it depends. Was Santa a rejected Christmas gift costing the donor $0 or did the donor go out and buy the inflatable Santa and then donate it? Did the donor use it for one year and then decide to move on to an inflatable snowman? The donor may need to rely on different valuation rules for each item donated.

The charity itself will have to keep accurate records of each item donated and the winning bids and may need to send acknowledgements out to donors and auction winners, depending on the value of the item or bid. The charity may also be responsible for complying with other applicable notice and/or taxation requirements.  

The examples above highlight just a few tax issues that can arise in the charitable auction setting. It turns out that while a charitable auction can be a great opportunity for a nonprofit to bring in donations and donors to be generous, it can present tax issues for almost everyone involved. For tax purposes, donors will primarily be concerned with valuing the property they donate, bidders/auction winners will want to know the fair market value of the items they won, and even the charity will have to comply with various IRS substantiation and disclosure requirements.

If you have questions about charitable deduction issues, whether or not they concern a charitable auction, please contact a member of our Trusts & Estates group.

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