Benefit auctions, fair market value and the IRS

Ever been to a benefit auction? They’re different from a typical commercial auction, where the goal is to buy an item at the lowest possible price. At a benefit or charity auction, the bidder knows (or should know) going in that the idea is to support the organization sponsoring the event, not necessarily to get the best deal. The spirit of giving is more prevalent; at least that’s how it should be.

Benefit auctions weren’t as common 10 or 20 years ago, but today, they’ve really caught on. Maybe you’ve been to one yourself. We’ve helped stage several at Powell Auction and Realty, and have gotten an education in the process. The one question that gets asked more than any other by people attending a benefit auction is: “Should I be told the fair market value of an item before I bid, for IRS purposes?”

It’s a fair question. I believe there are some benefit auctioneers who don’t want bidders to know the fair market value of what they’re bidding on, because if they did know they’d bid too low and that would reduce the buyer’s premium (or auctioneer’s commission). The fact is, the IRS requires a charity to publish the fair market values of the items to be sold, right in the catalog or silent bid form.

Winning bidders can then claim a charitable donation deduction on their federal income tax return, but only for the difference between the top bid amount and the fair market value of the item. If you bid on, say, a leather jacket, and that jacket has a stated fair market value of $250, and your winning bid is $350, then you may only claim a $100 charitable deduction on your income tax form.

What if the organization doesn’t publish an auction catalog, or doesn’t disclose any fair market values on its silent bid form? In that case, zero charitable tax deduction is available. That doesn’t seem fair (especially since the generous winning bid was made in the spirit of giving!) but that is the rule. It behooves the charity to know this information as much as the audience attending the sale.

Now, say the winning bidder takes a charitable donation deduction, unaware of the rule. Sorry – ignorance of the law is no excuse. If the person can’t prove when audited by the IRS that he knew the fair market value of the item before bidding began, his claimed deduction will be disallowed. Furthermore, the charity itself may be held liable for the tax, interest and penalty. Double ouch!

Here’s another hypothetical: What if the fair market value isn’t stated in the catalog or bid form, but appears on the receipt? Nope. A receipt isn’t acceptable because it was gotten after the bids were submitted, not before. And how do you assign a “fair” market value to an intangible – like a choice parking spot? It’s easy to see how this issue is capable of stirring up controversy – and it has.

There’s a saying in the auction business: “Don’t give legal advice and don’t give accounting advice.” It’s really up to the charity to defer to their attorneys and accountants in such matters, and to be aware of the IRS rules before a benefit auction is held. That way, no one gets in trouble. Ideally, a fair market value figure should appear in the catalog, on the bid form and on the receipt – all three.

That said, and especially now with fundraising auctions becoming more popular, the folks in my industry – the auctioneers – have an incumbent responsibility to enlighten and inform, right from the podium. We are aware of such a sale’s tax implications, and we are bound by the principles of full disclosure to dispense what we know. It’s a matter of respecting the audience and it only makes sense.

Keep in mind that many of the folks who attend benefit auctions are people of means. Like I said earlier, the whole event has been staged in the spirit of giving. For some, it’s an ego thing. To know the fair market value of an item, and to soar way past that amount, is a way of saying, “Look at me. I’m wealthy, I’m generous and I’m helping this charity.” That’s fine. The objective was met.

In the final analysis, it is backward for an auctioneer to think that by hiding the fair market value of an item, a person will tend to bid low. That just isn’t the case, unless you’re holding an auction at the Cheapskate’s Convention. People want to know the fair market value. From that, they can gauge how generous they wish to be. And from an IRS standpoint, regarding deductions – it’s the law.

Kenny Phillips is a managing partner at Powell Auction & Realty, Knoxville, Tenn.

COMMENT