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 auction, the spirit of giving pervades.
News-Antique.com - Jan 31,2008 - Benefit Auctions, Fair Market Value and the IRS
By Kenny Phillips, Managing Partner
Powell Auction & Realty, Knoxville, Tenn.
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 ten or twenty years ago. But today, they've really caught on. Maybe you've been to one yourself. We've helped stage several, 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 we 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). But 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 chartable 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