Q: Our organization recently held an auction. We were told that whatever someone was willing to pay for an item is the “fair market value” to that buyer for that item so people cannot claim any portion of their purchases as a donation. Can this be true? If it is, it will certainly put a damper on buying as word gets out.
A: It is true for some items, but not for others. The IRS regulations state that a claim for a charitable deduction may be made for monies paid in excess of the fair market value of an item purchased at an auction if the buyer can show that he or she knew prior to bidding that the value of the item was less than his or her eventual bid for it. Conceivably, then, if at the beginning of an auction the charity provides each participant with a catalog listing the fair market value of all the items, or the auctioneer announces the fair market value of each item prior to accepting bids, and someone bids more than this amount, he or she could claim a deduction for the amount paid over the publicized value. However, this only works where there is a good idea of the value of each item – say for a cruise, tickets to a sporting event or the theater, or a piece of jewelry.
Where this becomes dicey is when the auction features items for which there is no way to determine fair market value. The opportunity to meet a celebrity is an example of one such item. In such cases the person who purchases the item is determining the fair market value by deciding how much he or she is willing to pay for it. This means that regardless of how much is bid for an item that may have little “real” value there would still be no allowable claim for a deduction.
Obviously, too, if the charity has not provided a list of values for its items prior to accepting bids the prices paid will be assumed to be their fair market value. The exception here would be if the winner of any given bid is an acknowledged expert on the type of item on which he or she bid. In such a case he or she could legitimately claim awareness of its fair market value.