The rules governing the charitable income tax deduction of donations, ticket sales, and auction purchases at charity events are surprisingly complex. Following are answers to questions often asked by donors and charitable organizations.
Q. Is the admission price to a charity event fully deductible?
A. The portion of the admission or ticket price that equals the value of goods or services the donor receives at the event is not deductible. For example, if the ticket price is $100 and the fair market value of the food and/or entertainment received at the event is $25 per donor, the portion of the ticket price that is deductible as a charitable contribution is $75.
Q. What if the donor buys a ticket but does not attend the event, may the donor deduct the full amount of the ticket price?
A. No. If the donor makes a payment to a charity in connection with an event at which the donor would receive a benefit and the donor wants the whole payment to be a deductible gift, the ticket should be refused or, if received, returned to the charity in sufficient time so it can be sold to someone else.
Q. Is the donation of property to a charity for sale at its auction event deductible?
A. Yes, but not based on its fair market value. A donor's income tax deduction for a gift of tangible personal property, such as a painting or knitted sweater, is limited to the donor's cost of the item, not its fair market value, unless the property itself is used directly in carrying out the organizations charitable purpose.
Q. What about a donation of two weeks at the donors beach house?
A. The donation of the use of property, such as the right to use a home at the beach for a period of time, does not give rise to an income tax deduction because it is a gift of a "partial interest" in property.
Q. May a donor deduct any portion of his or her winning bid at a charity auction?
A. It depends. When a donor places the winning bid on an auction item, the donor receives a benefit equal to the fair market value of the item purchased with the bid. For there to be a charitable contribution element to that purchase, the donor must have knowingly bid an amount that exceeds the fair market value of the item. Only the amount equal to the difference between the winning bid (consciously made in excess of the fair market value) and the fair market value is a charitable contribution for income tax deduction purposes. Charities should be sure that the auction materials clearly identify the fair market value of auction items so that donors can intentionally bid higher than that value. Without the fair market value information, no winning bid, no matter how high, will have a deductible portion.
Q. How should a charity holding an auction establish the fair market value of items being auctioned?
A. Generally speaking, a charity may use any reasonable methodology (e.g., the prevailing commercial price) for determining fair market value, but it must be applied in good faith.
Q. How does celebrity involvement affect the fair market value of auction items?
A. The answer depends on the nature of the celebrity involvement. If, for example, an auction item is the opportunity to have dinner for two at a nice restaurant accompanied by a local celebrity, the fair market value of that auction item is the value of the two dinners. There is no added value due to the presence of the celebrity unless that celebrity normally charges people for the favor of his or her company. But if the auction item is a football signed by a celebrated football star, there is added value beyond the cost of a football because there is a commercial market for sports memorabilia.
Q. Does the donor need paperwork to support his or her claim of a charitable deduction?
A. Yes. If claiming a charitable deduction of $250 or more, a donor must have a written acknowledgment from the charity that includes the following: (i) the amount of cash and a description (but not value) of any property other than cash contributed, (ii) whether the charity provided any goods or services in return for the contribution, (iii) if the charity provided goods or services, a good faith estimate of the fair market value of those goods or services, and (iv) if those goods or services consisted solely of intangible religious benefit, a statement to that effect. For contributions of less than $250, the donor must retain a bank record (which includes a credit card statement) or a written communication from the charity that shows the charitys name and the date and amount of the contribution.
Q. Does including a raffle at a charity event raise particular issues?
A. Yes. A raffle is a game of chance” and is regulated by the Commonwealth of Massachusetts. A permit must be obtained from the clerk (and approved by the commissioner of public safety) of the city or town in which the raffle will be drawn. A permit is valid for one year. Within 30 days of the expiration of the permit, the charity must submit a report indicating the number of raffles held, money received, expenses connected with the raffle, names of winners of prizes exceeding $25, and use of the net proceeds. This report must be certified by the persons designated in the permit as responsible for running the raffle and signed by an accountant. In addition, a return must be filed with the state lottery commission within 10 days after a raffle is held and a tax paid equal to 5% of the gross proceeds derived from the raffle. If the value of the prizes to be awarded in a raffle exceeds $10,000 or if the raffle ticket price exceeds $10.00, further regulations apply, including detailed disclosure requirements to be printed on the raffle ticket or in a written notice given to the purchaser prior to the sale.
Q. Is the cost of a raffle ticket tax deductible?
Q. Does the winner of a raffle have taxable income?
A. Yes. The fair market value of the prize will be treated as ordinary income to the winner for federal and state income tax purposes. If the ticket price is over $10, the fair market value of the prize should be provided on the raffle ticket or in a disclosure received when purchasing the ticket.
Q. May a charity conduct a raffle over the internet?
A. The safest answer is no. It is unlikely that an online raffle would be able to meet the various Massachusetts rules governing raffles generally. Further, federal law may preclude Massachusetts charities from conducting online gambling, which includes raffles.
Judith Edington is counsel in the tax department of Sullivan & Worcester LLP, a full service law firm with offices in Boston, New York and Washington. Contact her at firstname.lastname@example.org.
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