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§ 9.13 CHARITY AUCTIONSIn one instance, a retired athlete decided to contribute various memorabiliaaccumulated over his career to a charitable organization, which in turn plannedto construct a museum housing these items. Among the gifted properties wereautographed photographs presented to him over the years as gifts from celebrities.The IRS held that the photographs were created in part by his efforts andthus the charitable contribution deduction was confined to his basis in the items.The IRS also so held with respect to diaries of his performances. By contrast, collectibles(such as art works and crystal), sports equipment, plaques, trophies,and awards given to him were considered by the IRS to be capital assets, so thatthe charitable deduction was not limited by this rule. 324§ 9.13 CHARITY AUCTIONSThere is considerable confusion and misunderstanding as to the federal tax lawapplicable to the conduct of charity auctions, particularly as to how the charitablegift substantiation and quid pro quo contribution rules apply. This uncertaintywas manifested in two articles in a personal finance magazine, where itwas written that a “special circle of tax hell has been carved out for you if you’reinvolved in one of today’s hottest fund-raising activities: charity auctions.” 325This body of law has seven elements: (1) the tax treatment, with respect tothe charitable organization, of the funds expended by the patrons at the auction;(2) the charitable contribution deduction available to those who contributesomething to be auctioned; (3) the charitable contribution deduction that maybe available to those who acquire an item at a charity auction; (4) the substantiationrules; (5) the quid pro quo contribution rules; (6) the state sales tax rules;and (7) the federal tax rules for reporting the event to the IRS. There can be differentand additional complexities when the fund-raising event is a lottery, raffle, or othergame of chance.(a) Charity Auctions as BusinessesThe federal tax law envisions a tax-exempt organization as being a bundle ofbusinesses. For this purpose, a business is any activity that entails the productionof income from the sale of goods or the performance of services. 326 An activitydoes not lose its identity as a business merely because it is carried on within alarger aggregate of similar activities or within a larger complex of other endeavorsof the organization. 327Some businesses are related ones, in that the conduct of them helps to advancethe organization’s exempt purposes (other than simply through the generation offunds). Other businesses are unrelated, because the conduct of them does not relateto achievement of a charitable, educational, or similar purpose; this type of businessusually is carried on solely for the purpose of generating income. 328324 Priv. Ltr. Rul. 9335017.325 Taxing New Rules for Charitable Giving, 48 Kiplinger’s Pers. Fin. Mag. (no. 5) 140 (July 1994).326 IRC § 513(c). See § 3.5(b).327 IRC § 513(c).328 See § 3.5(d). 311