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SPECIAL GIFT SITUATIONSThus, a charity auction is a business; it is the performance of a service (sellingitems). These auctions are not inherently exempt functions; in the case of privateschools, for example, the conduct of an auction is not an educationalundertaking. Consequently, the conduct of a charity auction is the conduct of anunrelated business by the charitable organization.The net revenue of a charity auction would, therefore, be taxable as unrelatedbusiness income were it not for one or more exceptions. The principalexception relates to the fact that, for an unrelated business to give rise to taxableincome, it must be regularly carried on. 329 An annual auction held by a charitableorganization is not an activity that is regularly carried on; thus, the netincome is not taxable. (If a charity were to hold an auction every weekend, however,this exception would not be available.)Another important exception is the one for businesses that constitute the saleof merchandise, substantially all of which was donated to the exempt organization.330 Although this exception was written for thrift shops, it is available in thecase of auctions. This exception alone shields charity auctions from taxation.The third exception is for businesses in which substantially all the work ofcarrying it on is performed by volunteers. 331 If a charity auction is conductedentirely by volunteers, the net income from it is not taxed. (Some charity auctionscan rely on all three exceptions.)Thus, it is almost inconceivable that the net income yielded as the result of acharity auction would be subject to unrelated income taxation—but only becauseof specific statutory exceptions.(b) Charitable Contribution Deductions—Donors of Items to Be AuctionedIn general, the contribution of an item to a charitable organization, for the purposeof being auctioned, gives rise to a charitable contribution deduction. Theusual rule is that the deduction is equal to the fair market value of the contributedproperty. 332 (This analysis is based on the assumption that the charity holdingthe auction is a public charity and not a private foundation. 333 )If the item donated is tangible personal property that has appreciated invalue, the charitable deduction is confined to the donor’s basis in the property. 334This is because the gift was made for an unrelated purpose—immediate resaleby the donee. 335If the item donated has a value in excess of $5,000, the charitable deductiondepends on a bona fide appraisal. 336 An appraisal summary must be includedwith the donor’s tax return. The charitable organization must report the sale tothe IRS if the auction took place within two years of the gift. 337329 IRC § 512(a)(1). See § 3.5(c).330 IRC § 513(a)(3). See § 3.5(f).331 IRC § 513(a)(1). See § 3.5(f).332 See §§ 4.1–4.5.333 See § 3.4.334 IRC § 170(e)(1)(B)(i).335 See § 4.6.336 See § 21.1.337 IRC § 6050L. See § 21.3. 312