What happens when you mix a charitable auction with a famous pair of pants from an iconic movie worn by a legendary international superstar?? A six-figure donation to cancer research and a lot of very happy people?
On November 2, 2019, the Estate of Olivia Newton-John listed several items on Julien?s Auction. The famous actor was battling cancer for the third time and the Hollywood star was donating the proceeds of a very special pair of her pants towards the Olivia Newton-John Cancer Wellness & Research Centre.
The description read,
A pair of custom-made stretch satin, figure-hugging, black high-waist pants worn by Olivia Newton-John in the finale of Grease (Paramount, 1978) when she and John Travolta perform ?You?re the One That I Want? and ?We Go Together?? Estimated value of the item: $40,000 ? $60,000.
There were only four prior bids on the pants until they sold for $162,500. Sarah Blakely, who is a successful entrepreneur, revealed herself as the buyer on, ?CBS This Morning? saying,? ??I have been the biggest fan of Olivia since I was a little girl, since ?Grease? came out, and my friend called me two days before the auction. I didn?t know it was happening ? and I thought? I?ve got to try to get these.?
The outlandish price Blakely paid for her new collector pants, albeit for a worthy cause, garnered the white hot media spotlight, but there is another side of the story that was not covered. As a family office consultancy firm, we thought we would take the opportunity to discuss the tax implications of purchasing and donating collectibles at charity auctions.
Benefits for the Buyer
Purchases made at charity auctions may be claimed as tax deductions as they are considered charitable contributions. You can?t claim the entire purchase price of item though- your deduction is limited to the amount that you spend beyond the items fair market value. In Blakey?s case, her charitable contribution would have been between $122,500 and $102,500 ($162,500 purchase price less the $40,000 ? $60,000 range of appraised value). A key element of being able to claim this deduction though is having the ability to show the IRS that the buyer was knowingly paying beyond the fair market value of the item. Blakely was covered in this case as the auction had published the appraised value of the pants on their site before the bidding began.
Benefits for the Donor
Buyers are the only ones that can receive benefits at auctions. Donors may also claim deductions however the amount that they can deduct is not quite as straight forward as that of the buyer. Most donors would assume that they can claim their property?s fair market value as a charitable contribution, however when it comes to appreciated collectibles, it?s not that simple. The IRS states:
?Under these circumstances, the law limits a donor?s charitable deduction to the donor?s tax basis in the contributed property and does not permit the donor to claim a fair market value charitable deduction for the contribution.? Specifically, the Treasury Regulations under section 170 provide that if a donor contributes tangible personal property to a charity that is put to an unrelated use, the donor?s contribution is limited to the donor?s tax basis in the contributed property.? The term unrelated use means a use that is unrelated to the charity?s exempt purposes or function, or, in the case of a governmental unit, a use of the contributed property for other than exclusively public purposes.? The sale of an item is considered unrelated, even if the sale raises money for the charity to use in its programs.?
When one is making a donation that will be sold at a charity auction, the deduction is limited to your tax basis and not what the actual item is worth. Now keep in mind that the limitation of your deduction does not apply to donating appreciated socks and other securities, but to personal property.
If you have any questions on charitable donation tax strategies, collectible capital gains tax rates or if you?re in need of objective tax and family office advice (we never sell investments), please consider contacting us here at Info@GROCO.com.? Or, visit our website at www.GROCO.com to learn more about us.? Unfortunately, we no longer give advice to other tax professionals gratis.