PDF Fundraising Auctions: Issues and Recommendations for Collectors

This Professional Guidelines topic is intended to more fully inform collectors about the impact that fundraising auctions have on the art community, their collections and what issues should be considered before attending an auction or donating work to an auction.

This Professional Guidelines topic is intended to more fully inform collectors about the impact that fundraising auctions have on the art community, what issues should be considered prior to and after an auction, and recommendations as to how collectors can maximize any benefits that they may receive by participating in an auction. Ultimately, we believe that the behavior of collectors can and should help change the way fundraising auctions are conceived and conducted.

This is one of four Professional Guidelines documents about Fundraising Auctions, each addressing a different perspective.

These documents provide insights and helpful suggestions for all members of the arts and crafts community.

You're welcome to read all four to see a thorough discussion from all perspectives.

Auctions can be a successful way for organizations to raise needed funds. However, frequent auctions by one group or multiple groups within the same geographic area can have a significantly negative impact on the arts community - the very constituency they often wish to support.

Unfortunately, fundraising auctions have gained a reputation for selling artwork at considerably less than market value. Consequently, over-reliance on auctions as fundraising mechanisms may ultimately harm galleries, individual artists and collectors, by siphoning off gallery sales, devaluing artists' work, and impairing the artists' and galleries' ability to make a living.

Organizations sponsoring or benefiting from fund raising auctions, especially those involved with the arts and crafts communities, should act responsibly when planning fundraising efforts. Artwork needs to be handled and displayed with care and respect. Every effort should be made to obtain the highest price for donated work, minimum bids should be established and honored, and all information regarding the purchaser forwarded to the artist for their records.

Bidders at auctions should be encouraged to be generous in their support of the organization (and the art community. It is hoped that bidders see these auctions primarily as an opportunity to support the sponsoring organization - and, by extension, the art community-- and not simply as a means to find quality work at bargain prices.

CONTENT

I.     INTRODUCTION TO FUNDRAISING AUCTIONS
II.    MYTHS ABOUT FUNDRAISING AUCTIONS
III.   FINANCIAL IMPACT OF FUNDRAISING AUCTIONS ON ART ORGANIZATIONS
IV.   RECOMMENDATIONS OF THE PROFESSIONAL GUIDELINES COMMITTEE
V.    CONSIDERATIONS FOR AUCTION SPONSORS
VI.   IMPROVING FUNDRAISING AUCTIONS
VII.  LIVE AUCTIONS VERSUS SILENT AUCTIONS
VIII. FUNDRAISING ALTERNATIVES
IX.   AUCTION SPONSOR'S CHECKLIS

I. INTRODUCTION TO FUNDRAISING AUCTIONS

This Professional Guidelines topic is intended to more fully inform collectors about the impact that fundraising auctions have on the art community, what issues should be considered prior to and after an auction, and recommendations as to how collectors can maximize any benefits that they may receive by participating in an auction. Ultimately, we believe that the behavior of collectors can and should help change the way fundraising auctions are conceived and conducted.

This is one of four Professional Guideline documents about Fundraising Auctions, each addressing a different perspective.

Fundraising Auctions: Issues and Checklist for Artists
Fundraising Auctions: Issues and Impact for Galleries
Fundraising Auctions: Issues and Recommendations for Collectors
Fundraising Auctions: Issues and Alternatives for Art Organizations

These documents provide insights and helpful suggestions for all members of the arts and crafts community. You’re welcome to read all four to see a thorough discussion from all perspectives.

Auctions can be a successful way for organizations to raise needed funds. However, frequent auctions by one group or multiple groups within the same geographic area can have a significantly negative impact on the arts community—the very constituency they often wish to support. Unfortunately, fundraising auctions have gained a reputation for selling artwork at considerably less than market value. Consequently, over-reliance on auctions as fundraising mechanisms may ultimately harm galleries, individual artists and collectors, by siphoning off gallery sales, devaluing artists’ work, and impairing the artists’ and galleries' ability to make a living.

Bidders at auctions should be encouraged to be generous in their support of the organization (and the art community. It is hoped that bidders see these auctions primarily as an opportunity to support the sponsoring organization—and, by extension, the art community-- and not simply as a means to find quality work at bargain prices.

II. MYTHS ABOUT FUNDRAISING AUCTIONS

Collectors are known to be generous and supportive of arts organizations. An organization inviting collectors to a fundraising auction encourages participation as a show of support for the arts community and an opportunity to see new artists. However, some rationalizations are overextended. Here are a few:

Myth #1: Fundraising auctions support the arts community.
Fact: Fundraising auctions do generate funds for the auction sponsor; however, auctions may not support the overall arts community which includes artists, galleries, and collectors. This is especially true in areas where a number of organizations all may be holding one auction per year--with the accumulated impact of several auctions in one year. Auctions often ask the same local artists to donate work and the same collectors to make a purchase. In selling art and craft, auctions compete with the same market as galleries who have invested year round to generate awareness. If one segment of the arts community, in this case a particular auction sponsor, gains at the expense of other members of the community such as artists and gallery owners, is the arts community better off?

Myth #2: Supporting the auction supports the artists.
Fact: Supporting the auction supports the auction sponsor. Auction sponsors usually request donations of artwork from artists (sometimes offering a small percentage of the auction purchase price to the donor) – or, alternatively, compensating the artist with tickets to the auction or a membership in their organization. In addition to the loss of income for the artist (with limited tax deduction for their donation) as well as the often uncompensated cost of labor and materials, donated artwork often auctions below the established retail price. This may adversely affect the retail value for the artist’s other work, which has a negative impact on the artist’s viability in the marketplace.

Myth #3: Fundraising Auctions do not impact galleries.
Fact: Fundraising Auctions can unfairly compete with galleries in the retail market. Selling artwork in an auction actually circumvents the role galleries play within the arts community. Galleries offer consistent visibility for an artist’s work, creating demand by mounting exhibitions, through advertising and by providing regular exposure in the gallery space. A case can be made that auctions piggyback on a gallery’s commitment to and promotion of an artist, reaping the benefits of the gallery1s efforts without making any long term investment themselves.

The simple fact is that galleries are for profit businesses. Fundraising auctions may also offer unfair sales competition in that bidders may see their purchase as an act of philanthropy (accurately or mistakenly), a motivating perception that drives auction sales and with which galleries cannot compete.

Patrons who buy work at auctions do so without the benefit of a gallery's professional guidance or having available the broader selection of an entire series of an artist's work shown by the gallery. Collectors may even delay the purchase of an artist1s work from a gallery, anticipating the possibility that it may be available at the annual auction at a reduced price. In another scenario a patron may defer a gallery purchase of a particular artist1s work if they have already acquired another piece at an auction. Frequent auctions may even exhaust the time and resources designated to the purchasing of artwork by some collectors. In this case, auctions negatively impact galleries.

Myth #4: Fundraising auctions are a great opportunity for collectors to attend a gala event, mix and mingle with members of the arts community, discover new artists and find quality work at reduced prices-- all while supporting the auction sponsor with a tax deductible purchase.
Fact: Auctions are not the utopian combination of philanthropy, and shrewd acquisition that they seem to be. The selection offered at an auction is limited to the pieces donated, and may not represent a superior example of an artist’s work. The auction venue does not offer the guidance of experienced gallery or museum staff nor the time to become fully acquainted with a particular piece and come to a careful decision. The pressures of limited time, competitive bidding, and the desire or sense of obligation to help the sponsoring organization with a purchase can lead collectors to make purchases of work that they may not truly wish to own or add to their collections.

Additionally purchases made at auctions are not necessarily tax deductible just because the check is written to a non-profit. Read Myth #5, the Appendix, and III. C. FINANCIAL IMPACT OF AUCTIONS ON COLLECTORS, The financial impact of ‘tax-deductible” contributions to find out how to make your tax-deductible donation legally.

Myth #5: Buying work at an auction is a totally tax-deductible contribution.
Fact: According to the IRS, the tax-deductible portion is only the amount paid above the retail value of the work. For example, if the stated retail value of a piece is $100 and the piece sells for $125, according to the IRS, then only $25 is tax deductible. Though the check for a winning bid at a fundraising auction is written to a non-profit organization, the entire amount of the check is NOT tax deductible. (See section III. Financial Impact of Auction on Collectors below for more details.)

III. FINANCIAL IMPACT OF AUCTIONS ON COLLECTORS

A. Sustainability. If a piece of artwork is just what you wanted and sells well below the retail price, then collectors may have gotten a bargain. But this is a relatively short-term advantage, since this practice, ultimately, is not sustainable. Artists and galleries suffer the cumulative financial impact of frequent auctions, possibly putting them both out of business. This negative financial impact is compounded if the auction is held within the same geographical area as the gallery or the artist’s retail business. The closing of a gallery impacts the art community—artists, patrons, appreciators and collectors—by removing a location for the discovery and advancement of artists, the screening and selection of art work, and guidance offered by galleries relating to purchase and acquisition.

B. Auction prices can affect collection values. The value of a collection depends on the established value of the artists’ work. This value relies in part on demand for an artist’s work which is a matter of perception. When higher or lower (above or below retail) prices are generated at auction, the established value within a collection may change. Since appraisals for insurance purposes are often based on the recent sales of similar works by the same artist, changes in established market prices may impact appraised value. When generous bidding at auction yields higher than retail sales prices, every one wins. Unfortunately, since artwork sold at fundraising auctions often sells below established retail prices, the collectable value of an artist’s work may suffer.

C. The financial impact of ‘tax-deductible” contributions

1. There are two ways collectors can declare a tax-deductible contribution related to auctions:

a. Collectors can take a tax-deduction for the full appraised value of the artwork or craft they donate to the auction. This is regardless of the bid price paid at the auction. This is certainly a positive point for the patron who chooses to donate. However, with an understanding of the impact that auctions have on the art community as a whole (see MYTHS, above), collectors who donate work may want to take a number of steps to ensure that their donation reaches the highest possible bid price to generate funds for the auction sponsor and protect the artist’s marketability. Look for this information later in this document under section VII. C. Alternatives to Bidding at an Auction: Consider donating artwork from your collection.

b. If a collector purchases work at the auction, and donates the work to a museum or non-profit for their permanent collection the full value paid for the item is a tax- deductible.

2. Items purchased at auction may not be tax-deductible. Technically, the bidder at an auction is purchasing artwork or craft for the bid price. The payment for the purchase is not a tax-deductible contribution unless the collector pays more than the retail value for the work. Then, only the portion of the purchase price above the retail value is tax deductible. The I.R.S. web site states: “If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.” I.R.S. Look on line for more information at: http://www.irs.gov/taxtopics/tc506.html

IV. RECOMMENDATIONS FROM THE PROFESSIONAL GUIDELINES

A. Set a Reserve Price
The Professional Guidelines recommends that the auction sponsor set a “reserve price” for work offered in an auction. The “reserve price” is the price below which the artwork will not be sold. This reserve would ideally be 80% of the retail price. The artists should be offered 40% of the retail price for their donations. The art organization will receive 40% of the retail price for fundraising and the collector has the possibility of receiving a 20% discount. Work sold above the retail price (as a result of generous bidding) creates additional revenue for the auction sponsor.

B. Ask the auction organizers to establish a reserve price. The Professional Guidelines recommend that the reserve price be 80% of the normal retail price. Read section IV. A. Recommendations from the Professional Guidelines
In the case of no reserve price, it is recommended that a “minimum bid” be established, at 40% of current retail price. This is a less satisfactory solution because it doesn’t assure that the price for the piece will reach the 80% benchmark as a minimum final bid.

Low prices should be discouraged generally, to improve fundraising, and to mitigate the potential negative impact on the retail market for artists, galleries, stores, and many other contexts such as craft shows.

A minimum bid is the starting point in the bidding of a “live” or “silent” auction. A low minimum bid psychologically stimulates bidding. The Professional Guidelines recommends that the minimum bid start at 40% of current retail price.
The “reserve price” is the price below which the artwork will not be sold. The Professional Guidelines recommends that the reserve price be set at 80% of the retail value. The reserve price is usually published, but not always.

V. COLLECTOR CONSIDERATIONS

Recommendations for Attending an Auction

A. Remember that you are there, in large part, to support the organization, so be generous. Support the organization and the artists with generous bids – and bid often.

B. View the auction donations in advance, if possible or go early when there is less of a crowd. Go to the Preview Night or review catalogs.

C. Look at the work carefully. Perhaps there really is an example of an artist’s work that appeals to you.

D. Seek out the artist at the auction. Artists may be invited to the auction as some compensation for donating their work. If you meet the artist, you may learn more about their art, craft, technique or unique vision. Interest expressed in an artist and their work is one of the intangible perks an artist/ craftsman receives from their participation in an auction. BUT, if you do get a great bargain on a piece of artwork avoid the desire to find the artist and tell them what a great deal you got. While they may be happy for your good fortune, they may be disappointed at the low bidding on their work.

E. Alcohol is often served at these events; use your best judgment.

VI. ALTERNATIVES TO BIDDING AT AN AUCTION

A. Consider a financial donation instead. If cash is donated, the full amount is tax deductible. The ultimate purpose of the auction is financial support of the sponsoring organization. Your financial contribution means you are truly supporting the arts community as well as the auction sponsor.

B. Consider volunteering your time instead. Your leadership on the Board of Directors, leadership councils or within the docent program can be a pivotal contribution to the organization. “Although you cannot deduct the value of your time or services, you can deduct the expenses you incur while donating your services to a qualified organization. If the expenses are for travel, which may include transportation and meals and lodging while away from home, they may be deducted only if there is no significant element of personal pleasure, recreation, or vacation in the travel. Actual costs of gas and oil can be deducted, or you can choose to take 14 cents per mile for using your own car.” Source: IRS web site at: http://www.irs.gov/taxtopics/tc506.html

C. Consider donating artwork from your collection. Reasons may include:

Deaccessioning an item from your collection
Making room for new work
Generosity toward the auction sponsor

1. If you donate work from your collection (especially if it is by a well known local artist), it is advisable to notify the artist, the artist’s gallery or both, in advance of the donation.

a. This is a basic courtesy that fosters goodwill within the arts and crafts community.

b. This avoids multiple donations of one artist’s work that could affect their market or gallery representation.

2. Is the artist or the artist’s gallery planning to donate other examples of the artist’s work? When multiple pieces of an artist’s work appear during the same auction, the overexposure may be injurious to the artist’s career or, reputation.
3. Will an appraisal be necessary? If a collector is donating an artist’s work, there are tax consequences that may require an appraisal (from a gallery or professional in the field) at the time of donation and advice from an accountant. (Read page 230 in the Legal Guide for the Visual Artist by Tad Crawford for a brief description; see the Professional Guidelines document Resources for Legal and Professional Advice for where to get this book.)

In the Appendix at the end of this document, there is information from the I.R.S. regarding when you need appraisals and what the appraisal needs to include.

VII. DONATING WORK TO FUNDRAISING AUCTIONS

A. Before you decide to make a donation, read The Professional Guidelines document, FUNDRAISING AUCTIONS: Issues and Checklist for Artists. It contains information that you may find insightful. In addition, the following information in this document is designed to make donations to fundraising auctions more attractive to bidders and more effective in generating funds for the auction sponsor. Topics covered include:

Questions to ask before donating to fundraising auctions (section VI.)
Donating work to fundraising auctions (section VII.)
The Appendix at the end of this document has information from the IRS website about charitable contributions. If you claim a deduction on your return of over $500 for all contributed property, you must attach a Form 8283, Noncash Charitable Contributions, to your return. If you claim a total deduction of $5,000 or less for all contributed property, you need only complete Section A of Form 8283. If you claim a deduction of more than $5,000 for an item or a group of similar items, you generally need to complete Section B of Form 8283 which requires a qualified appraisal by a qualified appraiser.

B. Donate work only to organizations that you want to support. You will probably get a number of requests during the year. Choose wisely.

C. Donate work only if the style of work is consistent with the organization. For example, if your donation is bold, contemporary, or conceptually challenging, then giving work to an auction for a folk art museum may not be consistent with the target audience.

D. Donate work only if the auction audience is familiar with the type of work. No matter how fantastic the piece, or how well received by critics, if the auction audience is not familiar with the work or understand it, they will not place bids. For example, most elementary school parents would rather get a donated Blockbuster gift certificate than a piece of jewelry that they do not understand or will never wear. This is not an insult, just a fact.

E. Be cautious when donating to auctions that rely heavily on the Internet. Internet sales of art and craft are still in their infancy. The computer screen does not convey adequately the rich experience of viewing an object or painting in person. The best use of the Internet is to increase exposure for an auction, extend the bidding to a wider audience that is already familiar with the work and extend bidding hours.

F. Document your donation by preparing an accurate description.
Submit this with the paperwork to the auction sponsor prior to the donation and include a duplicate copy when sending your donation to the auction. Do this even if the auction sponsor did not ask for it.
Include the following information:

1. Artist’s name

2. Title of donated work

3. Date of work

4. Complete description of materials, if available

5. Complete artist statement, if you have one, to be used in catalogue or web site. The more the artists say about themselves, the more information the auction can provide to the bidder.

6. Provenance of the work, if possible. This may include exhibitions, or books that included the artwork, and/or previous owners.

7. Retail value for the donated work.

G. A written appraisal is required by the I.R.S. for donations over $5,000 in value. The appraisal can be written by a gallery, museum or art professional familiar with the artist’s work stating the current value of your donation to the auction. (The price you paid for the work may not be an accurate valuation depending on the artist’s career developments. The value of the work may have increased since your original purchase.) To facilitate the appraisal, offer the appraiser:

1. Artist’s name

2. Title of donated work

3. Date of work

4. Complete description of materials, if available

5. Provenance of the work, if possible. See the Appendix to this document with pertinent facts from the I.R.S. web site including all the information required on your appraisal by the I.R.S.

H. Consider how the work will be displayed. Many auctions are not professionally hung or displayed. Temporary tables with cloth over them are typical. Consider offering an appropriate display your donation, (perhaps loaning a pedestal for example). This requires less effort from the auction staff and it enhances your donation tremendously.

I. Send photographic images early. Send digital images 2 to 3 months (or more) in advance of the auction, if possible. This is the most helpful item that a collector (or artist) artist can provide – after artwork. Maybe the auction sponsor will use the images of your donation for the publicity, newsletter or auction announcements.

VIII. AFTER THE AUCTION

A. Do not feel insulted if your donation does not sell for the minimum bid, the reserve price or at its regular retail price. Work at auctions rarely sells at full retail price. Maybe the auction did not attract just that person who could understand the work or afford the price. Arrange for the return of your donation, if necessary.

B. Get a receipt for your donation from the auction sponsor to whom you donated the work.

C. Submit a copy of the appraisal and receipt with your tax return. It is a good idea to submit a copy of this appraisal with your income taxes if you are taking this donation as a tax deduction. Donors must submit a specific IRS form for donations over $5,000. In general, refer all questions about tax matters to your tax advisor.

Download PDF FUNDRAISING AUCTIONS: Issues and Recommendations for Collectors

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© 2004, 2010 Harriete Estel Berman
The Professional Guidelines would like to acknowledge the contributions of the Professional Guidelines Committee 2004: Andy Cooperman, Contributing Editor; Boris Bally, artist; Suzanne Baizerman, curator; Tami Dean, production artist; Marilyn da Silva, artist; Lloyd Herman, curator; Cherry LeBrun, owner of DeNovo Gallery;, Dale and Patrick Maveety, collectors; Nancy Moyer. artist; Marc David Paisin, attorney; Biba Schutz, production artist; and Lynda Watson, metalsmith.

DISCLAIMER

THE COYRIGHT OWNER HAS PREPARED THE FOLLOWING MATERIALS AS AN INFORMATIONAL AID TO EDUCATE THE READER ABOUT COMMON SITUATIONS THAT GENERALLY ARISE IN THE ARTS AND CRAFTS FIELD. THESE MATERIALS, INCLUDING ALL SAMPLE AGREEMENTS, CANNOT AND DO NOT ADDRESS ALL OF THE LEGAL ISSUES THAT MAY BE PERTINENT TO ANY INDIVIDUAL CIRCUMSTANCE. THE READER SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED HEREIN WILL SATISFY ALL OF THEIR NEEDS. LAWS VARY FROM STATE TO STATE, AND THESE MATERIALS ARE NOT A SUBSTITUTE FOR OBTAINING LEGAL ADVICE FROM A LICENSED ATTORNEY IN YOUR STATE. THE READER IS ENCOURAGED TO SEEK SUCH LEGAL ADVICE PRIOR TO USE OF THESE MATERIALS. SNAG AND THE COPYRIGHT OWNER DISCLAIM ANY RESPONSIBILITY FOR ANY AND ALL LOSSES, DAMAGE, OR CAUSES OF ACTION THAT MAY ARISE OR BE CONNECTED WITH THE USE OF THESE MATERIALS AND/OR FORMS.