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Rush Limbaugh and Sen. Reid Duke it Out for Charity
Despite the old adage warning against discussing politics in polite company, we just couldn't resist the partisan throw-down that happened between Sen. Harry Reid and radio talk show host Rush Limbaugh during the past few weeks that resulted in a $4,200,200 gift to charity via an eBay auction. We were curious how the gift was structured and thought you might be as well.
Let the Mud Slinging Begin
On October 2, 2007, Senate Majority Leader Harry Reid (D-Nevada) wrote a letter to Mark Mays, CEO of Clear Channel Communications, Inc. and Premiere Radio Networks, which syndicates the Rush Limbaugh radio program nationwide, in which he claimed Mr. Limbaugh had characterized soldiers who oppose the war in Iraq to be "phony soldiers." Sen. Reid called this an outrage and insisted that Mays compel Limbaugh to apologize. The letter was then co-signed by 41 senators, all Democrats, and sent to Mr. Mays.
According to Limbaugh, however, he had said nothing of the sort and used that term only to define a caller to his program who had posed as an Iraq veteran to back his own opposition to the war. The battle lines between Limbaugh and Reid were now drawn.
Limbaugh stated on his radio program that Mark Mays gave the original copy of the letter to him. Crying foul that Sen. Reid had made misstatements in the letter and had otherwise abused the power of his office against a private citizen, Limbaugh then decided to get even by auctioning the original copy of the letter on eBay and donating the proceeds to the Marine Corps Law Enforcement Foundation ("MC-LEF"), an organization that provides scholarship assistance to the children of Marines and Federal law enforcement personnel whose parents die in the line of duty. Limbaugh, who also sits on the foundation's board, vowed to match the winning bid dollar for dollar with a contribution of his own.
The auction ended on October 19th with "bettyc588" placing the winning bid in the astounding amount of $2,100,100. Limbaugh then matched the amount for a total gift to the MC-LEF of $4,200,200.
Charitable Auctions on eBay
To understand how the auction was structured, we first looked at the eBay auction page on which the item was listed and learned the donation would be "backed" by MissionFish, a service of the Points of Light Foundation and exclusive charity solution provider for eBay Giving Works.
MissionFish works with eBay sellers who want to donate a portion of the proceeds from the sale of items they list on eBay.
During the listing process, eBay sellers are given the opportunity to select a certified nonprofit from the MissionFish database along with the percentage of the final value they wish to donate to that organization. The item then appears on eBay with the eBay Giving Works icon, the percentage to be donated, and the name of the charitable donee.
Charities that desire to receive proceeds from eBay auctions provide proof of their charitable status to MissionFish, which then places them in their database. Charities can also establish a Nonprofit Direct Seller and list items that have been donated to them or they otherwise already own.
Taxable Sale or Charitable Gift?
We had some questions about how the Limbaugh auction was structured so we contacted Michael Leger, Marketing Manager for MissionFish. Mr. Leger told us the seller was actually Premiere Radio Networks because it was the original recipient of the letter. Perhaps Premiere believed giving a letter of value to Limbaugh would have resulted in compensation to him.
Does this mean that for income tax purposes that Premiere Radio Networks sold the letter and then donated the cash sale proceeds? The short answer is yes.
To answer this question, we reviewed the MissionFish Seller User Agreement (Last Updated August 31, 2006) as published on its website. Paragraph 4.1 states in part:
4. Processing of Donations
4.1 We do not charge you a fee for using the Online Giving Tools or other portions of the MissionFish Web Site. By using the Online Giving Tools to make charitable contributions, you are making a charitable contribution to MissionFish/POLF. MissionFish/POLF is a tax-exempt organization under section 501(c)(3) of the U.S. tax code. Therefore, your donation is tax deductible to the full extent allowed by law. Under the terms and conditions discussed below, MissionFish/POLF grants your donation to your recommended Charitable Beneficiary, retaining a small portion of the donation to cover MissionFish's operating expenses. [Emphasis added]
Paragraph 4.6 states:
4.6 You acknowledge that your sales made by means of eBay listings are transactions between you and the relevant buyer(s), and you remain solely responsible for delivery of said items and collections of related amounts owed to you by buyers ("Proceeds").
MissionFish requires the eBay seller to deliver the item to the buyer, secure payment from the buyer, and then forward the charitable portion of the proceeds to MissionFish on a timely basis. To ensure it receives payment, MissionFish requires eBay sellers to provide their credit card information; however, sellers can also write a check or use an electronic funds transfer.
MissionFish then deducts a "small portion" of the proceeds to cover its expenses and then grants to remainder to the charitable donee selected by the seller. Its fee begins at 20% for amounts up to $50 and moves down to 3% for amounts exceeding $5,000 (1.5% if the sellers pays via check or EFT). There is no cap on this fee.
Presuming Premiere Radio Networks sent a check or wired the $2,100,100 to MissionFish (rather than using PayPal or putting it on its Visa card), the fee would have been $31,426.50!
Deductibility of Gifts Made Via MissionFish
Regarding the deductibility of such gifts, the MissionFish website states the following:
"It's tax-deductible. Every donation made from an eBay Giving Works listing is completely tax deductible. MissionFish collects your donation, delivers it to the nonprofit and provides you with a tax receipt."
This statement is correct because the donor is making a cash donation of a portion of the sales proceeds. For larger gifts, however, the percentage limitation rules may limit the amount the donor can deduct in any given tax year.
Donating Auction Proceeds Via MissionFish
It is clear from the MissionFish agreement that it considers the transaction a sale between the eBay seller and buyer with an irrevocable pledge of up to 100% of the net proceeds to MissionFish and the seller's designated charity. But was this the best way for the Limbaugh gift to be structured?
When Premiere Radio Networks sold the letter via this method, it realized ordinary income equal to difference between its basis in the letter and the sales price.1 Since it had no basis, it realized $2,100,100 (less any listing and sales fees charged by eBay). Premiere will receive a charitable deduction in the same amount, but as a C-corporation will only be able to use the deduction against up 10% of its taxable income in the year of the contribution (determined without regard to the charitable deduction and certain special deductions for the year and to net operating loss and capital loss carrybacks to the year,2with a five year carryover of an excess deduction. This might not be a problem for Premiere, but it could be disastrous for corporations with less income.
Conversely, had Premiere donated the letter to MC-LEF prior to the sale, with MC-LEF then listing and selling it on eBay, the tax results would have been quite different.
Premiere would have donated ordinary income property in which is had no cost basis; therefore, Premiere's charitable deduction would be limited to the lesser of fair market value and its adjusted cost basis - in this case, zero. Most importantly, however, by donating it prior to sale, Premiere would have also avoided realizing any income from the sale.
What About "Bettyc588" and Her Deduction?
Except for paying some additional accounting fees to account for the additional income and claim an offsetting charitable deduction, Premiere might come out fine. But what about Betty, who purchased the letter? Could she have deducted a portion of the purchase price for the letter as a charitable gift?
As the transaction was structured, she cannot. Betty purchased the letter from Premiere, a for-profit corporation; therefore, no charitable deduction is allowable.
But what if Premiere had donated the letter to MC-LEF, which then placed it on auction?
The rules of IRC section 6115 governing quid pro quo transactions in which a payment is made partly as a contribution and partly in consideration for goods or services provided to the payor state that an individual who purchases property from charity is entitled to an income tax charitable deduction to the extent the amount paid exceeds the item's fair market value. For this purpose, the charity is required to provide a good faith estimate of value.
Let's say for the point of illustration that MC-LEF obtained a qualified appraisal of $100,000 prior to the auction.3 When we spoke with Michael Leger at MissionFish, he stated charities that sell items directly via eBay are given the opportunity to place the item's value on the auction page. In that case, Betty would have been entitled to a charitable deduction of $2,000,100.
The IRS might have argued the letter was worth what Betty paid for it. After all, does not a public auction on eBay with 213 bids match the "willing buyer and willing selling having knowledge of all relevant facts" definition of fair market value? Or could Betty have countered that she paid a large charitable premium to make a political point? We may never know.
In summary, we believe charitable auctions are a fantastic way of raising awareness and funds for worthy causes and that eBay and MissionFish both provide a valuable service. However, when an item is highly appreciated and the amount involved significant, eBayers would be well advised to consider donating it directly to the charitable donee and letting the charity sell it.
Could this gift have been structured more efficiently for tax purposes? Maybe. But the children who will benefit from this gift really don't care about that.
For Further Reading
To give us chapter and verse of the tax rules that surround charitable auctions, we contacted Ronnie C. McClure, Ph.D., CPA, and asked him to reprise and update the article he wrote for the Planned Giving Design Center in 1999 entitled, "Charitable Auctions: Bountiful Blessings or Buried Burdens." He gladly agreed and we are pleased to publish it today.
We know many people have an opinion about the parties to this story and the war, and have attempted to be as neutral as possible in presenting the facts. If you decide to post a comment, please use similar restraint. Thank you.
Under IRC section 1221(a)(3)(B), a capital asset does not include a letter or memorandum for whom such property was prepared or produced. Therefore, it is considered ordinary income property.back
IRC section 170(b)(2)back
Although a qualified appraisal is not required for this purposes, some organizations may use an appraisal to help in establishing a good faith estimate of value. This is analogous to an independent trustee of a charitable remainder unitrust that sometimes uses an appraisal to establish the value of trust assets for purposes of determining the annual unitrust amount even though an appraisal is not legally required for this purpose.back