Terrie on Nonprofits
February 2005
WHAT COUNTS, WHAT DOESN’T
WHEN DETERMINING FAIR MARKET VALUE
Q: How is the deductible portion of a ticket
to a fund raising event determined? For
instance, at a luncheon, is it merely the
cost for the food and beverages served
or should other event expenses be included,
which would result in a smaller deduction
for attendees?
A: This question has plagued fund raisers for years, especially
since the IRS publication on charitable
contributions fails to directly answer
this question either in its descriptive
passages or its examples. However, an
IRS agent helped me clarify this. Fair
market value does not hinge on the
organization’s expenses, but rather on
the “value of the benefit received.” This
means that the fair market value may exceed
the cost of food and beverages but conceivably
be less than the organization’s total cost
per person in putting on the event.
Let me give you an example. You hope to attract 200 people to
the luncheon you referenced above. You
have negotiated food and beverage costs
at $40 per person including tax and gratuities. You
are offering free valet parking compliments
of the hotel – a $10 value. You have also
solicited favors for everyone which retail
at $25 each. The room rental is $1500,
the invitations work out to $4 per person,
and decorations add another $1000 to the
total. The cost to the organization of
putting on this event is $56.50 per person: $40
per person for food, $16.50 per person
for the room rental, invitations and decorations,
nothing for the parking and favors which
are both donated.
In determining the fair market value of the event you would not
include the room rental, invitations or
decorations because these are not benefits
to the individuals but rather costs to
the organization of doing business in this
way. However, because the meal, parking
and favors are benefits they should be
included in the calculation of fair market
value, even though the parking and favors
are donated. In our example, the meal
plus parking and favor totals $75. If
the organization is charging $100 for the
afternoon the allowable deduction is just
$25, not $43.50 as would be the case if
basing fair market value on the organization’s
costs.
One note of caution: Be sure to specify the fair market value
of the event when you promote it. Merely
saying something like, “deductible to the
full extent of the law” is not sufficient. The
IRS considers the cost of the event to
be its fair market value unless that figure
is broken out of the total cost.
Terrie
Temkin, Ph.D. is an internationally recognized
governance and planning expert. She is
president of NonProfit Management Solutions,
Inc.,
a principal in CoreStrategies for Nonprofits,
Inc., and a longtime member of AFP. Contact
her at terriet@nonprofitmanagementsolutions.com,
954-985-9489, or 866-985-9489.
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