This is an important question to show the differences between gambling and an auction.  A lottery or a raffle is a game of chance where the participant has to pay to play.  A sweepstakes is normally a game of chance where the participant does not have to pay to play.  (Either of them may be regulated under local law, so a charity using either of them should understand the regulations and seek to comply.) The IRS generally requires the person running the lottery, raffle or sweepstakes to report gambling winnings of $600 or more and the winner will have to pay federal income tax on the net winnings.  (If the winnings are more than $5000 or if the winner refuses to give his or her social security number, the organization has to withhold the tax.)  For a charity, the potential benefit of a lottery is that a lot of people will play so that the amount wagered is significantly more than the value of the item.  If a lot of people don’t play, of course, the take could be less than the value that could be realized by a straight sale.

An auction is simply a sale — at more or less than the fair market value of the item, but a sale nonetheless.  There is no element of “chance” and no gambling winnings for the successful bidder to report.  If the purchaser pays more than the fair market value of the item, the purchaser can deduct the difference as a charitable contribution.  The charity is obligated to tell a purchaser who pays more than $75 the value of the item and confirm the amount paid.  (See Ready Reference Page:  “Charities Must Set Value on ‘Quid Pro Quo’ Gifts”)  A purchaser who wins the bid at less than fair market value has just gotten an item “on sale” at a reduced price and cannot claim any deduction.