Is it illegal or unethical for a board member of a nonprofit to bid on an auction item at the annual fundraiser?
No. Directors frequently bid on items at auction during an annual charity fundraiser. They are among the strongest supporters of the organization. Sometimes they make a bid to generate some revenue from an item that nobody else seems to want. Sometimes they are actually interested in acquiring an item and are willing to pay a premium to get it. As long as the bids are in good faith and not intended to manipulate the bidding, they are completely appropriate.
Charities should understand that auctions provide one of the very few times that a charity should put a value on an in kind gift given to it by a donor. Ordinarily a donor is responsible for putting a value on a donation when claiming a charitable contribution deduction. But the regular “quid pro quo” rules apply when a payment to a charity is part gift and part payment for goods or services received, as happens with an auction. When the purchaser pays more than $75 for the item, the charity is legally required to notify the purchaser of the value of the item so that the purchaser may claim a charitable contribution deduction only for the amount of the payment that exceeds its value. Even if the payment is $75 or less, the same principle applies and the donor may claim a deduction only for the amount of the payment that is more than the value. The charity has no legal obligation to notify the purchaser of the value for a payment of $75 or less, but it is certainly a best practice to do so. If the purchase price is less than the value, of course, no deduction is allowed to the purchaser. (See Ready Reference Page: “Charities Must Set Value On ‘Quid Pro Quo’ Gifts”)