Did you ever hear of a law that says a 501(c)(3) organization cannot conduct an auction of any kind?
No. Charities regularly conduct auctions as part of their fundraising activity. (See Ready Reference Page: “Charities Must Set Value on “Quid Pro Quo’ Gifts.”)
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While you are permitted to conduct standard auctions, in PA you need a Small Games of Chance license for Chinese Auctions, and Quarter Auctions are considered to be illegal.
This is probably good advice since both of these types of "auctions" involve a lottery to see which bidder wins the item. Whenever someone has to pay to play, it is likely to be gambling and covered by local law. A charity using such a technique should be sure to understand the law. A lot of charities know the law and take the risk of disregarding it, but if someone wants to get you, there generally is no defense. --Don Kramer