How the donor treats the gift depends on how much it’s worth and what you are going to do with it.

The basic rule is that a donor claiming a charitable contribution deduction for any gift worth $250 or more must obtain a contemporaneous written acknowledgment of receipt of the gift and a statement that no goods or services were received in return (or if received, the fair market value thereof).   You can give a letter saying that you received the painting and didn’t provide any goods or services in return.  (See Ready Reference Page: “IRS Requires Substantiation of Contributions”) 

Presumably the donor will claim more than $250 as his charitable contribution deduction.  For a claimed deduction of property worth more than $500, the donor will need to file a Form 8283, showing that you received the gift, describing the gift and its condition, and placing a value on it. 

The basic rule for giving works of art or other personal property to a charity is that a donor may deduct the current fair market value of the property, but a donor may deduct a value greater than his cost only if the charity intends to use the property in its charitable purpose.  Since this is a painting of the first put bull that you rescued, it could hang nicely in your office and be used within your charitable purpose.

If he has a basis to say that it is worth more than $3500, he can claim a higher deduction.  For a claim of more than $5000, he would have to obtain an independent qualified appraisal.  

If you dispose of it within three years, however, the IRS will treat the gift as one that was not used for charitable purposes.  If he claimed a deduction of more than $5000, you will have to file a Form 8282 telling the IRS what you got for it in the disposition.  The deduction for a gift of personal property not used in the charitable purpose of the recipient is only the LOWER of the cost or current fair market value.  If the donor claimed a deduction higher than his cost, it will have to be reversed on a subsequent tax return.

Since you intend to sell it at your annual auction, it would be deemed from the outset as not to be used for your charitable purposes and the donor could deduct only the lower of cost or fair market value.  Since an appraisal is not required for a claimed deduction of $5000 or less, the donor would probably not bother with an appraisal and would probably rely on the sales receipt for the statement of tax cost.  It would not make sense to pay for an appraisal to show that the value had depreciated, especially if the donor thought the original price was reasonable.  The IRS would not be likely to contest a sales receipt of a painting, which is not likely to depreciate significantly in value, if the painting is still in good condition.  Nor is the IRS likely to consider the auction price as a valid measure of fair market value if the auction wasn’t conducted like a commercial auction of artwork.