Every now and then I get angry as a collector. It has very little to do with building my collection, it’s a joy. Rather, it has to do with donating items from my collection to museums and similar organizations. This happens because the organization’s employees who write thank-you letters to donors for their gifts do not think about it or are not trained to write the letter properly. While the communication sounds pretty sweet, and I assume the same template is sent to every donor regardless of what is given, they often miss important terms that the IRS requires to justify charitable deductions.
This is not good news for the donor, as he will not be able to claim the tax deduction he was expecting for his gift and will lose money as a result. Needless to say, the employee of the institution who wrote the letter will not be harmed unless a strict supervisor detects negligence and warns the employee. However, the donor not only suffers a financial loss, but also feels the pangs of loss aversion if there is a tax deduction for him. generosity is rejected.
This can happen with increasing frequency. The IRS received approximately $80 billion in new funding under the Inflation Relief Act of 2022, which is intended to be spent over ten years on enforcement, operations, technology and taxpayer services. Over the years, Congress has rescinded or reallocated a significant portion of this mandatory funding, but the rules governing the substantiation of philanthropic funds have not been relaxed. The Tax Court has continued to apply them strictly, making every donor and every non-profit gift officer pay close. attention.
Aversion to loss
Loss aversion is the tendency to avoid losses rather than take equivalent gains. Psychologists Daniel Kahneman and Amos Tversky, who first rigorously described this pattern, found that the pain of losing a certain amount is about twice as strong as the pleasure of gaining the same amount. A familiar example is the investor who does not sell a losing stock. It breaks away from the winners very quickly in an up market, but holds the losers when their prices fall, because the pain of this loss is more painful than the equivalent gain.
The pain of losing money because expected tax benefits don’t materialize works the same way. It hurts, and it may cause the donor to avoid this discomfort altogether next time by not donating again. From where I sit, both as a collector and as a researcher of the brain’s response to loss, it’s a quiet cost that institutions rarely consider. One silly letter doesn’t require just one discount; it can cost future gifts.
My story
Recently, my astute appraiser, J. Scott Keller (who agreed to remain anonymous), noticed that a thank-you letter I received from a major institution for a recent gift lacked the magic words to qualify for a tax deduction. Under the justification rules of Section 170(f)(8) of the Internal Revenue Code, a donor claiming a deduction of $250 or more must obtain a contemporaneous written confirmation stating the name of the organization, the amount of cash or property contributed, and any goods or services provided in exchange for the contribution. In practice, this usually manifests as language to the effect of “No goods or services are provided in exchange for this contribution.”
If the letter does not say so verbally, the donor should go back and ask the person at the institution who wrote it for a corrected confirmation. The confirmation must be simultaneous, that is, the donor receives it before the date of submission of the tax return for the year of contribution or payment period, including the extension. A corrected letter that arrives only after the return has been filed and the deadline has passed usually does not preserve the deduction.
Some others were not so lucky
Although my gift was modest, one widow who was featured in the Wall Street Journal gave more than $450,000. The receiving institution did not submit documents containing the relevant terms: “No goods or services were provided in exchange for this contribution.” He had to suffer because the gift deduction was incorrect.
He is hardly alone. In Albrecht v. Commissioner, a woman who donated part of her collection of Native American jewelry to a museum lost her full deduction because the deed of gift never stated whether or not she received anything in return, even though everyone involved agreed that the collection had real value and did indeed change hands. The Tax Court is rarely sympathetic in such cases and describes the recognition requirement as strict rather than suggestive.
As someone who frequently donates my collections to museums, what amazes me is that all of this can be avoided. If the letter is incorrect, the institution loses nothing. The donor bears all the financial and emotional losses, and this asymmetry makes this situation tragic.
When I wrote about buying and selling stocks, I wrote, “Buyer beware.” I would apply the same logic here. Donor beware. Read each thank you note carefully. The fine print is that the monetary value of a donor’s gift can be lost.
