Every time I am shocked as a collector. It has little to do with building my collection, which is a joy. Rather, it involves donating items from my collection to museums and similar organizations. This happens because staff members who write thank you letters to donors for their gifts do so either carelessly or because they are not trained to write the letter properly. Although the communication looks very sugary sweet and I assume the same template is sent to every donor regardless of who gave, they often ignore important terms that the IRS requires to justify the donation deduction.
This is less good news for the donor because he cannot claim the tax deduction he was expecting for his gift, and as a result suffers a monetary loss. It should be said that the employee of the institution who wrote the letter will not be harmed if a strict manager neglects and does not admonish the employee. However, the donor not only suffers financially, but also feels a sense of loss aversion if/when a tax deduction is made for him. generosity is rejected.
This can happen with increasing frequency. The Inflation Reduction Act of 2022 provided the IRS with nearly $80 billion in new funding over ten years for legislative enforcement, operations, technology and taxpayer services. In the years since, Congress has repealed or reallocated a significant portion of this forced funding, but the rules governing the eligibility of charitable contributions have not been relaxed. The Tax Court continued to enforce that each donor and each employee of the nonprofit must pay the gift. attention.
Loss aversion
Loss aversion is the tendency to favor the avoidance of losses over the acquisition of equivalent gains. Daniel Kahneman and Amos Tversky, the psychologists who first seriously described this pattern, found that the pain of losing a given amount is almost twice as intense as the pleasure of gaining the same amount. A familiar example is an investor who does not sell a losing stock. He quickly separates from the winners in a rising market, but keeps with the losers as their prices fall, because the pain of closing those losses is more painful than the corresponding gain.
The pain of losing money because an anticipated tax deduction doesn’t materialize works the same way. It hurts, and it can make a donor want to avoid the inconvenience altogether the next time, just not donate again. From where I sit, both as a collector and as someone who studies the brain’s response to loss, these are quiet costs that institutions rarely count. A bold letter requires more than just a design; it may be worth it for future gifts.
My story
Recently, my experienced appraiser J. Scott Keller (he agreed to remain anonymous) noticed that the thank you letter I received from a large institution for a recent gift did not contain the magic words that would qualify it for a tax deduction. Under Internal Revenue Code Section 170(f)(8), a donor claiming a deduction of $250 or more must receive a written confirmation that includes the name of the organization, the amount of cash or property contributed, and whether any goods or services were provided in exchange for the contribution. In practice, this usually appears as language that says, “No goods or services were provided in exchange for this contribution.”
If the letter does not give this verbally, the donor should go back and ask the person at the institution who wrote it for a revised confirmation. The declaration must be contemporaneous, meaning the donor receives it before the earlier of the tax return filing date for the year of contribution or the payment date, including extensions. An amended letter that comes only after the return is filed and after the deadline does not save the deduction at all.
Some others were not so lucky
Although my personal gift was modest, a widow profiled in the Wall Street Journal gave a gift worth more than $450,000. The receiving institution did not provide him with documents that correctly stated: “No goods or services were provided in exchange for this contribution.” He had to ignore the painful burning of the gift design.
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 entire design because the deed of gift never stated whether she received anything in return, even though everyone involved agreed that the collection had real value and had actually changed hands. The Tax Court is rarely sympathetic in these cases, characterizing the recognition requirement as a strict proposition.
What amazes me, as someone who donates my collectibles to museums, is how preventable all of this is. The institution does not lose anything if the letter is incorrect. The donor bears all the financial and emotional losses, and this asymmetry is exactly what makes this situation so tragic.
When I wrote about buying and selling stocks, I wrote, “Buyer beware.” I use the same logic here. Donor be careful. Read each acknowledgment letter carefully. The fine print is that the monetary value of a donor’s gift may disappear.
