Every once in a while, as a collector, I am exasperated. It has little to do with forming my collection, which is a joy. Rather, it has to do with gifting objects from my collection to museums and like organizations. This happens because institutional employees who write thank-you letters to donors for their gifts do so either thoughtlessly or because they have not been trained to execute the letter correctly. Though the communications seem so sugar-sweet, and I suspect the same template is sent to every donor regardless of what was given, they often omit crucial terminology the IRS requires to substantiate a charitable deduction.
This is less than good news for the donor, because she cannot claim the tax deduction she expected for her gift and suffers a monetary loss as a result. Needless to say, the institutional employee who wrote the letter is not harmed unless a rigorous supervisor catches the negligence and admonishes the employee. The donor, however, suffers not only a financial loss but also feels the sting of loss aversion if/when a tax deduction for her generosity is denied.
This may happen with increasing frequency. The IRS was granted roughly $80 billion in new funding under the 2022 Inflation Reduction Act, intended to be spent over a decade on enforcement, operations, technology, and taxpayer services. In the years since, Congress has rescinded or reallocated a significant portion of that enforcement funding, but the rules governing charitable contribution substantiation have not softened. The Tax Court has continued to enforce them with strictness that should make every donor and every nonprofit gift officer pay close attention.
Loss Aversion
Loss aversion is the tendency to favor avoiding losses over acquiring equivalent gains. Daniel Kahneman and Amos Tversky, the psychologists who first rigorously described this pattern, found that the pain of losing a given amount feels roughly twice as intense as the pleasure of gaining the same amount. A familiar example is the investor who will not sell a losing stock. She disengages from winners too soon in an up market but holds onto losers as their price drops, because the pain of locking in that loss hurts more than the equivalent gain would have felt good.
The anguish of losing money because an expected tax deduction fails to materialize works the same way. It hurts, and it can lead a donor to avoid that discomfort altogether the next time, by simply not donating again. From where I sit, both as a collector and as someone who studies the brain’s response to loss, this is the quiet cost that institutions rarely account for. A single sloppy letter does not just cost one deduction; it can cost future gifts.
My Story
Recently, my astute appraiser, J. Scott Keller (he has agreed to be named), noticed that the thank-you letter I received from a major institution for a gift I had recently given did not contain the magic words that would qualify it for a tax deduction. Under the substantiation rules of Internal Revenue Code Section 170(f)(8), a donor claiming a deduction of 250 dollars or more must receive a contemporaneous written acknowledgment stating the organization’s name, the amount of cash or a description of the property contributed, and whether any goods or services were provided in exchange for the contribution. In practice, this usually appears as language to the effect of, “No goods or services were provided in exchange for this contribution.”
If the letter does not verbalize this, the donor must go back and request a corrected acknowledgment from the institutional person who wrote it. The acknowledgment must be contemporaneous, meaning the donor receives it by the earlier of the date the donor files the tax return for the year of the contribution or the due date, including extensions. A corrected letter that arrives only after the return is filed and after the deadline has passed generally will not save the deduction.
Some Others Who Weren’t so Lucky
Though my own gift was modest, a widow profiled in the Wall Street Journal gave away a gift valued at well over $450,000. The receiving institution did not provide her with paperwork containing the proper terminology: “No goods or services were provided in exchange for this contribution.” She had to suffer the painful burn of a gift deduction gone awry.
She is hardly alone. In Albrecht v. Commissioner, a woman who donated part of her Native American jewelry collection to a museum lost her entire deduction because the deed of gift never stated whether she had received anything in exchange, even though everyone involved agreed the collection had real value and had genuinely changed hands. The Tax Court is rarely moved by sympathy in these cases, describing the acknowledgment requirement as strict, not a suggestion.
What strikes me, as someone who frequently donates my collectible objects to museums, is how avoidable all of this is. The institution loses nothing when the letter is wrong. The donor absorbs the entire loss, financial and emotional, and that asymmetry is precisely what makes this situation tragic.
When I wrote about buying and selling stocks, I wrote: “Buyer beware.” Here, I would apply the same logic. Donor beware. Read every acknowledgment letter closely. The fine print is where the monetary value of a donor gift can disappear.
