Your Client’s Charitable Deduction May Depend on a Good 'Thank You' Letter

On May 25, 2022, the Tax Court issued a Memorandum Decision in the case of Martha L. Albrecht v. Commissioner T.C. Memo 2022-53, which shows why a well written thank you letter, even from a public charity, is so important.

Donation Made to Museum

Martha L. Albrecht gave a large collection of Native American jewelry and artifacts to the Wheelwright Museum of the American Indian in Santa Fe, N.M. in late 2014.  The Museum and Martha executed a deed of gift that recited the terms of donation and the items being donated and referred to a gift agreement, but the Museum didn’t provide such agreement to Martha. She listed the fair market value of the donated jewelry and artifacts as a charitable income tax deduction on her 2014 Form 1040. The Internal Revenue Service denied the deduction on the basis that the high level of substantiation requirements on charitable gifts, and the Tax Court upheld the denial. This denial is a result of the Museum not writing a good enough “contemporaneous written acknowledgement” (CWA) to substantiate the gift. That is, the Museum didn’t write a proper thank you letter.

Strict Requirements

There’s no standardized form for a CWA but there are strict requirements of what must be included in a CWA. These include the amount of cash donated, a description (but not valuation) of the non-cash property donated, a written statement whether the charity provided the donor any goods or services in return for the donation and a description and estimated value of those goods and services (if any). A deed of gift has been held, previously, to be sufficient to meet the substantiation requirements of a CWA.

The problem with the deed of gift in this case is that, although it did specify the terms of the donation and the jewelry and artifacts  donated, it didn’t specify what, if any, goods and services were provided to Martha and their estimated value. Additionally, the deed makes a gift of all of the rights to the donation, except as stated in the gift agreement. This gift agreement wasn’t included with the deed of gift, nor was it provided to Martha before the date when she filed her 2014 tax return.

Because the substantiation requirements are quite exacting, the Tax Court upheld the IRS decision to deny the deduction.  The court isn’t able to “read between the lines” that the absence of either a reference to goods or services or the actual gift agreement in the deed of gift to infer that the deed did actually comply with the requirements nor could any subsequent fact or document after the date the tax return was filed can cure this omission. The Tax Court didn’t  blame Martha, who made a good faith effort to comply with the substantiation requirements of the Internal Revenue Code, and seemed to empathize with her on this unfortunate result.

Lesson Learned

Just as children are told that it’s important to write a prompt thank you letter for any gifts received, this advice goes doubly for charities that receive a donation.  Donors should check whether the documents from the charity acknowledging their donation includes the amount of cash donated, a description of non-cash donations, whether there are any goods and services provided in return for the donation and what the estimated value of those goods and services might be.  Also, if there is any reference to any other document, such as the gift agreement, donors should make sure they get a copy of the document acknowledged by the charity.

Matthew Erskine is Managing Partner, Erskine & Erskine (www.erskineco.com)