Long time reader, first time poster....

Here's how the IRS would view the refund of a cash gift - as income. Not because 
your museum is giving them a refund but because if the donor had not taken the tax 
deduction in the first place, the donor would have paid tax on that income.  Of 
course, this also presumes that the donor took a deduction and not all do! So now 
the question is whether you need to set off fire alarms in donors' heads over a few 
hundred dollars.

The IRS could consider the original gift a conditional gift - that is a gift directed for a 
specific purpose or event that may not take place. (See pg 12 of IRS Publication 526 
Charitable Contributions at http://www.irs.gov/pub/irs-pdf/p526.pdf). In this case, 
donors technically are not supposed to file the deduction until the event comes to 
fruition (yea, right...). However, the donor gave the gift in good faith that it would be 
spent for the exhibition purposes and the museum solicited it with the same 
intentions. Here's how to cope with this.

By all means, the best stewardship (of the funds and donors and for your museum) 
that you can do is as you suggested, Pamela - request that the donors redirect their 
gifts for a new or similar purpose. (In fact, your Letter of Gift language should include 
a clause that "in the event that the purposes of this gift become impracticable or 
impossible to achieve, the donor agrees that the museums' executive director/CFO/ 
board of trustees shall redirect the gift for purposes in keeping with the donor's 
intentions or as similar as possible." If this is already in your gift documentation, you 
do not need to consult the donor - just redirect the funds but inform them of the shift.) 
If the donor declines the redesignation, offer the refund and suggest that they seek 
the advice of a tax attorney as they may be required to file additional forms with their 
tax return.  Upon hearing this, donors are generally only too happy to let you keep 
the gift vs. thinking that they might owe more in taxes.  

And just for fun, check out pg 6 of the IRS pub mentioned above in case you need to 
help determine the charitable expenses of whaling captains (no joke!).
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Karen J. Kroslowitz
Director, Stewardship and Development Communications
University of California, Santa Cruz
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