Originally published on Forbes.com Nov 18th, 2014
When Avery Fisher gave Lincoln Center $10.5 million in 1973 to renovate Philharmonic Hall it was agreed that the hall be called Fisher Hall in perpetuity. Perpetuity turns out to be measured in decades rather than centuries or millennia. Lincoln Center wants to renovate or raze and rebuild now and is hoping to auction off naming rights. According to this story in the New York Times , objections by the Fisher family have been assuaged by “essentially paying ” them $15 million. I’d really like to dig into what is meant by “essentially paying”, but dammit Jim, I’m just a tax blogger, not an investigative reporter. I’m going to take “essentially paying” to mean paying and what was paid for was some amorphous right that the Fisher family had to keep its name plastered on a building.
The story raises the question of whether you should be able to take a full charitable deduction for a donation if, as a legally binding condition of the donation, you get to have a landmark building named after you. It is worth noting that the Fisher family actually ended up making a profit, although rather a modest one on the whole deal. I computed the pre-tax return to the family as being roughly 0.85%, which is really anemic, unless you compare it to what is being paid on contemporary deposit balances. If you assume that Mr. Fisher took a charitable deduction with a 70% benefit in 1973 and the family paid capital gain tax on the Lincoln Center payoff, the after tax return comes to 3.88%, which is not great, but still better than getting poked in the eye with a sharp stick.
I’m not sure where I might have went with this, so I have to say – Thank God for law professors – and not just because the Tax Prof gives me plug now and again. Professor William Drennan of Southern Illinois University has written an article titled Where Generosity And Pride Abide: Charitable Naming Rights
Is There A Rule About This?
The general rule is that if you get something in exchange for your contribution, the fair market value of what you get is deducted from the contribution, but “What’s in a name?”
Professor Drennan cited some rulings, actually from around the time of Mr. Fisher’s donation that indicated that the IRS ascribed no value to naming rights The rulings were mainly in the self-dealing area rather than donation valuation, but they have been enough for practitioners to, as we say, hang our hats on and the IRS has not raised the issue. As Professor Drennan puts it:
These IRS authorities fail to provide a detailed, theoretical analysis, but three brief references suggest the IRS rationales: (1) naming rights are incidental to the charity fulfilling its charitable mission, (2) naming rights are not ―significant return benefits, and (3) naming rights have no ―monetary value.
Tax practitioners have seized upon these authorities to conclude that their philanthropic clients can deduct the entire amount given to charity even when the donor acquires valuable, legally enforceable naming rights, and that advice appears accurate under IRS practices. Charitable naming arrangements are highly publicized, but as of December 31, 2010, there are no published court cases or rulings challenging a naming donor. Furthermore, the IRS operating manual
Furthermore, as of December 31, 2010 provides no suggestion that IRS auditors should challenge naming philanthropists.
How Solid Is The Position That No Value Is Ascribed To Naming?
In a 1968 ruling on what counts as offsets to charitable contributions, the IRS ruled
Such privileges as being associated with or being known as a benefactor or the organization are not significant return benefits that have a monetary value within the meaning of the Revenue Ruling.
It’s tempting to say that that was a simpler time, unless you were actually alive then, but it was different. Wealth inequality had been declining and was close to an all time low, so that an institution with a “naming opportunity” was unlikely to be able to start a bidding war over it.
According to one story, John Mazzola, the manager of Lincoln Center actually had to persuade Avery Fisher to have the Philharmonic Hall renamed after him. (Nobody from the Philharmonic family seemed to be objecting, but maybe they weren’t paying attention. Lots of drugs in the early seventies.) Fisher thought naming construction projects was silly and asked John Mazzola if he knew who Major Deegan was referring to a stretch of I-87 in the Bronx. (William Francis Deegan, among other things a major in the Army Corps of Engineers seems like an interesting fellow by the way.)
At any rate, the thinness of authority on the subject and the change in the wealth and philanthropic landscape indicate that the IRS could change its position on this subject without any new legislation. Nonetheless, in an appendix to his article Professor Drennan suggests a change to the Code to address the issue. It’s only 433 words, but still little changes like that is how the Code has gotten so unwieldy.
The proposed provision defines naming rights and indicates they should be valued at what a hypothetical commercial seller would charge a hypothetical commercial buyer. There is data available for all these hypotheticals from transactions involving the naming of football stadiums, which Professor Drennan provides in another appendix.
Another approach would be to reduce charitable contributions that include naming rights by a fixed percentage.
I would argue that existing law already provides that bargained for naming rights do reduce the deductible portion of the contribution and the IRS could allow the use of a fixed percentage as a safe harbor.
Should Naming Rights Reduce The Deductible Portion Of A Contribution?
Professor Drennan makes a pretty strong case that they should. There is an equitable argument:
Current rules specifically trim the deduction for a donor who contributes to a charity and receives the right to attend a buffet dinner, but allows a deduction for every penny transferred when a donor contributes and receives the right to name a building.
There is also something of a deleterious effect on the integrity of the fundraising process.
After all this commercial behavior—and in spite of the valuable naming rights given to the donors—in compliance with current law, the charity then issues each donor a receipt stating the charity provided ―no goods or services‖ in return for the donation
There is also an argument that “naming opportunities” tend to distort philanthropic efforts toward building construction, a tendency sometimes referred to as the “Edifice Complex”.
Current law encourages philanthropists to fund bricks and mortar for the symphony instead of food for the homeless.
Trimming the charitable contribution when there are bargained for naming rights might help.
Other Practitioners Disagree
I spoke with Michael Greenwald CPA at Friedman LLP. At 1700 Broadway in Manhattan, Michael’s office is walking distance (or a very short cab ride) to Lincoln Center. He indicated that there are quite a few people who are entranced with having things named after them and that development officers of charities make an art if not a science of identifying naming opportunities and pricing them appropriately. Development officers are a special breed. There was a joke going around that if they really had wanted to find Osama Bin Laden they should have given him a degree from a prominent university and followed the development officers who would hunt him downl Michael believes that the psychic benefit of having something named after you is too amorphous to value and lacks any resale value.
My friend Matt Erskine who runs a boutique law practice focusing on unique assets had similar sentiments
If the point is that naming a building has economic value, then I think the law review article is wrong. There is no economic value to naming a non-commercial venue (indeed I would argue that there is only transitory value for naming a commercial venue like a sports arena) despite their quote from Shakespeare.
It is the publicity around the act of giving that burnishes the good name, not the naming of the building in and of itself. Once the gift is complete,people forget who (or why) the gift was made. Do you know who (or why) Warner Theater is named Warner Theater at Worcester Academy and if you did, does it influence you purchasing decisions?
Just so Matt’s question will not drive you as crazy as it did me, here is the answer.
Back in the 1920s, Lewis Warner, the son of then Warner Bros. Studios President Harry Warner, attended Worcester Academy. The up-and-coming Lewis was seen as an heir apparent to the ever-growing and lucrative Warner film kingdom, but he died just three years after graduating from the private school.
Lewis’ affection for Worcester Academy and the city was apparently warm enough to prompt Harry Warner to construct a “movie palace-style theater” on campus in memory of his son.
Why Do People Do This?
It does strike me that bargaining to have something named after you is kind of tacky – that having something named after you is only worthwhile if people feel inspired and honored to be associated with your name. As I was writing this I kept thinking about a book that I had just read about Donald Cook. He was the first US Marine captured in Vietnam and was posthumously awarded the Medal of Honor for his conduct while a prisoner.
Colonel (then Captain) Cook established himself as the senior prisoner, even though in actuality he was not. Repeatedly assuming more than his share of responsibility for their health, Colonel Cook willingly and unselfishly put the interests of his comrades before that of his own well-being and, eventually, his life. Giving more needy men his medicine and drug allowance while constantly nursing them, he risked infection from contagious diseases while in a rapidly deteriorating state of health. This unselfish and exemplary conduct, coupled with his refusal to stray even the slightest from the Code of Conduct, earned him the deepest respect from not only his fellow prisoners, but his captors as well.
It is rather improbable that any of this heroic behavior was motivated by the prospect of having a guided missile destroyer named after him. Rather it is the makers of the ship and its crew that feel honored to have his name associated with them.
How To Take Credit While Remaining Humble
I didn’t expect that I would have a video clip for this piece, but Michael told me about one that I could not resist. It is from Curb Your Enthusiasm. Larry David is being honored for donating a wing to a museum and he sees that the other wing was an anonymous donation. As it turns out, though, “everybody” knows that anonymous is Ted Danson. Larry feels cheated
Nobody told me that I could be anonymous and tell people. … Anonymous! It’s fake philanthropy and its faux anononymity. What do you think about that?
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