Joel S. Newman, professor emeritus at Wake Forest University School of Law in Winston Salem, N.C.
Professor William Drennan’s article, “Conspicuous Philanthropy: Reconciling Contract and Tax Laws,” and Prof. Joel S. Newman’s response to it, “Conspicuous Philanthropy: A Response,” both center on the question: What’s the fair market value (FMV) of naming rights, specifically in the non-commercial context?
This question has obvious and, perhaps, hitherto overlooked, implications for the tax deductibility of large charitable donations. As Prof. Drennan points out, donors have the burden of proving the amount they gave to charity in excess of the benefits they received in return from the donee (citing United States v. American Bar Endowment).
That is, if you donate $10.5 million to the symphony hall at Lincoln Center in New York City to pay for (greatly needed) renovations and get your name on the building in the bargain, then perhaps $1 million of that sum is the value of those naming rights. In that case, the FMV of the actual gift portion of the sum transferred (net of the value of the naming rights) is only $9.5 million. It would follow, then, that if the donee later wants to remove your name from the building, it would have to pay you to buy back those same rights, perhaps at a value that’s increased since the original purchase.
This is essentially what happened to the Fisher family. They donated $10.5 million in 1973 and, in return, the same symphony hall was renamed “Avery Fisher Hall” in perpetuity. But few renovations, no matter how spectacular, last forever. Thus, in 2014, media mogul David Geffen offered a very handsome $500 million to again renovate the hall, renaming it “David Geffen Hall”—also, in perpetuity. This didn’t go down well with the Fisher family, but they did receive compensation, after some back and forth, of $15 million. Prof. Newman calculates (using the prime rate) that the 1973 present value of the $15 million (in 2014) equals approximately $640,000, but admits that this isn’t much better than “a guess.”
Profs. Drennan and Newman both believe that valuing naming rights—in non-commercial situations —is essentially impossible. They reach this conclusion by assuming that commercial valuations are irrelevant. When a private enterprise contributes millions to name a sports arena, for example, the “STAPLES Center,” presumably there are hard commercial calculations and negotiations determining the advertising benefit of that investment. Because such calculations are essentially impossible for a private family like the Fishers, the two contexts aren’t comparable.
Needless to say, if the task of determining the value of naming rights for such donors is impossible, then the burden of proving the excess of the donation over the benefit received is in itself impossible. Therefore, should the Internal Revenue Service take this position, donors will always fail to get their tax deductions, and perhaps such naming rights to prominent buildings (for example, at universities and cultural centers) will lose much of their value.
Prof. Drennan’s solution is a negotiation between the donor and donee’s counsel that specifically allocates a value to the naming rights. In the bargaining between the two parties, a value can thus be set. At first blush, it would seem that the tax deductibility of the excess would be the donor’s main concern, and the donor would therefore argue for a lower valuation of the naming rights. It’s harder to see why the donee’s counsel would care. Prof. Newman points out that this value can be compared with liquidated damages in case the donee reneges on the deal and changes the building’s name. It’s the donor and donee’s contract counsel who would negotiate, with the donor asking for the highest possible value and the donee asking for the lowest value (to better free the donee’s options up in the case of future fundraising needs and opportunities). Prof. Newman suggests that treating this value as simply an estimate of liquidated damages essentially solves the problem of naming things in perpetuity, when circumstances change (as they often do) and give rise to new requirements.
With the very substantial tax motivations in play here, however, and with the clear asymmetry of salience of those motivations between the donor and donee (the donor would clearly care very much more than the donee), this negotiation process would seem to be more hypothetical than real. And, are perhaps both professors a bit quick to dismiss the commercial deals as a benchmark here? Building owners, after all, have options. They may grant naming rights to anyone, whether commercial or non-commercial, and might favor the highest bidder in most cases. And, who’s to say that a family’s desire for its name on a building isn’t as strong as the purely financial motivations of a business?