Take-Away: A donor who negotiates  ‘naming rights’ in connection with a substantial philanthropic gift to a tax exempt entity could be jeopardizing his/her full charitable income tax deduction due to the Tax Code’s excess benefit rule.

Background: A donor has the burden of proof of the fair market value of the amount that the donor gives to charity in the substantiation of the  donor’s charitable income tax deduction. If the donor receives an excess benefit in exchange for a gift to a tax exempt entity, the value of that benefit must be deducted from the fair market value of the gift to the charity, which  in effect reduces the charitable income tax deduction amount.

Example: The cost of a meal provided to the donor in connection with the cost of the donor’s ticket to a charity’s fundraising event is considered an excess benefit, which must be subtracted from the gross value of the donor’s ticket price paid to the fundraiser to determine the donor’s actual charitable income tax deduction.

Questions: If the donor’s charitable contribution to the tax exempt entity is large enough to carry the right to have the donor’s name attached to a new structure, e.g. to a wing to be added to a hospital, or to construct a new building on a college campus sizeable enough to warrant the right to have the donor’s name placed on the hospital wing or college building, what is the fair market value of the naming right? Is the right to name the building built with the donor’s charitable gift treated an excess benefit, even if there is no remuneration to the donor or commercial or economic return to the donor?  What happens when the tax exempt entity removes a donor’s name from a building that had been negotiated by the donor years ago; if the donor (or the donor’s family) demands a ‘refund’ for the loss of the donor’s name on the building, is that taxable income to the donor or his/her family? To date, Treasury has not provided much guidance on naming gifts which could impact the amount of the donor’s initial charitable income tax deduction if the naming right is ultimately treated by the IRS as an excess benefit.

‘Real Life’ Example: One interesting true story example of this ‘what’s in a name?’ discussion is when the Avery Fisher donated $10.5 million in 1973 to renovate a symphony hall, where the charitable recipient gave the renovated symphony hall the name the “Avery Fisher Hall.” This charitable gift (and by implication the name on the hall) from Mr. Fisher was to be in perpetuity.  In 2014 music media mogul David Geffen offered $500,000,000 to the same charity to renovate the “Avery Fisher Hall”, subject to the condition that the symphony hall be renamed the “The David Geffen Hall”, also a name  to be used on the symphony hall in perpetuity. No surprise, the Fisher family  was not happy when Avery Fisher’s name came down from the symphony hall marque. To assuage the Fisher family, after serious negotiations, the Fisher family ultimately received $15 million a compensation for the loss of Avery’s name on the symphony hall. Does this payment suggest that the value of the initial charitable gift by Avery Fisher was $0.00, if the value of the Avery Fisher name, albeit valued 41 years later, was $15 million after his initial $10.4 million charitable gift? More a likely analysis is that the present value of $15 million in 2014 was about $650,000 in 1973:  does that mean that the initial $10.5 million charitable gift by Avery Fisher was overstated by $650,000?

Valuing a Name: It may be easier to put a fair market value on a name when the name is used for commercial purposes. Common examples can be seen watching any NFL or NBA game where team stadiums usually carry the name of a commercial sponsor, e.g. Ford Field, Comerica Park, Staples Center. However, it is more of a challenge to place a fair market value on a naming opportunity for a charitable gift if the name is attached to a non-commercial purpose, like naming a college classroom building or a hospital wing after its lead donor.

Liquidated Damages Clause?: One message that might be taken from the Fisher-Geffen symphony hall example is that buildings do not last forever, despite what was initially considered a ‘name in perpetuity.’ If you have client who is considering a large philanthropic gift to a tax exempt entity, large enough to warrant discussions about a naming opportunity, you might want to consider including in the gift agreement an amount that is specifically allocated to the value of naming rights, perhaps even labeled a ‘liquidated damages’ provision should the tax exempt entity later decide to tear down the building, or in the Geffen example, pay to remove the existing name in order to negotiate a ‘better deal’ with a wealthier donor. Rather than try to negotiate at a later date the value of the name that is to be removed, it might be a simple matter to  have that amount identified when the gift was made in the gift agreement, so that the tax exempt entity knows what it would have to pay to replace an name on an existing (or replaced) building. Of course the danger with using a ‘liquidated damages’ clause in anticipation of the possible loss of the ‘naming right’ it that is makes it that much easier for the IRS to put a value on the ‘naming right’ should it ever formally decide that the naming opportunity attached to a charitable gift is, in actuality, an excess benefit retained by the donor.

Conclusion: We all have clients who are regularly approached about making a major gift to a tax exempt entity. If the solicited gift is large enough to qualify for a naming right, then thought needs to be given to both the excess benefit rule and also the recognition that nothing ever lasts forever or ‘in perpetuity.’ Consequently, if the tax exempt entity later removes the name, or tears down the building with the major donor’s name, or it makes major renovations to the building and the donor’s name disappears, some ‘liquidated damages’ provision should be added to the gift agreement, and members of the donor’s family (if the donor is no longer alive) should be given rights to enforce the terms of the original ‘gift agreement.