“How do you get to Carnegie Hall?” The young performer asks a New Yorker upon disembarking at Penn Station. The New Yorker replies, “Practice, practice, practice.”
Of course, that was not how Andrew Carnegie got there. Philanthropy was his ticket; he paid for Carnegie Hall’s construction and for much of its upkeep until his death in 1919, and because his name is on the building, he will be remembered long after most of the musicians who have played there are forgotten. Others have had their names emblazoned on Carnegie Hall as well; more recently Sanford Weill and the Weill Family Foundation topped the $100 million mark for combined contributions to Carnegie Hall. As a result of that massive gift, much of which came from the Weill Family Foundation, there is now a Joan and Sanford I. Weill Recital Hall, the Weill Music Institute, the Weill Terrace and the Weill Terrace Room.
How could Sanford Weill use his private foundation for this purpose without running afoul of IRS rules? The first rule of private foundation operation that most donors and foundation managers learn is: “Thou shalt not personally profit from your relationship with the foundation.” Because of the strict “self-dealing” rules of section 4941 of the Internal Revenue Code, almost any financial benefit to a donor or insider from a private foundation’s activities, whether that benefit is direct or indirect, is forbidden.
So how is it that the Weill Family Foundation apparently benefited Sanford Weill very significantly – cementing his legacy for many years to come – by making grants to Carnegie Hall in exchange for these naming rights? And why do it through a private foundation at all, rather than from Sanford’s own resources?
A ‘Merely Incidental’ Benefit
While it’s true that private foundations are generally not allowed to provide benefits to donors, the tax rules mainly treat public recognition, including naming rights, as a benefit that is “merely incidental” to the charitable purposes served by the grant. This seems counterintuitive. Staples paid almost $120 million in 1999 to have its name on the Los Angeles arena now known as the Staples Center for a 20-year period. The name became permanent in a 2009 agreement (opens in new tab) with undisclosed financial terms. Surely, naming rights have real monetary value, and having a private foundation pay for those naming rights to benefit an individual or corporation affiliated with the foundation certainly seems like a self-dealing transaction. However, perhaps out of recognition of the importance of facilitating naming gifts for public charities that generate a lot of revenue this way, IRS rulings have generally blessed the use of foundations to make grants in exchange for naming rights.
This does not mean that there is no risk, and much may depend on how the distribution is framed. However, if done correctly via thoughtful negotiation and a carefully drafted gift agreement, using a private foundation to secure naming rights has a long-accepted track record of success, and should not present tax risks.
Advantage Over Individual Gifting
Using a foundation to make such a gift may have some benefits when compared to gifting individually. Many donors use their foundations to help ensure that there is a party to the naming rights agreement that will endure beyond the donor’s death. Heirs are typically denied the right to enforce naming rights agreements entered into by individuals. A private foundation, however, can endure indefinitely, ensuring that there is a party in existence to monitor the grantee’s compliance with the agreement. Additionally, should a breach occur, it’s much easier to negotiate for return of funds when the donor is a private foundation than when the donor is an individual.
There may also be tax benefits to using a foundation. For example, if the grantee is not a U.S. charity, the donor will almost certainly be better off using a foundation, as an individual generally cannot get a tax deduction for a gift to a non-U.S. charity.
Naming Through a Private Foundation
Let’s say you’re a donor who has a private foundation. Once you have decided to make your gift, you will need to negotiate an agreement in writing with your chosen charity to secure your desired naming rights. The written gift agreement should include many or all of the following elements:
- Parties to the agreement. Usually these will be the foundation making the grant and the charity receiving the grant. There may be instances where the grant may go to an affiliate of the charity, such as a supporting organization, while the naming will occur on a building directly owned by the charity.
- Amount and timing of the grant. Some grants will be made in a lump sum at the time of signing the gift agreement. In other situations, grant installments may be more desirable and might be conditioned on meeting certain milestones to keep the grantee incentivized and to limit a donor’s downside if the project to which the naming rights will attach dies on the vine. In addition, the agreement may provide that installments may come in from other sources, including individual donations, donor-advised fund grants, or gifts from other family members.
- The name. You, of course, will want to specify how the name will read. There is no need to mention your foundation if you don’t want to; even if the funds are coming from a private foundation, it’s OK to honor the name of an individual. With a corporate name or logo, the company will have to give permission for their use.
- How the name will be displayed. This can be very specific, such as requiring that the name appear in a particular location on a building in letters in a certain font and size. Attaching renderings to show how the name should look may help avoid later disputes.
- To what the name attaches. Charities will want flexibility to offer other naming opportunities in and around the building. The agreement should be clear on the extent to which these other opportunities will be offered, and in particular should ensure that no other naming opportunity will be afforded more prominent treatment.
- Destruction. What happens if the building or space that is named is destroyed and not rebuilt during the term of the naming right? Can the name be transferred to another building or space? Who has to approve a transfer? Can it be done unilaterally by the charity, or must the original donor agree?
- Publicity. Must all publicity regarding events at the building use the full name of the building? Must the name be used in the formal postal address for the building? Will the building be formally opened with a ceremony at which the person for whom it’s named will have the right to speak or attend? To what extent will the foundation or others have the right to pre-approve promotional materials involving the name?
- Time Limits and Morality Clauses. More and more, charities are seeking to put time limits on naming rights, and to ensure that they have a way out if circumstances change – in particular, if the name on the building becomes a source of concern or embarrassment. These provisions are highly sensitive and are carefully negotiated between the donor and/or the foundation and the recipient charity. It’s important in these negotiations to be sensitive not only to the donor’s wishes but also to the needs of the charity to protect its reputation and charitable mission. Compromises may include time limits and objective standards for determining whether to take naming rights away.
- Remedies for Violation of the Agreement. In many jurisdictions, a donor may not enforce the terms of a charitable gift unless the agreement expressly provides as much. Accordingly, if you want to impose consequences for a breach, you must do so clearly in the agreement. Remedies may include reversion of funds; “gift over” provisions, whereby breach of the agreement results in transfer of funds to another charity; or coordinated alternative solutions.
When all parties to a naming agreement respect the needs and imperatives of the other, with appreciation for both the donor and the mission of the charity, naming rights agreements can align both sets of goals, providing much-needed resources to the charity and cementing the donor’s philanthropic legacy for years to come.
Foundation Source acknowledges the assistance of Brad Bedingfield of Hemenway & Barnes, LLP, in preparing this article.
Jeffrey Haskell, J.D., LL.M. is chief legal officer and Jennifer E. Bruckman is deputy legal officer for Foundation Source, which provides comprehensive support services for private foundations. The firm works in partnership with financial and legal advisors as well as directly with individuals and families.
Foundation Source is the nation’s largest provider of management solutions for private foundations. We empower people and companies to create a better world with their philanthropy through a configurable suite of administrative, compliance, and advisory services complemented by purpose-built foundation management technology and private foundation experts. We work in concert with financial advisors, legal and accounting professionals, consultants and family offices, as well as directly with individuals, families and corporations to bring philanthropic visions to life. As we celebrate our 20th year of service, Foundation Source supports nearly 2,000 family, corporate and professionally staffed foundations of all sizes and has enabled more than $7 billion in charitable grants.
©2021 Foundation Source Philanthropic Services, Inc. All rights reserved.
Jeffrey D. Haskell, J.D., LL.M. is a leading expert in the areas of private foundation law, compliance and taxation. He is chief legal officer for Foundation Source (opens in new tab), the nation’s largest provider of management solutions for private foundations. Mr. Haskell has worked with Foundation Source since its inception in 2001. He leads a team of attorneys and accountants who provide legal and tax support to the firm’s foundation clients and their closest advisers.
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