Conspicuous Philanthropy: Reconciling Contract and Tax Laws

By Drennan, William A. | American University Law Review, January 1, 2017 | Go to article overview

Conspicuous Philanthropy: Reconciling Contract and Tax Laws


Drennan, William A., American University Law Review


INTRODUCTION

When a donor contributes to a charity and, in exchange, the charity names a prestigious building after the donor, the common law can treat the arrangement as a part sale-and therefore a contract-but the tax law will treat the transaction as an unrequited gift. This contradiction can be very advantageous for charities and their donors in the short run but may have long-term disadvantages for charities and society generally.

The story of Avery Fisher and the Lincoln Center charity vividly demonstrates the inconsistency and some of its consequences. Fisher was a titan of industry, a lover of classical music, and a generous philanthropist.1 In 1973, Lincoln Center's philharmonic hall, home of the New York symphony orchestra, needed renovation.2 Fisher stepped forward and pledged $10.5 million for the renovation in exchange for Lincoln Center's promise to publicize his name on the building in perpetuity and to use the name "Avery Fisher Hall" on all "tickets, brochures, program announcements, and advertisements and the like" in perpetuity.3 Charities and their fundraisers now embrace the sale of naming rights generally as an indispensable trick of the trade for enticing donations.4

On the tax side, under a series of special rulings, the Internal Revenue Service (IRS) treats a charitable donation in exchange for public recognition as an unrequited giftwith conspicuous philanthropists like Avery Fisher deemed to receive nothing of value in return for the contribution.5 The IRS takes this position even though the general rule is that no charitable deduction is available to the extent a donor received a significant benefit for a contribution.6 This general rule recognizes that, to the extent the donor received a benefit, the donor made a purchase, not a gift.7 The related policy is that the donor should only claim a charitable tax deduction when there "is not a consumption by the donor."8 Nevertheless, for almost fifty years, the IRS has steadfastly clung to its special rule that charitable recognition is not a benefit and is not consideration, and a donor like Avery Fisher can treat the entire amount that he transferred to the charity as a tax-deductible, unrequited gift.9 Furthermore, for federal estate tax purposes, there is no indication that a donor's estate (like Avery Fisher's) must include the value of the perpetual naming right in the taxable gross estate.10 Because of this extremely donor-friendly income and estate tax regime, if Avery Fisher, a wealthy business magnate, was subject to a forty percent federal income tax rate in 1973, and his estate was subject to a fifty percent federal estate tax rate upon his death, the after-tax cost to the Fisher family of the $10.5 million donation was only $3.15 million, or thirty cents on the dollar.11 U.S. taxpayers shouldered the other seventy percent of the after-tax cost of the donation.12 Commentators refer to the charitable contribution deduction as an "upside-down subsidy" because it benefits the rich more than the poor.13

On the common law side, Justice Cardozo's landmark Allegheny College14 opinion concludes that a charitable publicity arrangement can be an enforceable bilateral contract because the charity provides a benefit to the donor constituting consideration.15 Lincoln Center honored its agreement to publicize Avery Fisher as the naming donor, apparently without complaint, until another major renovation of the music hall was necessary.16 In 2002, when Lincoln Center proposed a new fundraising drive that would involve removing Avery Fisher's name and allowing a new philanthropist to make a major donation and acquire the primary publicity rights for the renovated building, Avery Fisher's heirs threatened legal action to enforce the 1973 agreement.17 After twelve years of saber-rattling and negotiations involving up to ten heirs, in 2014, the Lincoln Center charity repurchased the naming rights from the Fisher heirs for $15 million cash plus lesser publicity rights and honors for the Fisher family. …

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