Philanthropically minded donors have the highest giving capacity and can stress test the adequacy of an institution’s gift acceptance policies. While any institution would be thrilled to have donors of vast resources to achieve a charitable mission, there are complications.
Last July, Jeff Bezos committed $200 million for the support of various programs and capital projects at The Smithsonian in the District of Columbia. Recent reports indicate that Bezos would not be subject to The Smithsonian’s standard morals clause, which has prompted criticism. His gift raises a number of questions that your gift acceptance policy should be able to answer.
Firstly, will the amount of the gift be commensurate with the magnitude of the recognition? Some institutions require the commitment to cover a fixed percentage of the cost of construction or the annual recurring cost of a program. Since the gift to The Smithsonian was the largest in its history, the approval by the Board of Regents, which includes Chief Justice Roberts and Vice President Harris, should not have been surprising. Should it matter that the gift is 1/825ths of his estimated net worth?
Secondly, how “perpetual” is the naming opportunity? Perpetuity seems reasonable for endowments benefiting a specific function like scholarships, professorships or programmatic initiatives. A sunset provision for the naming of a building is more likely justifiable because of the perpetual cost of upgrading. Bezos was able to secure de facto perpetuity for at least his lifetime, as the rights expire on the later of the next renovation or 50 years. Presumably, Bezos will not live to 108. The Smithsonian saw fit to ignore its usual 20-year limit, noting that the programs from the Bezos Learning Center will run long past that time.
Thirdly, can there be any behavior to justify the termination of naming rights pursuant to a “morals” clause? Most people agree murder would be a trigger as well as a conviction for lesser criminal offenses. What about admission of civil fraud? Criminal tax fraud? Should your morals clause be invoked when the recognition follows someone other than the donor—such as a parent—or does the gift become radioactive because of the donor’s deeds alone?
Some of the criticism of the awarding of the recognition revolves around how Bezos “made his money” through allegedly abusive workplace conditions or anti-competitive practices. Does an organization really want to be tasked with how their donors’ fortunes are made? For example, is Mark Zuckerberg’s philanthropy tainted because Facebook’s social media may be causing depression in a generation of youth?
Finally, should a morals clause be invoked, is your strategy to “remove” or “remove and return”? Will removing the donor’s name be sufficient? If the funds are returned, the donor will have income pursuant to the tax benefit rule.
Of course, all the issues surrounding naming rights could disappear if Congress were to change the current tax treatment of naming rights. Presently, their value is deemed to be incidental or of no value to the donor. Congress could deny, either in whole or in part, a deduction if naming rights are awarded or such rights would run beyond a measuring lifetime or fixed term.* As nine-figure commitments become more common, the tax treatment of naming rights likely will need to be revisited. Is your organization ready to meet the challenges of success?
By Professor Christopher P. Woehrle, JD, LLM
*For an excellent summary of many issues arising from naming rights, see https://www.wealthmanagement.com/high-net-worth/nine-steps-negotiate-charitable-naming-rights.
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