Does giving donors naming rights to buildings and programs make for good philanthropy? Tufts University and other nonprofits recently removed the Sackler name from their buildings and programs due to the family’s opioid crisis connection. The Smithsonian Institute, on the other hand, was bound by a donation agreement to maintain the name, “Arthur M. Sackler Gallery” in perpetuity. [1] The University of Pennsylvania’s law school came under fire when it announced its name change in honor of the W.P. Carey Foundation’s generous gift of $125 million.[2] Such news sparked a widespread outcry from law students and alumni who were concerned that “Carey Law” would not hold the same name recognition and prestige among employers as the reputable “Penn Law” name.[3]
Careful evaluation and planning are thus warranted for charitable organizations and their donors. Along with protecting the donors’ tax-deductible gifts, other significant areas to address include manner of recognition, timing, reputational considerations, and changed circumstances.
Tax Considerations – Protecting the Deductibility
First, a nonprofit should have a good understanding of what benefits it can provide a donor without diminishing the value of the donor’s charitable deduction. Recognizing a donors’ contributions through naming rights is an excellent way for a 501(c)(3) organization to honor their donors’ generosity without causing a reduction in their deductible contribution. The benefit a donor might receive from public recognition of his or her contribution—such as recognition in the nonprofit’s publications or designation of the donor’s name on a building or charitable program—is generally deemed merely incidental to the greater charitable benefit the organization provides to the broader public. (See Rev. Rul. 77-367, 1977-2 C.B. 193). Such an arrangement is treated as a gift, not as a quid pro quo transaction in which the donor receives a significant economic return benefit (such as tickets to the theatre, a musical, or sporting events). Accordingly, charitable organizations that recognize donors in this manner may include a statement in the related charitable receipt that no goods or services were provided in exchange for the donors’ contributions and that the full contribution is deductible.
Additional Considerations for Nonprofits
Careful consideration should be made as to the scope of naming rights being provided and to address a number of legal situations that commonly arise. In most cases, this means entering into a written contract that addresses, at a minimum, the following.
- Manner of Recognition: Charitable organizations should be sure to specify the item or program that will bear the donor’s name and the manner in which it will be displayed. For example, will the name be inscribed on an exterior wall (and thereby not easily removed), or will it be displayed on a plaque or sign fastened to the wall? Will the display merely contain the donor’s name or a statement recognizing that a facility or structure was made possible by the donor’s generous contribution? These matters may be discussed and customized based on donor preference or standardized under a specific naming policy.
- Duration: As demonstrated by the news events described above, charitable organizations should consider limiting donor name recognition to a specific period of time (e.g., 25 years). At some point, it may no longer be feasible or desirable to maintain a designated name for a charitable program or physical structure. Setting a limit to name recognition will provide a natural end to naming rights when the term expires.
- Plan for Contingencies (especially donor misconduct): Regardless of the duration of donor name recognition, charitable organizations should account for occurrences that may require early termination of naming rights. For example, building damage, lack of funding, or donor misconduct might make it no longer possible or practical to continue donor name recognition. Additionally, the organization may seek to transfer the donor’s name to another building, such as to make way for a new donor. Charitable organizations should ensure they address such contingencies. Specifically, will the organization make efforts to find a replacement item in the event that external forces prevent the completion of or destroy the contemplated item? Additionally, the organization should ensure it maintains the right to remove the donor’s name in the event that the organization determines, in its sole discretion and in good faith, that the donor’s conduct would adversely impact the organization’s reputation, image, mission or integrity.
- Transferability: What if a donor changes its name? Will your charitable organization be responsible for modifying signage or other displays of the donor’s name accordingly? Or will the donor be responsible for the cost of such modifications? What if the donor refuses to cover the expenses incurred by the charitable organization for the modifications? These questions should be thought through carefully and properly communicated to the donor.
Donor Naming Policies and Practices
Some donors may not be amenable to entering into an agreement that limits the scope of their naming rights, particularly when it comes to termination of rights based on donor misconduct. To make such terms more palatable, charitable organizations might consider developing a general naming policy that governs all naming rights. The policy should be provided to the donor and referenced in a written gift acknowledgment letter, or other similar writing. Alternatively, charitable organizations may develop a form donation agreement and explain to donors that the agreement includes boilerplate language included in all donation agreements.
[1] https://www.forbes.com/sites/lisettevoytko/2019/12/06/smithsonian-tufts-...
[2] https://penntoday.upenn.edu/news/w-p-carey-foundation-makes-historic-125...
[3] https://www.thedp.com/article/2019/11/penn-law-carey-renaming-change
