Recently, the New York Supreme Court ruled that Paul Smith’s College may not violate the Will of Phelps Smith and change the name of the college as part of the donor recognition of a new donation. According to the college, Joan and Sanford Weill had pledged to donate $20 million to the college if the college would change the name of the school to the Joan Weill-Paul Smith’s College. Since the bequest of Phelps Smith indicated that the name of the school should “forever be known as Paul Smith’s College”, the college had to obtain the permission of the court to violate the will of Phelps Smith, Paul Smith’s son, who established the college over 65 years ago in memory of his father.
The court ruled against the college.
Last week, the college announced that it would not appeal the court ruling. As a result, the Weills have pulled their $20 million “conditional pledge” from the college, according to an article appearing in the New York Times. The Times article noted that the donation had been offered on the condition that the college change its name to recognize Mrs. Weill. According to Bob Bennett, a Paul Smith’s spokesman quoted in the article, “It was a naming gift, so without the court allowing us to go forward, there was no money. That was the deal from the beginning.”
As I am sure they teach at Paul Smith’s College, there are no failures in life, there are only learning experiences. So what are the lessons to be learned from this situation?
In order to study the lessons learned, it is necessary to go back to basics.
A charitable contribution or donation is a gift. It is something given voluntarily without payment in return, intended to show favor toward someone or to make a gesture of assistance. It is something bestowed without any particular effort by the recipient and without being earned. The IRS disallows charitable contribution deductions when the donor receives something of value in return for their payment. The IRS has ruled, however, that donor recognition provided by the charity, such as a donor’s name in a donor listing, or on a plaque or even a name on a building, is an insubstantial benefit and does not reduce or eliminate the charitable contribution deduction.
The way this is supposed to work is that a charity, in accepting financial assistance from a donor, may offer to provide some form of recognition. Donor recognition is important to the charity because it demonstrates to the community that donor support is both important to and appreciated by the charity, and is critical to the charity achieving its mission. When the donor and the charity are in agreement on the donation amount and the donor recognition, the transaction will likely be reduced to writing. This is frequently referred to as a gift instrument. Donors and charities should be careful to document transactions in exactly this manner.
Contingent donations do exist in the philanthropic world. They involve a donor pledging financial support to a charity if the charity meets certain specified criteria. For example, a matching grant is a contingent donation whereby the donor pledges a certain sum if the charity raises a specified amount from other sources. Or a donor may pledge a significant amount of financial support if the charity begins a certain type of program. For example, a donor pledges $5 million to his alma mater if they will start a nursing school. When the college takes the steps to commit to the nursing school, the donor fulfills their pledge. The nursing school may even be named for the donor if the charity so desires and the donor agrees.
Documenting this process as I have laid it out above is critical. A donor may be denied the charitable contribution deduction if it appears that the donor received something of value in return for the donation. But what is it that demonstrates value?
The standard definition of value is what a willing buyer will pay to a willing seller for whatever it is they are discussing. For example, the real value of your antique automobile is only established when you sell it. What the buyer is willing to pay for it and what you are willing to sell it for represents the value of the auto.
If a donor has an agreement with a charity that indicates that the donor will give the charity a specified sum of money if the charity names something after the donor, the IRS has an excellent case for asserting that the amount given by the donor was not a gift but a payment in return for something of value—i.e., a name on a building. The payment can only be considered a gift when it was bestowed upon the charity without it being earned.
In the Paul Smith’s College situation, I assume that the college and Bob Bennett are being a little imprecise with their words. Regardless of what may transpire in the real world, behind closed doors, what matters most is the documentation of the transaction. I do not believe there is anything in philanthropy or in the IRS charitable contribution definitions as something known as a “naming gift.” This transaction should have been referred to as follows: The Weills were ready to take a $20 million charitable contribution deduction for what the IRS would term is a unilateral transfer of funds from the Weills to the college. The college was going to provide donor recognition in the form of naming the college after this substantial donor for all of the reasons noted above.
There is no such thing as a “naming gift" in philanthropy. In the for-profit world, there are stadium naming rights which are sold to the highest bidder. This is why Bob Kraft’s stadium in Foxboro, Massachusetts is known as Gillette Stadium. The Gillette Company purchased the naming rights believing that it was a good business decision to have television and newspapers continually referring to the Super Bowl New England Patriots game “coming to you from Gillett Stadium.” Gillett is not getting a charitable contribution deduction for the payment they made to secure the naming rights, although they may be deducting it as part of their advertising costs.
Joan and Sanford Weill do not advertise. They were supposedly proposing financial support of an institution of higher education that they had come to know and value. The college was seeking to honor the Weills' substantial support in a manner that would both thank them for their donation and inspire others to support the institution, as well. Saying this was a “naming gift” and claiming that changing the college’s name was the deal from the beginning would cause the IRS to challenge the Weill’s charitable contribution deduction if this transaction had been consummated.
In addition to documenting this gift incorrectly—a fact that may have had some influence on the judge’s decision—I do not believe that the college put forth their best effort in petitioning for permission to change the Phelps Smith Will.
The college should have separated the need to be able to change the college’s name from the Weill gift. But in their petition, they specifically asked for the change in order to rename the college the Joan Weill-Paul Smith College. The legal requirement for vacating the Phelps Smith will is to demonstrate that circumstances have changed subsequent to his gift that render continued compliance with his gift impossible or impracticable. The existence of the Weill pledge really has nothing to do with changed circumstances since the Phelps Smith donation. This was just a distraction and diminished the college’s argument when it finally spoke of changed circumstances.
Not only was it a potential distraction for the court, but it was likely a distraction for the people who prepared the petition to the court. The court disagreed with the college’s claim that that naming restriction contained in Phelps Smith's will was wasteful and impractical. The court also found that the college failed to demonstrate that the college could not operate effectively absent the requested relief. The petition completely failed to comply with the legal requirements to vacate the Phelps Smith will.
It appears to me that the college mixed up two issues. It needed to demonstrate to the court that strict adherence to the Phelps Smith will was damaging to the college’s ability to operate. This would be a difficult task at best. But it was apparent that this only became an idea when a donor appeared who made their pledged support contingent on changing the college’s name. Thus, the very existence of the court petition invalidates the charitable nature of the proposed Weill payment. I purposely did not refer to that payment as a contribution. Essentially, the college argued in court that the name of the college is worth at least $20 million. A willing buyer and a willing seller were ready to consummate such a transaction.
Let’s hope that Paul Smith’s College is just being imprecise in its language and that everything about this gift was appropriate, legal and aboveboard. Let’s hope that our institutions of higher education fully understand the arenas in which they operate and do not violate the law, if for no other reason than to serve as a shining example to the students whom they are charged with educating. Let’s hope that the Weills decided not to fulfill their pledge for some substantive reason. And then let’s hope that the college has a good reason for not enforcing the pledge.