You’ve probably heard by now that Lincoln Center’s Avery Fisher Hall will soon be known as something other than “Avery Fisher Hall.”
Some background: in 1973, Avery Fisher (a music philanthropist and the founder of Fisher Electronics) donated $10.5 million (about $53 million in 2014 dollars) to the Lincoln Center to renovate the concert hall. In exchange, Lincoln Center agreed that his name would be on the building, programs, tickets, and the like in perpetuity.
But there’s a problem: Lincoln Center is undergoing a massive renovation, and needs to raise lots of money. Like, hundreds of millions of dollars of money. And they believe the best way to do so is to sell naming rights. Twelve years ago, when Lincoln Center tried to do the same thing, the estate of Mr. Fisher threatened to sue.
Today, though, Lincoln Center and the family have come to an agreement: Lincoln Center will pay the family $15 million for permission to change the name.
This transaction raises all sorts of interesting questions. This being my tax blog, though, I’m going to address one question: what are the tax consequences?
The Lincoln Center is a tax-exempt organization; basically, that means that it won’t face any tax consequences.
The estate, though, is not tax-exempt and will owe taxes on the $15 million. If you make a charitable donation and later get the donation back, you have to pay taxes on the recovery if you were able to reduce your taxes with the original donation. (This is called the “tax benefit rule,” and was originally created by the courts and later partially codified.)
It’s probably fair to assume that Mr. Fisher got a tax deduction for his donation to the Lincoln Center; assuming that’s true, his estate will owe taxes on the recovery. Even still, though, they’re probably better off financially than they would have been had the donation not been made originally, for two reasons.
First, the time value of money. Time value of money principles say that a dollar today has more purchasing power than that same dollar a year from now. By getting the deduction in 1973, and deferring the payment of taxes until (presumably) 2016, the cost of the taxes in real dollars has gone down dramatically.
Even ignoring the time value of money, though, the amount of taxes due is significantly lower than it would have been. In 1973, a married taxpayer who filed jointly paid taxes on income over $200,000 at a 70% rate. Assuming that Mr. Fisher paid taxes at the top marginal rate (and, given the size of his donation, that’s probably a fair assumption), a $10.5 million charitable donation reduced Mr. Fisher’s taxes by $7.35 million.
In the world of tax, though, the taxable year is sacrosant; the estate will pay taxes on its income inclusion at the rates applicable in the year it recovers the money. In 2015, barring a change in rates (which seem unlikely to rise, given both houses of Congress will be controlled by Republicans), the top marginal rate will be 39.6%. On $15 million of income, then, the estate will pay $5.94 million in taxes.
Even ignoring the time value of money, then, the nominal value of taxes the estate will pay will be $1.39 million less than the deduction that Mr. Fisher originally got.
Which is to say that, from a tax perspective, the family’s in pretty good shape.