:17th Annual Entertainment Law Issue

PLUS ..verse Ratio Rule Studio .. .,. in Copyright Self-Dealing paie 29 pap 36

Net Neutrality , page9 ~ :: Joint-Work ", Copyrights '/"page 14

ights of Publicity 'Video Games e 17 , _.

by Bradford S. Cohen and Kyle R. Neal

Celebrity involvement in charitable causes raises both tax and business affairs issues

THE PARTICIPATION OF CELEBRITIES the Boston Red Sox, vvorked behind the scenes in charitable causes is rooted in tradition and for years on behalf of the Dana Farber Cancer increasingly apparent in a variety of venues. Institute's Jimmy Fund, making unannounced When those who are famous for their achieve- (and unreported) visits to children and pay- ments in the arts, entertainment, media, or ing their hospital bils.l sports decide to become involved in charities, Celebrities often respond when a natural they are undertaking. a complex endeavor, disaster strikes or when they are asked to with a wide variety of legal and business chal- raise public awareness for a worthy cause. lenges involving many parties. They are One example is Farm Aid, organized by Willie becoming "charitable actors," with many Nelson, John Mellencamp, and Neil Young in attendant rewards but also a number of 1985. Sometimes a charitable event becomes responsibilities. The close relationship between entertain- Bradford S. Cohen is a partner at Venable LLP in Los ment and sports celebrities and charities has Angeles, and Kyle R. Neal Is of counsel to the firm. a long lineage. In the entertainment world, Cohen's practice focuses on business and tax Bob Hope's decades-long support of the USO advice for clients in the motion picture, televi. by performing for U.S. troops throughout sion, music, emerging media, and sports indus. ~ the world led Congress to name him an hon- tries. He also faciltates relationships among non. o;; orary veteran. At last year's Emmy Awards profit organizations and individuals and entites -' ceremony, George Clooney received the Bob in entertainment and advertising. Neal advises ;5 -' Hope Humanitarian Award for his fundrais- individuals regarding estate planning and non. 'W~ profit organizations regarding their formation and Ui ing contributions. In the sports arena, Ted ~ Williams, the legendary baseball player with operation.

22 Los Angeles Lawyer May 2011 =- an annual tradition, such as the Jerry Lewis fist to the for a term of years, with the istrative expenses exceeding charitable spend- MDA , which has taken place every remainder to the celebrity's family members ing. A private 's good works could Labor Day weekend since 1966. In response aftenhe charity's term interest. If the asset to be overshadowed if its missteps are on display to a crisis, celebrities plan and present one- be donáted is something other than publicly for all the world to see in publicly available time fundraisers in a matter of days, such as traded stock, the celebrity should carefully filings.!4 the Hope for Haiti event organized by George choose a trustee. Practitioners can help with Private foundations have special rules Clooney and Wyclef Jean in 2010. this as well as advise the celebrity on manag- against self-dealing to prevent the founde1; Whatever the circumstance, a legal team ing expectations for investments. The celebrity family members, related business interests, or needs to oversee the formation of the chari- donor also must be alerted to avoid the pitfall otherwise disqualified persons from taking table program. Attorneys provide direction in that occurs when the donor enters into a con- advantage of their position to engage in trans- working with personal and business man- tract for sale of the asset prior to contributing 'actions with the private foundation, regard- agers, public relations teams, agents, in-house the asset to the charitable remainder trust. If less of whether the transaction might benefit counsel, corporate advisers, and nonprofit the trustee of the trust later sells the asset, the foundation. Acts of self-dealing are sub- directors to ensure strict compliance with all what would have been a tax-free sale instead ject to penalties in the form of additional applicable laws. They also monitor the pro- becomes a taxable sale followed by the dona- taxes. A celebrity who establishes a private ceedings so that all the participants' objectives tion of the after-tax proceeds.s foundation needs to be well advised on what are met. can and cannot be done with the funds he or ~~., This process actually begins before any Priv;jl.G FounrlaH(lns she has contributed to the foundation. Even specific charitable need or involvement is For some celebrities with a considerable a seemingly insignificant act, such as distrib- even considered. Successful young entertain- record of charitable giving and adequate uting tickets purchased by the foundation ment or sports stars soon realize that the rap resources to continue doing so,6 the use of a for a gala dinnei~ must be carefully scrutinized lyric distilling their lives to "mo money, mo private foundation may be the best means of with an eye toward the self-dealing rules.ls problems"2 also includes "mo" people: sustaining the individual's in Celebrities may appoint family members lawyers, publicists, tax and wealth advisers, the future. A private foundation allows as salaried officers to the foundation. business managers, and CPAs. At some point, celebrities to channel their charitable giving Reasonable salaries will not violate the self- the young stars wil usually have a conver- through an organization under their control. dealing rules, but the board must demon- sation with one or more of these advisers This type of foundation can be formed fairly strate how it arrived at its determination of about personal wealth planning. That con- quickly by, for example, establishing a Cal- reasonableness. In addition, California rules versation should include a discussion about ifornia or Delaware nonprofit public benefit provide that no more than 49 percent of the charitable giving as a way to accomplish per- corporation. A trust may be used instead directors of a foundation may be "interested sonal and financial goals. of a corporation, but a trust is a less flexible persons." An "interested person" is defined A simple, direct to a charity results in structure than a corporation and tends to be as any person other than the director who is a charitable income tax deduction in the year used infrequently. compensated for services rendered to the of the gift.3 The gift can be cash, or securities, A California corporation may have as foundation during the previous 12 months, or some other . A gift that is not a few as one director,? is not required to have including brothers, sisters, spouses, parents, readily valued asset (such as cash or pub- voting members, and is allowed to have hon- descendants, and in-laws of interested per- licly traded securities) requires an appraisal, orary members if it so chooses.8 The corpo- sons.l6 The self-dealing rules prevent any and an attorney is needed to sort through the ration applies to the Internal Revenue Service sale, exchange, license, ~r lease of prop~rty sometimes confusing rules on deductions for (and to California's Franchise Tax Board) between the foundation and the celebrity or appreciated property. The deduction can for recognition as a tax-exempt organiza- his or her family members, unless the lease is depend on the type of property contributed, tion.9 Once this status is granted, tax exemp- withoutcharge.l 7 the holding period, who the donee charity is, tion is generally retroactive to the date of Celebrities who created private founda- what the donee does with the gift, if there incorpora tion. tions include actor and director Matthew were large in prior years, and the num- A celebrity or an authorized agent uses a Modine, who formed Bicycle for a Day ber of elections that the donor and his or private foundation to grant money to estab- (BFAD), a dedicated her CPA may choose to make. lished charities. By law, a private foundation to educating individuals about environmen- If a celebrity wishes to make a gift of must make an annual minimum distribution tal and health issues and encouraging students assets but stil retain some ongoing benefit of 5 percent of the average fair market value to ride their bicycles to schooL. BFAD's first from the assets, he or she may consider a of its assets, as determined by periodic event attracted approximately 14,000 bicy- charitable remainder unitrust, which pro- appraisals.10 clists to lower Manhattan. Modine himself vides for a continuing income stream to the A private foundation allows a celebrity to has used a bicycle as his primary form of celebrity for life or a term of years, with the put his or her name on a charitable organi- transportation since moving to New York remainder passing to the charity at the celebri- zation and to directly manage how the funds City in 1980. Modine also serves on the ty's death or the end of a predetermined will be distributed. However, there are draw- board of New York City's Transportation time.4 If the celebrity creates a charitable backs to this approach. The deductibility Alternatives, Madison Square Garden's remainder trust, he or she can provide for limitations are lower than they would be if the Garden of Dreams Foundation, the Lustgarten family members, such as a spouse and chil- celebrity contributed directly to a charity or Pancreatic Cancer Foundation, and the Van dren, to be beneficiaries of the trust as well, to a fund that the celebrity established at the Cortlandt Park Conservancy. To advise a but this type of trust requires careful planning charity.l! Moreover, private foundations have strong charitable actor like Matthew Modine, regarding the type of asset contributed, the special excise taxes on net investment practitioners must understand the complex length of the trust term, the annual payout income.!2 In addition, private foundations rules applicable to founders and directors of amount, and investment of trust assets. with gross revenues exceeding $2 milion charitable organizations. Alternatively, the trust could be a charita- must prepare audited financial statements,1 Another example of a celebrity involved ble lead trust, which provides an income stream Celebrities also must guard against admin- with a private foundation is musician Jack

24 Los Angeles Lawyer May 2011 Johnson, who created the Kokua celebrities manage their philan- Hawai'i Foundation to support envi- thropy. For example, the Giving ronmental education in the schools Back Fund, a 501(c)(3) organiza- and communities of Hawaii. The tion, provides philanthropic con- foundation raises money through sulting and foundation manage- an annual music and environmental ment to high-profile individuals festival and continues to grow and committed to philanthropy. The expand. As it does so, it takes on the Giving Back Fund can establish a characteristics of any other busi- DAF for the individual or provide ness and must address issues relat- consulting regarding a private foun- ing to employment, real estate, and dation.19 Athletes for Hope, a intellectual property (including the 501 (c)(3) , protection of trademarks and logos). was founded by a group of suc- Moreovei; it must ensure compli- cessful athletes20 to inspire and fos- ance with the relevant laws to main- ter a commitment to charitable and tain its tax-exempt status. community causes in the next gen- Artists for Peace and Justice, eration of athletes and in the f~ns formed by film director Paul Haggis who support them. in 2009, has long-term plans to sup- Another advisory organization is port a host of social projects, but its Global Philanthropy Group, whose immediate goal is to serve children founder, Trevor Neilson, has been in the poorest areas of Haiti by dubbed a "Charity Fixer to the building schools and providing Stars. "21 The company currently meals, clean drinking water, and advises 2.0 clients, with some pay- regular medical treatment. Prac- ing $150,000 to $200,000 a year titioners advising charitable organ- for consulting services. These izations with overseas operations include research, education, and must determine whether the U.S. strategic design to ensure that a charity will establish its own pro- celebrity's philanthropy will have gram in a foreign country or will operate by banks and trust companies. However, the the intended impact. supporting an existing foreign charity. This donor does not have as much control as in a Celebrities must understand that donating decision may affect the deäuctibility of dona- private foundation, because the celebrity their considerable and valuable' time and tions made by U.S. taxpayers. donor acts only as the adviser to the DAF, and energy to a cause they believe in does not pay the fund's administrator legally must have off with an income tax deduction. The con- Donor-Advised Fund the final say on where to allocate the grant tribution of services cannot be deducted.22 An alternative to a private foundation is a funds. Stil, a celebrity donor working closely Celebrities must contribute money or prop- donor-advised fund (DAF), a kind of "mini with a DAF customarily will find that his or erty to charity to receive an income tax deduc- foundation". that offers many benefits of a pri- her wishes will be fulfilled. According to tion. However, a celebrity's endorsement or vate foundation but without some of the pit- Carol Bradford, senior counsel and charita- link to a charitable cause can increase the falls. A DAF is a giving vehicle that provides ble advisor of the California Community celebrity's value to a sponsor or marketer- an individual with immediate tax benefits. At Foundation, "Donor-advised funds are a pop- and this, in turn, may increase the individu- the same time, individuals forming a DAF ular way for celebrities or anyone to make al's bottom line more than a charitable income may support the charities of their choice charitable contributions easily, quickly, and tax deduction. through grant recommendations-and may even anonymously. CCF can set up a fund The 2010 Cone Cause Evolution Study, a do so on timetables of their choosing. within 36 hours, handle all sorts of contri- 17-year benchmark study of cause marketing DAFs are efficient, cost-effective alterna- butions to the fund, and ensure that grants attitudes and behaviors, found that 83 percent tives to private foundations. Unlike a pri- from the fund, whether large or small, are of consumers want more of the products, vate foundation, there is no annual mini- made efficiently and effectively." services, and retailers that they use to bene- mum gifting amount. The donor making a gift Some celebrities have a natural affinity fit causes. According to the study, 88 per- to the DAF is allowed the higher deduction for certain charities based on family circum- cent of consumers say it is acceptable' for limits that are provided to donors to a pub- stances or personal passions. For others, sort- companies to involve a cause or issue in their lic charity. The may be made ing through the many charities seeking sup- marketing, 85 percent have a more positive anonymously, unlike a private foundation port can be daunting. There is so much need image of a product or a company when it sup- that must make its records available to the and so many good causes that finding a way ports a cause they care about, and 80 percent public. The paperwork of the DAF, such as to make each dollar count requires time and are likely to switch brands, similar in price tax returns and informational reporting, is due diligence. Organizations have emerged to and quality, to one that supports a cause.23 handled by the fund's administrator, so the help donors with these decisions. For exam- celebrity is only responsible for advising on ple, is an independent Cause-Related Marlteting Campaigns the grant recipients. charity evaluator that assesses the financial Celebrities who are publicly identified with a A DAF can be formed swiftly and without health of more than 5,500 charitable organ- particular cause can align with a company as difficulty, and many organizations are set up izations. Its Web site has a page that allows a partner in an effort to market a product that to facilitate their creation. These include the users to search charities based on which will benefit that cause. The celebrity, the California Community Foundation, the celebrities support the charity.I8 developers of the product, and the charity all Jewish Community Foundation, and many Some organizations specialize in helping must make careful choices in taking this

Los Angeles Lawyer May 2011 25 approach.24 Moreover, a celebrity presence to take advantage of this provision. However, or comparative language; price information, does not guarantee that a charity will see an music publishers and record companies gen- or other indications of savings or value; increase in donations. According to a 2006 erally are supportive of the songwriter's dona- endorsements; or inducements to purchase, Cone study, Americans rank celebrity involve- tion, since it expands public awareness of sell, or use the payor's products or services. ment as one of the least effective methods for the song and potentially increases the over- There is a safe harbor for an arrangement that non profits to gain attention, placing it ninth all revenue from the song at no additional cost designates a corporate sponsor as the exclu- on a list of 10 marketing methods to gain con- to them. Indeed, the charity steps in as a sive sponsor of an event, as long as the des- sumer support (just edging out telemarket- marketing and distribution partner for the ignation does not result in a substantial return ing).25 The right combination, however, can song, so everyone wins. benefit to the sponsor. If, however, the char- be extremely effective-for example, Sheryl ity agrees with the sponsor that it can be the Crow's 2008 concert for the Susan G. Komen QlJs~me(l 5i:mutlllsliiJr W"aymerrrii sole provider of a product or service at the Breast Cancer Foundation, with admission Two main umbrella nonprofit organizations event, then the transaction may be taxable, consisting of 10 specially designed lids from serve the charitable needs of the entertain- because the sponsor is receiving a significant Yoplait products.26 ment industry, but in very different ways: the benefit.31 In creating a cause-related marketing cam- Motion Picture and Television Fund (MPTF) The Treasury Regulations provide an paign involving a concert and a product tie- and the Entertainment Industry Foundation example of a qualified sponsorship payment: in, numerous legal issues emerge. If the con- (EIF). The MPTF was created in 1921 by M, a local charity, organizes a marathon and ~.'- cert is filmed, a determination of who wil Charlie Chaplin and Mary Pickford, among walkathon at which it serves drinks and other own the film rights and any music recordings others. Its mission statement is "We Take refreshments provided free of charge by a must be made. For liability purposes, the Care of Our Own." The MPTF recognizes national corporation. The corporation also organizers must decide whether a separate that the vast majority of persons who work gives M prizes to be awarded to winners. M entity from the charit), should be used or in entertainmi:nt ~"f' not thf' people whose recognizes the assistance of the corporation established to produce the show. If the price farriliar faces line the magazine racks at by listing the corporation's name in promo- of the ticket is an actual dollar amount supermarket checkout counters. What started tional fliers, in newspaper advertisements of (instead of the proof of purchase of a prod- as coin boxes for Hollywood workers to the event, and on T-shirts worn by partici- uct), concertgoers need to be informed that donate change to help their fellow workers pants. M changes the name of its event to they are not entitled to a charitable deduction has evolved into a comprehensive organiza- include the name of the corporation. M's for the portion of their ticket that represents tion offering health-related and financial ser- activities constitute acknowledgment of the the usual cost of attending the show. vices for needy members of the entertainment sponsorship. The drinks, refreshments, and Normally, the concertgoer would be allowed industry. prizes provided by the corporation qualify as to deduct any premium that was charged The mission of EIF28 is to harness the col- a nontaxable sponsorship payment rather and was intended to be a charitable gift. For lective power of the entertainment indus- than as income from an unrelated trade or example, when a $50 ticket is sold for $75 on try-including artists and celebrities, film business.32 A charity such as EIF may provide the night of a gala, $25 of the ticket price is and television executives, guild members, tal- a link on the charity's Web site to the spon- deductibleP The legal team should consider ent agencies, and employees-to raise aware- sor's Web site-;nd this is a permissible how the event can be structured to best ness and funds for critical health, educa- acknowledgement, not advertising. However, enhance the ability of donors and sponsors to tional, and social issues. ElF has created a the charity should not endorse the sponsor's receive income tax deductions. Attention to series of initiatives to address specific issues products in connection with this link on the the charitable solicitation registration require- and has developed a plan for charity's Web site,33 because that can change ments for all applicable jurisdictions is key. A each initiative. Often these plans involve one the link from permissible acknowledgement well-coordinated effort to comply with all or more key celebrities who become the face to taxable advertising. state and local registration requirements wil of the cause. ~~~SIp¡¡TII!¡IJ¡;~iD iiTDSGiS prevent penalties and fines. ElF is a charitable organization with its The tax code provides a new, albeit under- own donors and sponsors. A tax-deductible A celebrity may have established a private used, provision that could be a boon to cause- payment by an EIF sponsor to a charity must foundation or a DAF, and may be working related marketing. Under Internal Revenue be distinguished from a payment for a service, with an advisory organization, business man- Code Section 170(m), a songwriter may such as an advertisement for goods. Under the ager, or lawyer to structure his or her appear- donate a song to a charity, providing signif- IRC, a "qualified sponsorship payment" is ances, sponsorships, and charitable gifts. At icant benefits to both the songwriter and the any payment made by any person engaged in times, the celebrity seeks to join forces with charity. The songwriter can donate all or a a trade or business to which there is no expec- others in response to an urgent natural or portion of the writer's and/or publisher's tation that the person will receive any sub- man-made crisis. Celebrities may decide to share of a copyright to a charity, avoid the stantial benefit other than the use or acknowl- become involved in immediate action or set income tax on the income from the exploita- edgment of the name, logo, or product lines in motion a "spre~d the word" campaign. tion of the copyright, and receive a significant of the person's trade or business in connec- An example of the acute response is the income tax charitable deduction over a 10- to tion with the activities of the recipient exempt Hope for Haiti Now telethon. A telethon i2-year period, based upon the revenue organization.2 The tax code provides that the generally has celebrity hosts and perform- received by the charity. The song can be either solicitation and receipt of qualified sponsor- ers, all donating their time and services, as specifically written for the charity or an exist- ship payments does not constitute an "unre- well as celebrities operating the phone banks ing song from the songwriter's catalogue. No lated trade or business" that would cause to receive pledges of support from viewers. In appraisals are required; the deduction is the charity to receive unrelated business the case of the Hope for Haiti Now telethon, instead based on the income received by the income and incur tax.30 ElF processed the donations and distributed charity during the applicable period. Music A sponsorship message crosses the line the funds to seven identified charitable recip- publishers and record companies do not have from mere acknowledgment to imperiiissible ients. Celebrities produced a top-sellng album to participate for the songwriter and charity advertising if the message contains qualitative and video, with the proceeds benefiting the

26 Los Angeles Lawyer May 2011 charity. The preparations for the telethon involved determining whether intellectual property rights were donated or licensed as appropriate. Mediator · Arbitrator · Discovery Referee Examples of a "spread the word" response EXPERIENCED · PERSUASIVE · EFFEcrlVE include Stand Up to Cancer (SU2C) and the RED Campaign. SU2C is an initiative formed Daily Journal Top Neutral2007, 2009 & 20 10 by EIF to raise funds for ground-breaking Super Lawyer, Dispute Resolution 2008-2011 research in the fight against cancer and bring- . Employment . Legal Malpractice ing new treatments to patients as quickly as . Business/Commercial . Real Property possible. The initiative involved a team of . Personal Injury . Intellectual Propert film, television, music, and sports stars appear- ing on all the major broadcast networks in a one-hour commercial-free program. It also included 30 online streaming partners as welL. The Red Campaign-with its tag line "Buy (Red), Save Lives"-focuses on stopping the spread of HIV/AIDS in Africa. A company pays a fee for permission to market a prod- uct under the Red logo. Then, when a con- Anita Rae Shapiro sumer buys a Red product, the seller donates SUPERIOR COURT COMMISSIONER, RET. a percentage of the sale to the Global Fund, which invests 100 percent from the sale to PRIATE DISPUTE RESOLUTION i-IV/AIDS programs iii Africa.34 The wide PROBATE, CIVIL, FAMILY LAW array of Red products allows celebrities a PROBATE EXPERT "\(fITNESS way to simultaneously associate with a brand and with the charitable campaign. Moreover, TEL/FAX: (74) 529-0415 CELL/PAGER: (714) 606-2649 special edition products are being created for E-MAIL: PrivateJudgeêadr-shapiro.com the campaign. http://adr-shapiro.coin One of the next major collaborations between the charitable world and the enter- tainment industry will be a telethon this year on Veterans Day to provide support for the needs of U.S. veterans. The plan is to trans- form Veterans Day, November 11, into a participatory national holiday of major importance similar to July 4. EIF is develop- ing an event that wil be broadcast nationally with the Alliance for Veterans (AV), a tax- exempt organization. The broadcast will fea- ture performances by acclaimed concert artists interspersed with testimonials from veterans and their families. For a celebrity, living a life in the public eye may be measured by a list of credits and sometimes awards. But for many who have found fame, their resumes now include char- itable work. Stepping into the role of chari- table actor may begin as a way to save on truetaxes, but it canlegacy. end as defining a celebrity's LJ

1 For years, \'(illiams encouraged people who wanted his autograph to make out checks to "Ted Williams for the Jimmy Fund." Williams would then endorse the check and send it to the charity. The 'Jimmy Fund would get the , and the check writers would get valuable Ted Williams autographs on the back of their canceled checks. See http://www.jimmyfund,org. 2 NOTORIOUS B.I.G., Mo Money Mo Problems, on LIFE . AlTER DEATH (July 15, 1997). 3 LR.C. § 170. 4 LR.e. §664(d)(2). Alternatively, a charitable lead Huron law group trust provides for payment to a charity for a term of years, with the remainder passing typically to the huronlaw.com I 310.284.3400 donor's children at the end of the term. LR.C.

Los Angeles Lawyer May 2011 27