he corporate underwriting of events and activities run by exempt organizations has been a very controversial issue during the last decade. These arrangements can take many forms, such as providing refreshments and T-shirts to participants in a local charity’s walkathon, underwriting a special museum exhibition, acting as the exclusive provider of athletic apparel and soft drinks for a college or university, or sponsoring a college football bowl game.
Given the various situations in which these types of payments may be found, how they are treated from a tax perspective can significantly affect many exempt organizations’ operations and fundraising activities.
WHEN IS A SPONSORSHIP TAXABLE?
Background. When the IRS first addressed this issue, the amounts received by exempt organizations for these events and activities were considered unrelated to the organizations’ tax-exempt functions, and thus taxable to the organizations. After criticism, the Service reexamined the area, proposing regulations that generally treated corporate sponsorships as nontaxable.
Sec. 513(i). To reduce the uncertainty about the tax treatment of corporate sponsorship payments, Congress considered it appropriate to distinguish sponsorship payments for which the donor received no substantial benefit other than the use or acknowledgement of the donor’s name or logo as part of a sponsored event (which should not be subject to tax) from payments made in exchange for advertising provided by the organization (which should be taxed). Therefore, in 1997 Congress enacted Internal Revenue Code Section 513(i), which provides that any amount considered a “qualified sponsorship payment” will not be unrelated business income subject to tax. To further refine and explain the specifics of this provision, in March 2000 the IRS issued proposed regulations.
Qualified sponsorship payments. A qualified sponsorship payment is any payment for which there is no arrangement or expectation that the payer will receive a substantial return benefit other than the use or acknowledgement of the payer’s name or logo. A “substantial return benefit” (which could cause the payments to be taxable to the organization) is more than goods, services or other benefits “of insubstantial value” and can include advertising.
Use or acknowledgement. A substantial return benefit does not include the use or acknowledgement of the payer’s name or logo in connection with the exempt organization’s activities. Such use or acknowledgement includes logos or slogans that do not contain qualitative or comparative descriptions of the payer’s products or services. In addition, logos or slogans that are an established part of a payer’s identity would not run afoul of these rules.
Advertising does include messages containing qualitative or comparative language; price indications or other indications of savings or value; an endorsement; or an inducement to purchase, sell or use any company or product.
Exclusivity arrangements. The proposed regulations also address the treatment of exclusivity arrangements under which a payer serves as the exclusive provider of products, goods or services to an organization.
An arrangement that acknowledges a payer as the exclusive sponsor of an organization’s activity (or the exclusive sponsor in a particular trade, business or industry) will not, in and of itself, result in the payments being taxable as substantial return benefits. However, exclusive provider arrangements (commonplace for many colleges and other large exempt organizations) that limit the sale, distribution, availability or use of competing products or services in connection with an organization’s activity will generally result in a substantial return benefit and thus may be taxable.
For a detailed discussion of these proposed regulations and other current developments, see the Tax Clinic, edited by Philip Wiesner, in the June 2000 issue of The Tax Adviser.
—Nicholas Fiore, editor
The Tax Adviser