What are the rules when “sponsors” pay to have their logos or contact information displayed as “acknowledgements” in event programs, on banners, or in other ways?
Marathon Bible College (MBC) is a private college that is exempt under I.R.C. section 501(c)(3). Because of their location in the Florida Keys, they have been able to sponsor a very popular Women’s Basketball Christmas Tournament each year. After working with us on an REO (Revenue Enhancement Opportunity) project (see “Tax Tips”, July 3, 2015) MBC receives sponsorship payments from a local auto dealer, two local restaurants, and three local professionals of $5,000 each. MBC agrees to hang banners in its basketball arena acknowledging these sponsors. The content on the banner is only the name of the sponsor, the logo of its brand, and a web address.
Because the banner contains only the type of information that is included in the “qualified sponsorship” rules – and not any qualified language or inducement to buy – the $30,000 in sponsorship revenue would be excluded from unrelated business income.
Treasury Regulation 1.513-4(1)(c) says:
Definition. The term qualified sponsorship payment means any payment by any person engaged in a trade or business with respect to which there is no arrangement or expectation that the person will receive any substantial return benefit. In determining whether a payment is a qualified sponsorship payment, it is irrelevant whether the sponsored activity is related or unrelated to the recipient organization’s exempt purpose. It is also irrelevant whether the sponsored activity is temporary or permanent. For purposes of this section, payment means the payment of money, transfer of property, or performance of services.
Capin Crouse Commentary
In 2002, the IRS released final regulations concerning “qualified corporate sponsorships”. Several rulings and court cases prompted these rules. These rules are enumerated in Treasury Regulation 1.513-4
Ultimately, the requirements boil down to whether payments by “sponsors” are corporate sponsorships (excluded from unrelated business income) or advertising (subject to unrelated business income tax). The final regulations consider advertising to be a “substantial return benefit”.
Basically, corporate sponsorships represent an IRS-granted exception to the unrelated business income tax (“UBIT”) in the federal tax code. Exempt organizations must pay UBIT on their income-producing activities that are 1) a trade or business; 2) regularly carried on; and 3) unrelated to their exempt purposes. There are numerous exclusions from UBIT of which “corporate sponsorships” are one.
The corporate sponsorship rules provide a closely defined safe harbor of activities or actions on which no tax will be due.
The 2002 final regulations provide six acceptable actions, or corporate sponsorship elements, that would avoid the “substantial return benefits” realm:
(1) Listing the name or logo or product line of sponsor;
(2) Awarding exclusive sponsorship award (e.g., via industry one to airline one to hotel industry);
(3) Providing logos or slogans that do not contain any qualitative language or comparative description of the products;
(4) Listing of payor’s locations, addresses, phone numbers and Internet addresses;
(5) Providing value-neutral descriptions of the sponsor’s product display; and
(6) Listing sponsor’s brands or trade names.
Conversely, the regulations list four things that are deemed substantial return benefits, including “advertising” (“what you can’t do”). Those are:
(2) Designating a sponsor as an exclusive provider;
(3) Providing facilities, services or other privileges to the sponsor unless they are of “insubstantial value;” and
(4) Granting of either exclusive or nonexclusive rights to use sponsor’s intangible asset (e.g., name or logo).
As we have said before, UBIT issues can be very complex. You should seek expert advice and take extreme care in planning and accounting for these activities. But, that should not keep you from carrying on activities that would make sense for your school. We’ll talk more about “substantial return benefits” in 2016.
Specific questions? Email Dave Moja
The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.