Issue

Colleges are “partnering” with a fast food restaurants to have a fundraising nights where members of the general public go to eat at the restaurant, get a discount, and have a portion of the proceeds go to the institution.

Situation

Marathon Bible College (MBC) is a public charity and a school under I.R.C. sections 501(c)(3) and 170(b)(1)(A)(ii). They set up “Marathon Bible College Night” with participating Aunt Paula’s All-American Pancake house restaurants across the state of Florida. MBC promotes the event by sending flyers that offer 20% off pancakes on a given day and “a portion of the proceeds goes to support the MBC Cross Country program.” They call us to ask, “Is this revenue subject to UBIT?”

Although a review of the corporate sponsorship regulations under Treasury Regulation 1.513-4 would suggest that the wording on these communications would constitute “advertising” and thus be subject to UBIT, our answer – based on narrative below – is “probably not.”

Rules

From Treasury Regulation 1.513-4(c)(2)(v):
Advertising. For purposes of this section, the term advertising means any message or other programming material which is broadcast or otherwise transmitted, published, displayed or distributed, and which promotes or markets any trade or business, or any service, facility or product. Advertising includes messages containing qualitative or comparative language, price information or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use any company, service, facility or product. A single message that contains both advertising and an acknowledgment is advertising. This section does not apply to activities conducted by a payor on its own. For example, if a payor purchases broadcast time from a television station to advertise its product during commercial breaks in a sponsored program, the exempt organization’s activities are not thereby converted to advertising.

From IRS Exempt Organizations and UBI Webcast Q&A (June 24, 2014):
3. If an organization sends out an email stating to go eat at an unrelated, taxable entity fast food restaurant, get a discount, and have a portion go to the exempt organization, is this UBI? The emails do appear to be advertisements due to language in the ad.

IRS ANSWER: This would depend on the specific facts and circumstances of the case. However, if the business activity (the sale of food) is conducted by the restaurant rather than the exempt organization, the business activity (and the income resulting from it) would likely not be imputed to the exempt organization. (underline added)

Bottom Line

This is another interesting and “murky” area of the UBIT rules. Be careful to document the facts and circumstances and closely review agreements regarding “co-ventures”.

It makes sense to touch base with a qualified tax advisor on this issue. He or she will be able to help you navigate these potentially treacherous waters.

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.