The IRS has issued new proposed regulations intended to help tax exempt organizations determine whether payments received from corporate sponsors are taxable as unrelated business taxable income. The regulations, published February 29, are the latest in a series of proposed regulations, statutes, and other IRS announcements on this issue.
The new proposed regulations contain many provisions that will be familiar to those who have been operating under the corporate sponsorship tax rules that are currently in place, but there are a few changes. Under the new rules, organizations that offer sponsorship packages that result in a combination of taxable and non-taxable payments are obligated to determine the value of the benefits attributable to each type of payment. This may present some difficult valuation issues. The new rules also make payments for exclusive supplier arrangements taxable.
The General Rule
The basic issue that is addressed by the proposed regulations is whether corporate sponsorship payments received by a tax exempt organization should be taxable as advertising income or tax exempt as contributions. The general rule described in the regulations is that .qualified sponsorship payments. are tax exempt. A qualified sponsorship payment is a payment by a business for which there is no arrangement or expectation that the business will receive any .substantial return benefit..
.Substantial Return Benefit.
As with many legal terms, it.s the exceptions that are important here. The tax exempt organization.s recognition of the sponsor by displaying or communicating the following are disregarded and are not considered substantial under the new rules:
- The sponsor.s name, logo, or products
- Slogans that are an established part of the sponsor.s identity (.G.E..We bring good things to life.) or that do not contain qualitative or comparative descriptions of the sponsor.s products, services, facilities or company
- A list of the sponsor.s locations, telephone numbers, or Internet address
- Value-neutral descriptions, including displays or visual depictions, of the sponsor.s products or services
- The sponsor.s brand or trade names and product or service listings
- Display or distribution of a sponsor.s product by the sponsor or the exempt organization to the general public at the sponsored activity
In addition, certain token items or other very low cost items that the organization might provide to the sponsor or others are disregarded.
Revenue from advertising is not exempted by the proposed regulations. Advertising includes any message that promotes or markets a trade or business, including messages that contain:
- Qualitative or comparative language (.We.re better.)
- Price information or indications of savings or value (.All items 10% off.)
- Endorsements (.I use Acme products and you should too.)
- Inducements to buy (.10% off for ticket holders.)
Payments for exclusive sponsorship rights for an event are not taxable under the new rules, but payments for exclusive provider rights are taxable. For example, a payment by Coca-Cola for the right to be the sole beverage sponsor of an event would not be taxable. A payment by Coca-Cola to have only its products, and not those of a competing beverage company, sold at the sponsored event, would be taxable.
A payment is not a qualified sponsorship payment if the amount is contingent upon the level of attendance at an event, broadcast ratings, or other factors indicating the degree of public exposure to the sponsored activity.
What About the Internet?
While it has been voicing concern about the taxability of payments for web site links and page sponsorships, banners, and the like, the IRS still has not taken a position on this issue. They have, however, specifically requested public input.
Allocation and Valuation Issues
Most, if not many, sponsorship deals will involve both non-taxable acknowledgments and taxable advertising or other benefits. The sponsorship payment can be allocated between the two, but the burden falls on the exempt organization to establish that the sponsorship payment exceeds the fair market value of all the .substantial return benefits. in the sponsorship package. Exempt organizations should consider methods for establishing and documenting the valuation of the components of such mixed benefit packages.
Don.t forget that even if a payment does not qualify for exemption from tax as a qualified sponsorship payment, it might fall outside the definition of unrelated business taxable income for some other reason. To be taxable as UBTI, the income must be from a .trade or business. that is .regularly carried on. and that is not .substantially related. to the exempt purposes of the sponsored organization.
Tax exempt organizations may treat the proposed regulations as law until final regulations are published, which may not happen for some time. The proposed regulations can also be applied retroactively to payments received on or after January 1, 1998.
An auto manufacturer agrees to underwrite the expenses of charity X.s golf tournament. X recognizes the auto manufacturer by including the manufacturer.s name and established logo in the title of the tournament as well as on signs, scoreboards and other printed material. The auto manufacturer receives complimentary admission passes and pro-am playing spots for the tournament that have a significant value. Additionally, X displays the latest models of the manufacturer.s premier luxury cars at the tournament. X.s use of the manufacturer.s name and logo and display of cars in the tournament area constitute acknowledgment of the sponsorship. However, the admission passes and pro-am playing spots are a substantial return benefit. Only that portion of the payment, if any, that X can demonstrate exceeds the fair market value of the admission passes and pro-am playing spots is a tax exempt qualified sponsorship payment.
The IRS is accepting written comments on the proposed regulations until May 31, 2000. A public hearing will be held on June 21, 2000, in Washington, DC.