The Treasury Department and the Internal Revenue Service last spring came out with final rules on the tax treatment of corporate sponsorship payments received by tax-exempt organizations, which includes, of course, sponsorship money received by many event organizers.
In a nutshell, the final rules say that when a corporation makes a “qualified sponsorship payment,” that is, a payment for which there is no expectation that the sponsor will receive a “substantial return benefit,” the income received by the sponsored organization is not subject to tax as unrelated business income. Of course, some definitions are key: A “substantial return benefit” is any benefit other than the use or acknowledgment of the sponsor's name, logo, or product lines. Advertising, per se, is not considered a “use or acknowledgement.” Benefits such as complimentary tickets and receptions for donors are allowed if the fair market value is not more than 2 percent of the sponsorship payment.
Give Me an Example
In one example, a corporation pays the organizers of a football game $1 million to be the exclusive sponsor. As part of the agreement, the corporation receives a block of game passes valued at $6,000. In addition, the corporation is provided with advertising space in the program book at no charge. Comparable space is sold to others for $10,000. Because the fair market value of the game passes and advertising does not exceed 2 percent of the total payment, the benefits, including the advertising, are considered to be a qualified sponsorship payment.
Significantly, the final rules address for the first time whether a hyperlink from an organization's Web site to a sponsor's Web site constitutes an acknowledgement or advertisement. In general, a simple hyperlink is deemed an acknowledgement.
Another interesting aspect of the final rules is that backers have the right to be the only sponsor of an activity, or the only sponsor representing a particular industry, but when a sponsorship payment is made on the condition that a company be the exclusive provider of products or services at an event, then it is deemed to have received a substantial return benefit.
The final regulations took effect April 25, 2002, and apply to any payments solicited or received after December 31, 1997.
Jed R. Mandel is a partner in the Chicago-based law firm of Neal, Gerber & Eisenberg, where he heads the trade and professional association practice.