Now meeting planners who work for tax-exempt organizations have another set of regulations to consider. The Treasury Department and Internal Revenue Service last spring came out with their final rules relating to the tax treatment of corporate sponsorship payments received by tax-exempt organizations, which includes the sponsorship monies received by many event organizers. [In this column, the word sponsor refers to the company providing funding.] The final regulations took effect on April 25, 2002, and apply to any payments solicited or received after December 31, 1997.
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,” but the definition does include:
- Listing of the sponsor's locations, telephone numbers, and Internet address;
- Use of the sponsor's brand or trade names and product or service listings;
- Use of the sponsor's logos and slogans that do not contain qualitative or comparative descriptions of its products, services, facilities, or company; and
- “Value-neutral” (i.e., not qualitative or comparative) descriptions, displays, or distribution of the sponsor's products or services.
certain “disregarded benefits.”
Benefits such as complimentary tickets, player spots in pro-am tournaments, and receptions for donors are allowed if they have a fair market value of not more than 2 percent of the sponsorship payment.
In one example included with the final rules, a corporation pays the organizers of an annual 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 and is provided with advertising space in the program book at no charge. Comparable advertising space is sold to others for $10,000. Because the fair market value of the game passes and program advertising does not exceed 2 percent of the total payment, the benefits, including the advertising, may be disregarded, and the entire payment is a qualified sponsorship payment.
Hyperlink With Caution
The final rules address for the first time whether a hyperlink from a tax-exempt organization's Web site to a sponsor's Web site constitutes an acknowledgement or advertisement. In the one example, a symphony orchestra posts a list of its sponsors on its Web site, with each sponsor's name and Internet address. The Internet address appears as a hyperlink, but the orchestra does not promote any sponsor or advertise its merchandise. Under those circumstances, the hyperlink is just acknowledging sponsorship.
In another case, a charity includes a hyperlink from its Web site to that of a pharmaceutical company that has provided funding to produce educational materials about a medical condition. The pharma company's Web site includes the charity's endorsement of a drug produced by the company for treatment of the medical condition. Because that hyperlink leads to an endorsement, it constitutes advertising.
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 they are deemed to have received a substantial return, so the portion of the payment going toward the exclusive provider would not be a qualified sponsorship payment.
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.