It is important to understand the new rules on corporate sponsorship, which the Internal Revenue Service expects to finalize soon. The IRS proposal focuses on the nature of the benefits received by a sponsor in return for its payment. Where a corporation makes a "qualified sponsorship payment," that is, a payment for which there is no expectation that the sponsor will receive a substantial benefit, the income received by the sponsored organization is not subject to tax as unrelated business income.
The proposed regulations provide that a "substantial return benefit" does not include (1) goods and services of "insubstantial value" (i.e., those having a fair market value of not more than 2 percent of the payment or $74, whichever is less); or (2) an "acknowledgment" of the sponsoring organization's trade or business. According to the proposed regulations, "acknowledgments" may include:
- Use of the sponsoring organization's name or logo;
- Listing of the sponsor's locations, telephone numbers, and Internet address;
- Use of the sponsoring organization's brand or trade names and product or service listings; and
- "Value-neutral" descriptions, displays, or distribution of the sponsor's products or services (that is, those without qualitative or comparative descriptions).
Further Clarification The IRS also proposes different treatment for "exclusive sponsor" and "exclusive provider" relationships. Specifically, there is no substantial return benefit if a sponsor has paid for the right to be the only sponsor of an exempt organization activity. In contrast, when a sponsor makes a payment on the condition that it be the exclusive provider of products or services, the IRS will consider the sponsor to have received a substantial return benefit.
In addition, under the proposal, when a sponsorship payment is contingent on the level of attendance at an event, the sponsor may be deemed to have received a substantial return benefit. However, a sponsorship can be considered "qualified" when payment is contingent on the sponsored activity taking place.
One big plus of the latest proposal is that when a sponsorship turns out to involve both qualified and nonqualified payments, the IRS will make an allocation: Only the nonqualified portion will be subject to tax. However, if the qualified and nonqualified payments are mixed, there is no allocation.
Ready for a Pop Quiz? Question: A local charity organizes a "Funfest," to which Company X, a soft drink producer, makes a substantial donation. The charity provides participants with Company X T-shirts, and the banner over the entrance reads, "Funfest: Made Possible Through a Major Grant From Company X." In addition, booths are set up offering free samples of Company's X's products. What are the tax consequences to the charity?
(a) Company X receives a substantial return benefit from the exposure of its name and products, and the entire payment is subject to unrelated business income tax.
(b) The entire payment is qualified. The charity's use of the Company X name and logo banner and T-shirts, as well as its distribution of Company X products, all constitute acknowledgments.
(c) An allocation must be made between the acknowledgments on the banner and T-shirts and the benefit Company X receives from having its products distributed.
Answer: (b). If, however, Company X made its payment on the condition that it would be the exclusive soft drink provider, (c) would be correct.
Question: Company M, a piano store, makes a donation to an opera company in support of a performance series. In return, the opera provides Company M with two season tickets, valued at $100 each, and recognizes its support in the program with the following: "This series is sponsored by Company M, located at 321 First St. Visit today for the finest selection of baby grands in the Midwest." What are the tax consequences to the opera?
(a) The entire payment is qualified. The recognition to the company is only an acknowledgment, and the tickets are an insubstantial benefit.
(b) An allocation must be made between the acknowledgment in the program and the tickets, which have greater than an "insubstantial value."
(c) An allocation must be made between the acknowledgment, the advertising portions of the program, and the tickets.
(d) The entire amount is taxable advertising.
Answer: (d) Because advertising and an acknowledgment are included in a single message, the entire message is considered advertising, and the allocation rule cannot be applied. If an ad had been included on a separate page from the acknowledgment, an allocation could have been made. Alternatively, the sentence, "Visit today ..." could have been deleted. In addition, the series tickets have more than "insubstantial value."
Tax-exempt organizations have lots of options to encourage sponsorship, but it must be planned with care. From the IRS' perspective, it's more than the thought that counts.