The U.S. Treasury Department and Internal Revenue Service last spring came out with final rules on tax treatment of corporate sponsorship payments received by tax-exempt organizations, which includes sponsorship money.
The 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, 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:
List 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, pro-am playing spots, and receptions for donors are allowed if they have a fair market value of not more than 2 percent of the sponsorship payment. An earlier proposal had a cap of approximately $79.
Give Me an Example
Examples included with the final rules provide a pretty good indication of how the new code will be interpreted, and can be extrapolated to the realm of corporate sponsorship of meetings and events.
In one government example, a corporation pays organizers of an annual football game $1 million to be the exclusive sponsor. The corporation receives a block of game passes valued at $6,000 and is provided with advertising space in the program book. Comparable ad 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.
Web Sites Addressed
The rules address 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 government example, an 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 link, but the orchestra does not promote any sponsor or advertise its merchandise. In those circumstances, the link is an acknowledgement of the sponsorship.
However, in another example, a health-based charity includes a link from its Web site to the Web site of a pharmaceutical company that has provided funding for educational materials about a particular medical condition. The pharmaceutical company's Web site includes the charity's endorsement of a drug produced by the company for treatment of the subject medical condition. The charity gave permission for the endorsement to appear. Because that hyperlink leads to an endorsement, it constitutes advertising.
Another interesting aspect 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 condition that a company be the exclusive provider of products or services at an event, the company is deemed to have received a substantial return benefit. In that case, the portion of the payment going toward the exclusive provider arrangement is not a qualified sponsorship payment.
The final regulations took effect April 25 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.