IRS issues corporate sponsorship prop. regs.

• Author: Locastro, Richard J.
• Position: IRS proposed regulations concerning tax-exempt organizations

On March 1, the IRS published proposed regulations on the income tax treatment of corporate sponsorship payments received by exempt organizations. Corporate sponsorship payments are a significant source of revenue for many exempt organizations and often provide much-needed funding for exempt activities. The proposed regulations contain some surprises that could significantly increase exempt organizations' tax burden from sponsorship arrangements, especially when the payments are from "exclusivity arrangements."

History

In 1991, the Service issued Letter Ruling (TAM) 9147007, dealing with the tax treatment of corporate sponsorship payments in connection with a major college bowl game, and subsequently issued proposed audit guidelines for corporate sponsorship payments (Ann. 92-15). The TAM and the audit guidelines, which would have treated most sponsorship payments as unrelated business income (UBI), were widely criticized and created much controversy. The IRS responded in 1993 with proposed regulations under Sets. 511-513 that were more "taxpayer-friendly" generally treating corporate sponsorship arrangements as nontaxable events, by focusing on the distinction between "acknowledgments" and "advertising." Acknowledgments were defined as recognition or identification of the sponsor; advertising was defined as a communication that promoted or marketed a company, service, facility or product. Under the 1993 proposed regulations, acknowledgements were not UBI; however, advertising was. The 1993 proposed regulations included a tainting rule that would treat an entire sponsorship payment as advertising if any portion of the activity or message was advertising.

Sec. 513(i)

The 1993 proposed regulations under Sec. 513 were never finalized. Sec. 513(i) was added to the Code by the Taxpayer Relief Act of 1997, and generally codifies many of the provisions of the 1993 proposed regulations. Sec. 513(i) provides that an exempt organization's UBI does not include any amount that is a qualified sponsorship payment (QSP). A QSP is a payment in which there is no expectation that the payor will receive any substantial return benefit other than the use or acknowledgement of its name or logo. A substantial return benefit includes advertising. The proposed regulations define advertising as a message or other programming materials that promote or market any trade or business or any service, facility or product. A substantial return benefit also includes...