IRS issues prop. regs. on corporate sponsorships and exclusivity payments.

• Author: O'Connell, Frank J., Jr.

In March, the IRS issued proposed regulations on the tax treatment of corporate sponsorship payments made to exempt organizations. The regulations indicate that exempt groups could face additional income taxes on sponsorship payments for agreements not to provide or sell products or services that would compete with the sponsor (i.e., exclusivity payment arrangements).

Background

Corporate sponsorships often provide significant revenue for exempt organizations. Under Sec. 513(i)(2)(A), a "qualified sponsorship payment" is a payment made by a person or entity engaged in a trade or business, in which there is no arrangement or expectation that the person or entity will receive any substantial return benefit other than the use or acknowledgement of its name or logo with the organization's activities.

Under Prop. Regs. Sec. 1.513-4 (c)(2)(v), exclusive payment arrangements are either exclusive (1) sponsorship arrangements or (2) provider arrangements. In an exclusive sponsorship arrangement, the sponsor has the right to be the only sponsor or the only sponsor representing a particular trade, business or industry of an exempt organization's activity.

In an exclusive provider arrangement, the exempt organization agrees that products or services that compete with the sponsor will not be sold or provided in connection with the exempt organization's activities.

UBIT

Prop. Regs. Sec. 1.513-4(c)(2) further defines or modifies the definition of "substantial return benefit." A substantial return benefit is any benefit other than (1) a use or acknowledgement of a payer's logo in connection with the exempt organization's activities or (2) certain goods or services that have an insubstantial value under existing guidelines. Generally, items such as complimentary tickets, receptions for donors and pro-am playing spots, have an insubstantial value only if they have a market value of the lesser of 2% of the payment or $74. If a payer receives a substantial return, the amount considered unrelated business income (UBI) must be determined under Secs. 511-514.

In general, qualified sponsorship payments do not generate UBI to the exempt organization or a substantial return benefit for the sponsor. Substantial return benefits would include payment arrangements that require advertising of a person's or entity's products or services (including any qualitative or comparative data) or pricing information, or endorsements or other inducements to sell or use the products...