Sponsorship prop. regs. may increase UBIT liability.

• Author: Hall, William H.
• Position: IRS regulations; unrelated business income tax

Charities and other related tax-exempt organizations should carefully consider the effect of recently released proposed regulations under Secs. 512 and 513, addressing corporate sponsorship payments, to avoid or minimize unrelated business income tax (UBIT) liabilities in connection with both current and future sponsorship arrangements. Whether a corporate sponsorship payment (such as income from a "pouring rights" arrangement with a beverage supplier) is subject to UBIT depends on whether it constitutes a "qualified sponsorship payment," which, in turn, depends on what the sponsor receives in return for its payment.

The proposed rules replace earlier proposed regulations released in January 1993, to reflect enactment of Sec. 513(i) by the Taxpayer Relief Act of 1997 (TRA '97). Sec. 513(i) excludes from the definition of unrelated trade or business the activity of soliciting and receiving qualified sponsorship payments, defined as payments made by individuals or business entities for which the contributor received no substantial return benefit other than the use or acknowledgment of the name, logo or product lines of the trade or business in connection with the exempt organization's activities.

Background

Prior to Sec. 513(i), the IRS sometimes took the position that corporate sponsorship payments were advertising income (not contributions) and, therefore, determined that the exempt organization recipient was carrying on an unrelated trade or business, generating income taxable under Sec. 511.

The debate over the tax treatment of corporate sponsorship payments began with Letter Ruling (TAM) 9147007, concluding that payments by Mobil Corporation to sponsor the Cotton Bowl Athletic Association were for advertising and, therefore, subject to UBIT. Before the enactment of Sec. 513(i), the Service focused on an exempt organization's services, not the benefit received by the sponsors. Advertising was defined as any message, programming material or broadcast transmitted, displayed or published in exchange for remuneration. The initial IRS guidance and apparent reversals (as a result of intervening legislation) left many unanswered questions.

Qualified Payments

The new proposed regulations would (1) clarify the notion of substantial return benefit, (2) limit qualified sponsorship payments when exclusivity arrangements exist and (3) restrict the deductible expenses that can be used to offset unrelated business income (UBI) from sponsorship...