Corporate Sponsorship Income
A payment received from a corporation (or other business entity) to sponsor an organization's activity is often referred to as corporate sponsorship income. The taxability of such income depends upon several rules set forth in IRC Sec. 513(i)(2).
A “qualified sponsorship payment” (QSP) is excluded statutorily from Unrelated Business Income (UBI) [IRC Sec. 513(i)(1)]. A QSP is a payment (whether in money, property, or services) by an entity engaged in a trade or business (i.e., the sponsor) to an exempt organization (i.e., the recipient) without an “arrangement or expectation” that the sponsor will receive any “substantial return benefit. This is the only requirement. It does not matter whether the sponsored activity is related or unrelated to the recipient's exempt purpose or whether the sponsored activity is temporary or permanent.
A substantial return benefit includes:
1. advertising as defined in Reg. 1.513-4(c)(2)(v);
2. an exclusive provider arrangement ;
3. providing facilities, services, or other privileges to the payor or persons designated by the payor (subject to a de minimis exception described later); and
4. granting the payor or persons designated by the payor an exclusive or nonexclusive right to use an intangible asset, such as a trademark, patent, logo, or designation of the exempt organization.
The de minimis exception allows a recipient to provide a sponsor with benefits that have an aggregate fair market value (FMV) of not more than 2% of the sponsor's payment. If the FMV of the goods or services provided to the sponsor exceeds the permissible limit, the entire FMV (not merely the excess amount) is a substantial return benefit and potentially taxable to the organization.
A substantial return benefit does not include the recipient's use or acknowledgment of the sponsor's name, logo, or product lines in connection with its activities also allows the recipient to mention the sponsor's location(s), telephone numbers, internet address, slogans, and value-neutral descriptions of the sponsor's goods or services in acknowledging the sponsor's support. In addition, the sponsor's products can be displayed or distributed to the general public at the sponsored activity without disqualifying a payment as a QSP.
Sponsor Recognition May Be Advertising
Sponsor recognition promoting (i.e., advertising) the sponsor's products, facilities, or services is a substantial return benefit that prevents all or a portion of a payment from being a qualified sponsorship payment (QSP). Only the portion that exceeds the FMV of the advertising is a QSP. Advertising is defined as any sponsor recognition or message that contains qualitative or comparative language (e.g., “sponsor's product is better than competitor X's product”); price information (or other indications of savings or value); an endorsement; or an inducement to purchase, sell, or use the sponsor's products or services. Logos or slogans that are an established part of a sponsor's identity are not considered to contain qualitative or comparative descriptions. A single message containing both advertising and an acknowledgment is advertising.
In addition, certain sponsor recognition will prevent a payment from being a QSP even though it does not contain qualitative or comparative language. Any payment that “entitles” the payor to have its name, logo, or product lines used in the organization's periodical is not a QSP. A periodical is defined as “regularly scheduled and printed material” that is “not related to and primarily distributed in connection with a specific event” conducted by the exempt organization. For this purpose, printed material includes electronically published material. Thus, an acknowledgment in a periodical that is required as a condition of the sponsorship payment causes the payment to be advertising income. The taxability of such payments is determined under UBIT rules other than the sponsorship rules. However, if such acknowledgment were voluntary (i.e., not required under the terms of the sponsorship payment), the QSP rules should be applicable provided the acknowledgment does not contain qualitative or comparative language.
The following are also excluded from the definition of QSP:
1. Any payment that is contingent, contractually or otherwise, upon the amount of public exposure received by the sponsor, such as the level of attendance at recipient's event(s) or broadcast ratings. Such a payment will be advertising revenue. However, a payment can be contingent upon whether an event actually occurs or is broadcast..
2. Any payment related to a qualified convention or trade show [IRC Sec. 513(i)(2)(B)(ii)(II)].
When only a portion of a sponsor's payment meets the QSP rules, that portion is carved out of the total payment and is not UBI. The balance of the payment is tested independently to determine if it is UBI.
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