Corporate sponsorship proposed regulations issued.

A new set of proposed regulations offers significant planning opportunities to exempt organizations with income from corporate-sponsored events. Corporate sponsorship agreements should be amended to conform with the new regulations.

In 1991 and 1992, the IRS issued Letter Rulings (TAMs) 9147007 and 9231001, concluding that two tax-exempt college bowl associations were subject to unrelated business income tax (UBIT) on income received from corporate sponsors. In essence, the Service contended that the associations provided advertising services to the corporate sponsors, and that the prominent display of the sponsor's name and logo during the event constituted more than mere "donor acknowledgment".

The proposed regulations show considerable responsiveness by the IRS to concerns expressed by the exempt organization community and offer considerable planning opportunities. Among other features, the proposed regulations adopt a relatively bright-line demarcation between taxable advertising services and nontaxable donor acknowledgments. In addition, the regulations expressly adopt the "exploited exempt activity" rules for taxable income from sponsored events.

The proposed regulations add new Regs. Sec. 1.513-4 and three new examples to Regs. Sec. 1.512(a)-1(e). Regs. Sec. 1.513-4 generally adopts a definition of advertising that parallels that used by the Federal Communications Commission for public broadcasting stations. In brief, a nontaxable acknowledgment may include the donor's name, logo, slogan, telephone number and address; "value-neutral" descriptions of the sponsor's products and/or services; and a listing of the sponsor's brands and/or trade names.

Nontaxable acknowledgments may not include comparative statements (e.g., "Tide, the best laundry detergent"); calls to action (e.g., "Buy Tide"); price information (e.g., "Tide is now on sale"); or an endorsement of, or inducement to buy, the sponsor's product. However, a logo or slogan that is an established part of a sponsor's identity (e.g., "Ford: The Best-Built American Cars") will not be considered to be comparative or qualitative.

Notwithstanding the relatively bright-line definitions, Regs. Sec. 1.513-4(c)(1) provides that the effect of the acknowledgment must be the identification of the sponsor rather than promotion of the sponsor's products. Thus, the Service may be able to assess a tax even when the specific content of the acknowledgment complies with the rules. Payments will also be viewed as taxable advertising when contingent on a level of attendance at the event or on broadcast ratings. However, payments may be contingent on the event actually taking place.

The proposed regulations adopt the view that the "exploited exempt activity" rules of Regs. See. 1.512(a)-1(d) apply to sponsored events. Thus, if the event loses money, disregarding both sponsorship income and the expenses directly related to the sponsorship income, the event's loss may generally offset any taxable sponsorship profits. The calculations and concept are similar to those used in connection with print advertising.

The proposed regulations contain a number of other special rules. For example, if any of the activities or acknowledgments constitute advertising, then all will be viewed as advertising (Prop. Regs. Sec. 1.513-4(b)(c)(2)). Other special rules provide that (1) the distribution of a sponsor's samples at the event, whether or not free of charge, will not render the sponsorship payments taxable; (2) an exclusive, contractual arrangement between the sponsor and the charity will not result in a presumption of advertising (Prop. Regs. Sec. 1.513-4(d)); and (3) free goods and services provided to sponsors will not affect the characterization of the payments (Prop. Regs. Sec. 1.513-4(f)).

The definition of advertising in the proposed regulations applies only for the purposes of corporate sponsorship, not for periodical or trade show advertising. However, the preamble indicates that the proposed regulations are intended to apply equally to broadcast and nonbroadcast events. Consequently, they apply to sponsored dinner dances, museum exhibitions and live theatrical performances as well as athletic events. The preamble also states that the proposed regulations do not determine whether the sponsor may deduct the payments under Sec. 162 or 170.