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Charities taxed on fees from sport event sponsors.

The Service recently treated sponsor fees received by a tax-exempt entity as unrelated business income subject to the unrelated business income tax (UBIT). (See IRS Letter Ruling (TAM) 9147007, the "Cotton Bowl" ruling.) In this widely reported development, the Service held that, if a sponsor receives something in exchange for its fee (a quid pro quo), the fee is taxable to the exempt entity.

Any exempt organization that depends on sponsor fees to support its exempt purpose should review its sponsor agreements to determine whether a quid pro quo exists. The TAM indicated that this is a facts and circumstances test.

In the TAM, the IRS determined that Mobil Oil Corporation received a "substantial return benefit" for its fee. Mobil reportedly received benefits such as its name used for the event (it was the "Mobil Cotton Bowl Classic"), its logo on the football field and on football jerseys, and its name telecast over television several times. The TAM stated that these items represented more than a mere acknowledgement of the sponsor's generosity.

The Service further stated, in a statement separate from the TAM, the continual repetition or exposure of a corporate name or logo during a sponsored event places the sponsor fees outside a contribution with mere acknowledgement. College bowl games and pro golf or tennis tournaments are certain targets under this position.

The IRS National Office was recently contacted (on an unofficial and informal basis) on behalf of a tax-exempt organization to determine if its sponsor fees would be subject to the UBIT. Like most charity golf classics, this organization received substantial revenue from a sponsor under a title sponsor agreement.

It was learned that the Service would treat these sponsor fees as advertising income. Consequently, they would be subject to the UBIT, since advertising revenue is unrelated to the organization's exempt purpose. Also, sponsor fees from nonsporting events such as fairs, festivals and similar activities may be subject to the UBIT.

On Jan. 17, 1992, the IRS issued proposed audit guidelines that attempt to clarify its new position (Ann. 92-15). (See the Tax Trends item, "IRS Sets Guidelines for Corporate Sponsorship of Public Events," TTA, Mar. 1991, at 193.) The Service also invited public comment by Apr. 3, 1992 "[b]ecause this matter raises important and sensitive isues. . . ." Ann. 92-58 extended this deadeline until May 18, 1992.

Shortly thereafter, it was reported in the financial press that many tax-exempt organizations were pinning their hopes on expected appeals of the IRS rulings in the bowl cases and lobbying Congress to exempt taxation of sponsorship revenue.
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Author:DeLanoy, Charles J.
Publication:The Tax Adviser
Article Type:Brief Article
Date:May 1, 1992
Words:426
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