December 11, 1997 | Read Time: 2 minutes
The I.R.S. plans to use a new tax statute to resolve some cases involving corporate sponsorships of non-profit events.
The statute, which takes effect January 1, clarifies when a charity can avoid income taxes on revenue it receives from companies’ sponsoring of such events as non-profit football bowl games, symphony performances, and public-broadcasting productions.
The new law applies only to sponsorship payments solicited or received after December 31.
But Marc Owens, director of the revenue service’s Exempt Organizations Division, said about 20 existing cases, some dating back six years, will be handled in a way that is consistent with the new statute.
The measure, which Congress passed last summer as part of a major tax bill, clarifies when a charity can accept a corporate sponsorship and still avoid the unrelated-business income tax, or UBIT. Normally, charities must pay the tax on income from business that is not related to their missions.
Unrelated-business income taxes are calculated at the corporate rate of 15 to 34 per cent.
A charity can use a company’s corporate name, logo, or products in connection with an event — even one unrelated to the charity’s mission — as long as it doesn’t promote the business in a way that seems like paid advertising, the statute says.
The amount of the corporate sponsorship cannot depend on things like audience size or broadcast ratings. And the charity can’t use qualitative or comparative messages to publicize the sponsorship.
Thus, an art museum could use publicity materials to acknowledge a car company’s underwriting of an exhibit, but it could not say the company’s autos were “beautifully styled” or “the fastest.”
The unresolved cases stem from a controversy that first arose in 1991, when the I.R.S. said sponsorship payments from businesses to organizers of the Mobil Cotton Bowl in Dallas and John Hancock Bowl in El Paso were not charitable gifts but rather unrelated-business income that the non-profit bowls received in exchange for advertising.
After charity executives complained about the I.R.S. ruling, the service reversed itself and in 1993 proposed regulations similar to those adopted this summer by Congress. But the I.R.S. regulations were never made final, which threw unresolved cases into legal limbo.
When Congress passed the new statute, it “created a way out of the woods for everybody,” Mr. Owens says.
Congress did depart in one significant way from the rules the I.R.S. proposed in 1993. It eliminated a so-called tainting rule that would have made an entire sponsorship subject to the unrelated-business income tax even if only a fraction was used to advertise a donor’s business.
Under the new law, a non-profit organization can state what part of a sponsorship payment was used for advertising and then pay tax on that portion alone.
