Issue Title: Advertising or Qualified Sponsorship Payments? Determining whether corporate sponsorship payments received or solicited by an exempt organization are qualified sponsorship payments as described in section 513(i). Description: The term "unrelated trade or business" does not include the activity of soliciting and receiving qualified sponsorship payments. IRC Section and Treas. Regulation: IRC Sec. 513(c) – Advertising IRC Sec. 513(i) – Qualified Sponsorship Payments Treas. Reg. 1.513-4 – Certain sponsorship not unrelated trade or business Resources (Court Cases, Chief Counsel Advice, Revenue Rulings, Internal Resources): Rev. Rul. 67-246 holds that where a transaction involving a payment is in the form of a purchase of an item of value (advertising), the presumption is that no gift has been made. Rev. Rul. 77-367 depicts an organization formed to create and operate a replica of an early American village. The organization qualifies for exemption even though a corporation which donated the land and a substantial percentage of the organization's support benefits by having the village named after it and by having its name associated with the village through both the corporation's and the organization's advertising. The corporation financially assists the organization in publishing informational and publicity pamphlets and in publishing the results of historical research carried on by the staff of the organization. In each publication so financed, the corporation is given credit for its financial support. It was held that although the corporation benefits by having the village named after it, by having its name associated with the village in conjunction with its own advertising program, and by having its name mentioned in each publication of the organization that it finances, such benefits are merely incidental. Analysis: Background Corporate sponsorship represents a significant funding source for tax exempt organizations and an important business strategy for taxable corporations. Sponsorship creates corporation identification with charitable activity. This type of identification is valuable to corporations. Sponsorship payments received by tax-exempt organizations has been an issue that the Service had struggled with in the past. The Service originally tried to address the issue by focusing on the nature of the services provided by the exempt organization rather than the benefit received by the sponsor, and distinguishing advertising, which is an unrelated trade or business activity from acknowledgements, which are not UBIT. In 1997, the issue was addressed by adding section 513(i), which governs the treatment of certain sponsorship payments by providing that “qualified sponsorship payments” are not subject to unrelated business income tax. Issue The problem presented by the issue of corporate sponsorships is distinguishing qualified sponsorship payments and the associated acknowledgment of donors from the sale of advertising, and thus the payment being treated as unrelated business income. Law IRC Section 513(i) defines a “qualified sponsorship payment” as any payment made by any person engaged in a trade or business with respect to which there is no arrangement or expectation that such person will receive any substantial return benefit other than the use or acknowledgement of the name or logo (or product lines) of such person's trade or business in connection with the activities of the organization that receives such payment. Such use or acknowledgement does not include advertising such person's products or services (including messages containing qualitative or comparative language, price information, or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use such products or services). Exclusions from Qualified Sponsorship Payments Section 1.513-4(b) states that a qualified sponsorship payment does not include: Any payment if the amount of such payment is contingent upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events, Any payment which entitles the payor to the use or acknowledgement of the name or logo (or product lines) of the payor's trade or business in regularly scheduled and printed material (periodicals) published by or on behalf of the exempt organization that is not related to and primarily distributed in connection with a specific event conducted by the payee organization, or Any payment made in connection with any qualified convention or trade show activity. (The term "convention and trade show activity" means any activity of a kind traditionally conducted at conventions, annual meetings, or trade shows (IRC Sec. 513(d)(3)(B)). To the extent that a portion of a payment would (if made as a separate payment) be a qualified sponsorship payment, such portion of such payment and the other portion of such payment shall be treated as separate payments. See section 513(i)(3) Analysis Treasury Regulation 1.513-4 provides explanation and interpretation of IRC Section 513(i). The Regulation’s definitions of key elements of IRC Section 513(i) offer guidance to assist in distinguishing normal fundraising and the associated acknowledgement of donors (or sponsors) from the sale of advertising. Qualified Sponsorship Payments Qualified sponsorship payments are not unrelated business income. Treas. Reg 1.513-4(c)(1) defines a qualified sponsorship payment” as any payment of money, transfer of property or the performance of services, by any person engaged in a trade or business, where there is no arrangement or expectation that the person will receive any substantial return benefit in exchange for the payment. The Regulations apply to all forms of corporate sponsorship activities and not just single events. Sponsored activities may include a single event, a series of related events, an activity of extended or indefinite duration, and/or continuing support of an exempt organization’s operation. A payment may be a qualified sponsorship payment regardless of whether the sponsored activity is related or unrelated to the organization’s exempt purpose(s). Advertising Advertising is defined in Treas. Reg. 1.513-4(c)(2)(v) as any message or other programming material which is broadcast or otherwise transmitted, published, displayed or distributed and which promotes or markets any trade or business or any service, facility or product. Advertising includes messages containing qualitative or comparative language, price information or other indications of savings or value associated with a product or service, an endorsement or an inducement to purchase, sell or use the sponsor’s company, service, facility or product. Distribution of a sponsor’s product by the sponsor or the exempt organization to the general public at the sponsored event, whether for free or for remuneration is not considered an inducement to buy, sell or use. Advertising does not include acknowledgements. Acknowledgements are the mere recognition of sponsorship payments and may include sponsor logos and slogans (that do not contain comparative or qualitative descriptions), sponsor locations and telephone numbers, value-neutral descriptions (including displays or visual depictions) of a sponsor’s product-line or services and sponsor brand or trade names, and product service listing. The effect of an acknowledgement is identification of the sponsor rather than the promotion of the sponsor’s products, services or facilities. Logos or slogans alone are considered acknowledgements as they do not contain comparative or qualitative descriptions. A message that contains comparative or qualitative descriptions does not meet the definition of a qualified sponsorship and is advertising. A single message that contains both advertising and acknowledgement is advertising Substantial Return Benefit Treas. Reg. 1.513-4(c)(2) provides that if there is an arrangement or expectation that the payor will receive a substantial return benefit with respect to any payment, then only the portion of the payment that exceeds the fair market value of the substantial return benefit is a qualified sponsorship payment. However, if the exempt organization does not establish that the payment exceeds the fair market value of any substantial return benefits, then no portion of the payment constitutes a qualified sponsorship payment. Substantial return benefit is defined Treas. Reg. 1.513-4(c)(2)(ii) as any benefit other than a use or acknowledgement (explained below) or disregarded benefits. A benefit is disregarded if the aggregate fair market value of all the benefits provided to the payor during the organization’s taxable year is not more than 2% of the amount of the payment. Treas. Reg. 1.513-4(c)(2)(ii) provides that benefits include, but are not limited to: Advertising (as defined above) Exclusive provider arrangements that limit the sale, distribution, availability, or use of competing products, services or facilities in connection with an exempt organization’s activity generally results in a substantial return benefit. See Treas. Reg. 1.513-4(c)(2)(vi)(B) for definition. However, an arrangement that acknowledges the payor as the exclusive sponsor of an exempt activity, or the exclusive sponsor representing a particular trade, business or industry, generally, does not result in a substantial return benefit. (The difference here is exclusive sponsor versus an exclusive provider.) Goods, facilities, services or other privileges Rights to an intangible asset such as a trademark, patent, logo or designation of the exempt organization Treas. Reg. 1.513-4(c)(2)(iv) provides that a substantial return benefit does not include the use or acknowledgement of the name or logo (or product lines) of the payor’s trade or business in connection with the activities of the exempt organization. Use or acknowledgement does not include advertising (as described above) but may include: Exclusive sponsorship arrangements (as opposed to exclusive provider arrangements described above) Logos or slogans that do not contain qualitative or comparative descriptions of products, services, facilities or company A list of payor’s locations, telephone numbers or internet address Value-neutral descriptions including displays or visual descriptions of product lines and/or services Brand or trade names and product or service listings Logos or slogans that are part of a payor’s identity are not considered to contain qualitative or comparative descriptions. Mere display or distribution, whether for free or for remuneration, of a payor’s product at the sponsored activity is not considered an inducement to purchase, sell or use the payor’s product. Issue Indicators or Audit Tips: Review contracts for sponsorship payments to determine if: The “sponsor” received any substantial return benefit. Payments are contingent upon the level of attendance. The payment entitles the payor to the use or acknowledgement of the name or logo (or product lines) of the payor's trade or business in periodicals. The payment is made in connection with any qualified convention or trade show activity An exclusive provider arrangement exists. Determine if the use or acknowledgement contains: qualitative or comparative language price information indications of savings or value an endorsement or an inducement to purchase, sell, or use such products or services.