IRS Oversight of Exempt Organizations

IRS Issues Final Rule on Corporate Sponsorship

On April 25, the IRS published final regulations (PDF) regarding tax treatment of corporate sponsorship payments to tax-exempt organizations. The rule addresses whether sponsorship payments made to exempt organizations will be considered unrelated business taxable income. 

The final regulations are consistent with the proposed regulations (published in March 2000) with respect to exclusive provider arrangements. The right to be the only sponsor of an activity will generally not be considered a substantial return benefit causing an arrangement to fall outside of the qualified sponsorship safe harbor. If, however, an exempt organization agrees that products or services that compete with a sponsor’s products or services will not be sold or provided in connection with one of the exempt organization’s activities, the sponsor has received a substantial return benefit and its payments to the exempt organization would not be considered qualified sponsorship payments.

The final regulations eliminate the $79 insubstantial value ceiling placed on the fair market value of benefits received by a corporation that may be disregarded. However, the rule retains the restriction that the fair market value of such benefits may not exceed 2 percent of the payment.

The final rule also provides examples to clarify whether a hyperlink from a tax-exempt organization’s website to that of a corporate sponsor would be considered an acknowledgement or advertising of a sponsor’s product. The distinction is significant because acknowledgements fall within the qualified sponsorship safe harbor, whereas advertising does not.

Text of the rule