Corporate Sponsorship and UBIT:
What Every Nonprofit Should Know

Most nonprofits are very familiar with the federal Unrelated Business Income Tax (“UBIT”) that imposes a tax – at the flat 21% corporate income tax rate – on net income derived from regularly carried-on trade or business activities that are not substantially related to the organization’s tax-exempt purposes. But not as many are familiar with the exception to UBIT for “qualified corporate sponsorship payments.”

When properly utilized, this very beneficial exception can permit a nonprofit to turn what might otherwise be taxable (as UBIT) advertising income into tax-free corporate sponsorship income. It behooves every nonprofit to understand the nuances of the law, the unusually detailed and helpful Internal Revenue Service (“IRS”) guidance on the topic, and strategies for taking full advantage of this exception to UBIT.


In the early 1990s, the corporate sponsorship issue arose in connection with monies received by the sponsors of the Mobil Cotton Bowl college football game. The sponsoring organization was a tax-exempt organization that received a considerable payment from the Mobil Corporation. In exchange, the Cotton Bowl became known as the Mobil Cotton Bowl. On audit, the IRS determined that the money received by the Cotton Bowl organizers should be characterized as taxable advertising income, given the considerable exposure that the Mobil Corporation received in return for the payment.

This action caused a stir in Washington, DC and – after considerable back-and-forth between the IRS and the tax-exempt community, with Congress brought into the fray – ultimately led to the enactment of a 1997 federal tax law, which superseded the prior (and, in many ways, contradictory) IRS guidance on the subject.

The 1997 law amended the Internal Revenue Code of 1986 (the "Code") to provide that the receipt of "qualified sponsorship payments" by a tax-exempt organization does not constitute the receipt of income from an "unrelated trade or business." In addition, for Code Section 501(c)(3) public support test purposes, "contributions" include "qualified sponsorship payments" in the form of money or property (but not services). The new law created a new section of the Code (Section 513(i)) clarifying that these qualified sponsorship payments will not be considered taxable income to a tax-exempt organization.

It is important to note that Code Section 513(i) is a "safe harbor" – if a payment received by an exempt organization does not meet the definition of a qualified sponsorship payment, it is not necessarily taxable income to the organization. Rather, such a payment may qualify for one of numerous exceptions to UBIT, or it might not otherwise meet the definition of what constitutes taxable Unrelated Business Income (“UBI”).

In 2002, the IRS published final regulations regarding the tax treatment of corporate sponsorship payments received by tax-exempt organizations. The release of these final regulations came almost ten years after an initial set of (very different) regulations were proposed, and almost five years after the enactment of the 1997 federal tax law that created the statutory safe harbor.

Below is a description of key provisions of the final regulations and (still-current) IRS guidance on this area of law.

Definition of "Qualified Sponsorship Payment"

A "qualified sponsorship payment" is defined as "any payment [of money, property or services] by any person engaged in a trade or business with respect to which there is no arrangement or expectation that the person will receive any substantial return benefit." In determining whether a payment is a qualified sponsorship payment, it is irrelevant whether the sponsored activity is related or unrelated to the recipient organization's tax-exempt purposes. It also is irrelevant whether the sponsored activity is temporary or permanent.

Definition of "Substantial Return Benefit"

A "substantial return benefit" is defined as any benefit other than: (i) goods, services or other benefits of "insubstantial value" (as described below); or (ii) a "use or acknowledgment" (as described below). Good, services or other benefits of "insubstantial value" are those that have an aggregate fair market value of not more than 2% of the amount of the payment. Note that if the fair market value of the benefits exceeds 2%, the entire fair market value (as opposed to the cost) of such benefits, not merely the excess amount, is considered a substantial return benefit.

A substantial return benefit includes:

  • advertising (as described below);
  • providing facilities, services or other privileges to the sponsor (or persons designated by the sponsor), unless such privileges are of "insubstantial value" (as described above);
  • granting the sponsor (or persons designated by the sponsor) an exclusive or non-exclusive right to use an intangible asset (g., name, logo, trademark, copyright, patent) of the tax-exempt organization. Note that while payment for providing a sponsor with the right to use such an intangible asset will not constitute a qualified sponsorship payment, it may constitute a tax-free royalty; or
  • designating a sponsor as an "exclusive provider" (defined below).

Use or Acknowledgment

As stated above, a substantial return benefit does not include a "use or acknowledgment" of the name or logo (or product lines) of the sponsor's trade or business in connection with the activities of the tax-exempt organization. Use or acknowledgment does not include advertising (as described below), but may include:

  • sponsor logos and slogans that do not contain qualitative or comparative descriptions of the sponsor's products, services, facilities, or company;
  • a list of the sponsor's locations (g., street addresses), telephone numbers, or website addresses;
  • value-neutral descriptions (including displays or visual depictions) of the sponsor's product line(s) or services;
  • sponsor brand or trade names and product or service listings; and
  • designating a sponsor as an "exclusive sponsor" (defined below).

Logos or slogans that are an established part of the sponsor's identity are not considered to contain qualitative or comparative descriptions. Mere display or distribution (whether for free or remuneration) of a sponsor's product by the sponsor or the tax-exempt organization to the general public at a sponsored activity will not be considered an inducement to purchase, sell or use the sponsor's product and thus will not affect the determination as to whether a payment constitutes a qualified sponsorship payment.


"Advertising" is defined as any message or other programming material that is broadcast or otherwise transmitted, published, displayed, or distributed, and that 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;
  • an endorsement; or
  • an inducement to purchase, sell or use any company, service, facility, or product.

A single message that contains both advertising and an acknowledgment is considered advertising. The above rules do not apply to activities conducted by a sponsor on its own (e.g., if a sponsor purchases broadcast time from a television station to advertise its product during commercial breaks in a sponsored program, the tax-exempt organization's activities will not thereby be converted to advertising).


The IRS addresses the provision of an Internet hyperlink in two examples (Examples 11 and 12). In one example, providing an acknowledgment on a tax-exempt organization web page that includes a link to the sponsor's website (no specification is made as to whether the link in this example is to the sponsor's home page or to some other page on the sponsor's website) is determined not to be a substantial return benefit to the sponsor. In the second example, the tax-exempt organization ("X") provides a link to a page on the sponsor's website that includes an endorsement by the tax-exempt organization of the sponsor's product. The IRS states that "the endorsement is advertising," and thus "only the payment, if any, that X can demonstrate exceeds the fair market value of the advertising on the … company's [web]site is a qualified sponsorship payment."

It is interesting to note that the IRS does not affirmatively state that the fair market value of the provision of the hyperlink on the tax-exempt organization's website would be considered advertising income to the organization in this example; rather, the example focuses on the value of the benefit conferred through the endorsement.

Exclusivity Arrangements

Exclusive sponsor. An arrangement that acknowledges the sponsor as the exclusive sponsor of a tax-exempt organization's activity, or the exclusive sponsor representing a particular trade, business or industry, generally will not, by itself, result in a substantial return benefit. For example, if in exchange for a payment, a tax-exempt organization announces that its event or activity is sponsored exclusively by the sponsor (and does not provide any advertising or other substantial return benefit to the sponsor), then the sponsor has not received a substantial return benefit.

Exclusive provider. An arrangement that limits the sale, distribution, availability, or use of competing products, services or facilities in connection with a tax-exempt organization's activity generally will result in a substantial return benefit. For example, if in exchange for a payment, a tax-exempt organization agrees to permit only the sponsor's products to be sold in connection with its event or activity, then the sponsor has received a substantial return benefit.

Allocation of Payment

If there is an arrangement or expectation that the sponsor will receive a substantial return benefit with respect to any payment, then only the portion (if any) of the payment that exceeds the fair market value of the substantial return benefit (determined on the date the sponsorship arrangement is entered into) will be considered a qualified sponsorship payment. In other words, if, in exchange for a payment to a tax-exempt organization in connection with a sponsored event or activity, the sponsor receives advertising benefits as well as an acknowledgment, then UBIT will be assessed only on the fair market value of the portion allocable to the advertising benefits (subject to the burden of proof described below).

However, if the tax-exempt organization fails to establish that the payment exceeds the fair market value of any substantial return benefit, then no portion of the payment will constitute a qualified sponsorship payment. The UBIT treatment of any payment (or portion thereof) that does not constitute a qualified sponsorship payment will be determined by application of the standard UBIT rules and exclusions.

For example, payments related to a tax-exempt organization's provision of facilities, services or other privileges to the sponsor (or persons designated by the sponsor), advertising, exclusive provider arrangements, a license to use intangible assets of the tax-exempt organization, or other substantial return benefits, will be evaluated separately in determining whether the tax-exempt organization realizes any UBI.

Fair Market Value

The fair market value of any substantial return benefit provided as part of a sponsorship arrangement is the price at which the benefit would be provided between a willing recipient and a willing provider of the benefit, neither being under any compulsion to enter into the arrangement, both having reasonable knowledge of the relevant facts, and without regard to any other aspect of the sponsorship arrangement.

Valuation Date

In general, the fair market value of a substantial return benefit will be determined when the benefit is provided. However, if the parties enter into a binding, written sponsorship agreement, the fair market value of any substantial return benefit provided pursuant to that agreement is determined on the date the parties enter into the agreement. If the parties make a material change to a sponsorship agreement (including an extension or renewal of the agreement, or a more-than-incidental change to the amount of consideration), it is treated as a new sponsorship agreement as of the date the material change is effective.

Anti-Abuse Provision

To the extent necessary to prevent avoidance of the "Allocation of Payment" rule described above, where the tax-exempt organization fails to make a reasonable and good-faith valuation of any substantial return benefit, the IRS may determine the portion of a payment allocable to such substantial return benefit and may treat two or more related payments as a single payment.

Written Agreements

The existence of a written sponsorship agreement will not, by itself, cause a payment to fail to constitute a qualified sponsorship payment. The terms of the agreement, not its existence or degree of detail, are relevant to the determination of whether a payment constitutes a qualified sponsorship payment. Similarly, the terms of the agreement, not the title or responsibilities of the individual(s) that negotiate the agreement, will determine whether a payment (or any portion thereof) made pursuant to the agreement constitutes a qualified sponsorship payment.

Contingent Payments

A qualified sponsorship payment does not include any payment the amount of which is contingent, by contract or otherwise, upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to the sponsored event or activity. The fact that a payment is contingent upon sponsored events or activities actually being conducted will not, by itself, cause the payment to fail to constitute a qualified sponsorship payment.

Determining Public Support (for 501(c)(3) Organizations)

With respect to 501(c)(3) organizations, qualified sponsorship payments in the form of money or property (but not services) will be treated as "contributions" received by the tax-exempt organization for purposes of determining public support to the organization.

Tax Deductibility of Payments by Sponsors

The fact that a payment constitutes a qualified sponsorship payment that is treated as a contribution to the tax-exempt organization does not determine whether the payment is tax deductible to the sponsor as a business expense or as a charitable contribution.

Exception for Trade Show Activities and Periodicals

The UBIT exception for qualified sponsorship payments does not apply with respect to: (i) payments made in connection with qualified convention and trade show activities (which are governed by a separate exception in the Code); or (ii) income derived from the sale of advertising or acknowledgments in periodicals of tax-exempt organizations. For this purpose, the term "periodical" means regularly scheduled and printed material published by or on behalf of the tax-exempt organization that is not related to and primarily distributed in connection with a specific event conducted by the tax-exempt organization. The IRS clarified that periodicals may be in electronic form.


The final regulations issued by the IRS contain 12 detailed (and very helpful) examples illustrating the application of the proposed regulations to the sponsorship and related activities of tax-exempt organizations.

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