The rules include revenue from such events as football bowl games, symphony performances and public broadcasting productions. They also address whether Internet links on your organization's Web site constitute a non-taxable acknowledgment or a taxable advertisement.
Here are a few examples from the IRS regulations that help shed light on whether or not your group is liable for UBIT:
1. A university enters into a multi-year contract with a sports drink company who then becomes the exclusive provider of sports drinks for the university's athletic department and concessions. As part of the contract, the university agrees to perform various services, such as guaranteeing that coaches make promotional appearances on behalf of the company, assisting the company in developing marketing plans, and participating in joint promotional opportunities.
According to the IRS: The university's activities are likely to constitute a "regularly carried-on trade or business." Any revenue is likely to be subject to UBIT because the activities are unlikely to be substantially related to the university's exempt purposes. Furthermore, the income received for those services cannot be excluded as a royalty.
2. A tax exempt organization posts a list of its sponsors on its Web site, including their Internet addresses, which appear as a hyperlink to the sponsor's Web site.
According to the IRS: The sponsor's Web site address constitutes a non-taxable acknowledgment, not advertising, even though it appears as a hyperlink.
3. A charity maintains a Web site that contains a hyperlink to a sponsor's Web site. When visitors go to the sponsor's site, they see an endorsement by the charity for the sponsor's product. The charity approved the endorsement before it was posted on the sponsor's Web site.
According to the IRS: The endorsement is taxable advertising.
4. A national charity dedicated to promoting health organizes a campaign to inform the public about potential cures for a serious disease. As part of the campaign, the charity sends representatives to health fairs around the country to answer questions about the disease and inform the public about developments in the search for a cure.
A pharmaceutical company makes a payment to the charity to finance its booth at a health fair. The charity places a sign in the booth displaying the company's name and slogan, Better Research, Better Health, which is an established part of the firm's identity. The charity also grants the company a license to use its logo in marketing products to health care providers around the country. The fair market value of the license exceeds two percent of the total payment received from the company.
According to the IRS: The charity's display of the pharmaceutical company's name and slogan constitutes a non-taxable acknowledgment of the sponsorship. However, the license granted to the pharmaceutical company to use the charity's logo is a substantial return benefit because it has a fair market value of more than two percent of the payment and the portion of proceeds attributed to it are subject to UBIT.
The tax treatment of corporate sponsorship deals is complex. Consult with your tax adviser before entering into any transactions to ensure the most tax-wise outcome.
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The information in this Tax Guide is for general guidance only, and does not constitute legal advice, tax advice, accounting services, investment advice, or professional consulting. The information should not and may not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making decisions or taking actions, consult a professional adviser who has been provided with all pertinent facts relevant in your particular situation. Tax articles in this Guide are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer.
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