IRS Issues Final Corporate Sponsorship Regulations
NAW Legal Advisory
August 9, 2002
LLA-2002-03
IRS has issued its final regulations concerning the tax treatment of payments to tax-exempt organizations from corporate sponsors. The final regulations and IRS commentary upon their issuance may be accessed at: frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2002_register&docid=02-9930-filed.pdf.
The regulations do not apply with respect to payments made in connection with qualified convention and trade show activities or to income derived from the sale of advertising or acknowledgements in exempt organization periodicals.
In general, under the regulations an association's receipt of a "qualified sponsorship payment" will not trigger unrelated business income tax liability on such payment. To qualify as a qualified sponsorship payment, there must be no arrangement or expectation that the payor will receive any substantial return benefit, as this term is defined in the regulations. Generally, any advertising of the payor's business or products by the association will constitute a substantial return benefit. Advertising includes messages which in whole or in part contain 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, product or service.
According to the regulations, the following acknowledgements by an association do not constitute a substantial return benefit to the payor: (1) recognition of the payor as the exclusive sponsor of an activity or event; (2) an acknowledgement containing the payor's name, logo or product lines; (3) a list of the payor's locations, telephone numbers or Internet address; (4) value-neutral descriptions of the payor's products or services; (5) the payor's brand or trade names and product or service listings; and (6) display of logos and slogans that do not contain qualitative or comparative descriptions of the payor's business, products or services.
Use of an association's website to acknowledge a sponsor was also addressed in the regulations. An association may post a list of its sponsors on its website, including the sponsor's internet address with a hyperlink to the sponsor's website without creating tax liability, provided the association does not endorse or advertise the sponsor's business or products. The regulations contain 12 examples to help illustrate the distinction between tax-free acknowledgement and taxable advertising and details on how to calculate the value of taxable substantial return benefits.
Patent Royalty Claims For Meeting Management Via the Internet
A software company, Software Management, Inc. ("SMI"), claims to have a pending patent application covering the use of the Internet to conduct virtual (online) tradeshows, conventions and meetings, and to perform event registrations online. SMI has reportedly contacted a number of associations requesting compensation or a royalty of about $1,250 per event for the association's use of this technology which is allegedly protected by the patent application pending in the U.S. Patent and Trademark Office. The patent application was published by the patent office in August 2001.
There is no legal right to demand a royalty on a patent unless and until the patent application is granted and the patent issued. Associations or others are under no present legal obligation to make a royalty payment for an alleged infringement of a patent that has not yet been issued. However, under some circumstances the law permits a patent owner to seek a reasonable royalty for prior use from the date the patent application was published to the date of patent issuance, provided the invention as claimed in the issued patent is substantially identical to the invention as claimed in the published patent application.
