Non-profit organizations like the Red Cross and the National Football League are normally exempt form US income taxes, but they must pay taxes on their income from certain commercial activities. For example, a non-profit that runs a trade journal may be subject to tax on its advertising income.
In two memos from the early 1990s, the Internal Revenue Service concluded that two non-profit organizations that ran college football games should be taxed on sponsorship payments that they received from corporations. The payments were not charitable gifts, but rather payments in exchange for "well positioned visual images" of the sponsors' names during the games.
Although the memos were heavily redacted, insiders knew that they were talking about the John Hancock Bowl, sponsored by the John Hancock Mutual Life Insurance Company, and the Mobil Cotton Bowl, for which the Mobil Oil corporation paid $1 million to display its logo prominently on the playing field, scoreboards, uniforms, paper cups, and all printed material. Both Bowl games were organized by non-profit organizations.
The memos set off an incredible firestorm of lobbying from Big Nonprofit. The IRS quickly retreated from its position with new regulations, and Congress finally resolved the matter in 1997 with new Internal Revenue Code section 513(i), which provides that non-profits are not taxed on receiving "qualified sponsorship payments."
Qualified sponsorship payments are sponsor payments for which the sponsor will not receive any substantial return benefit other than the use or acknowledgement of the sponsor's name.
The non-profit cannot directly advertise the sponsor's products or services, other than showing the sponsor's name. So the Mobil Oil corporation cannot sponsor a game advertisement for Mobil Oil gasoline, but it can have the non-profit advertise Mobil Oil generally. The sponsor's products can be distributed or displayed at the event.
Section 513 Unrelated trade or business.
(i) Treatment of
certain sponsorship payments.
(1) In general.
The term “unrelated trade or business” does not include the activity of
soliciting and receiving qualified sponsorship payments.
sponsorship payments. For purposes of this subsection —
(A) In general. The term “qualified sponsorship
payment” means 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 a 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
(i) Contingent payments. The term “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
(ii) Safe harbor does not apply to periodicals
and qualified convention and trade show activities. The term “qualified
sponsorship payment” does not include—
(I) 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 published by or on
behalf of the payee organization that is not related to and primarily
distributed in connection with a specific event conducted by the payee
(II) any payment made in connection with any
qualified convention or trade show activity (as defined in subsection (d)(3)(B)).