AdvanceWork: "Soda" Deals: Could IRS Spoil the Party?

By Susan L.Q. Flaherty , Thomas Arden Roha

Q: How can campuses keep corporate sponsorships from generating unrelated business income tax?

A: Corporate sponsorships can be a great asset to your college or university. Campuswide versions of the so-called Pepsi or Coke deals typically involve a company paying your institution for the exclusive right to sell its product line on your campus. The company will also position its logo in places around campus, on event tickets, and in souvenir programs. For the institution, the deals bring welcome dollars; for the company, exclusive access to a major market.

There may be a few tax consequences to consider before agreeing to such arrangements, however. The 1997 corporate sponsorship legislation, codified in Internal Revenue Code Section 513(i), states that a university's receipt of "qualified sponsorship payments" will not give rise to unrelated business income tax. What constitutes "qualified" is key, however.

A QSP is a sponsorship payment for which there is no substantial return benefit to the company other than the use or acknowledgment of its name and logo or product line. That means the sponsorship agreement cannot include advertising, such as messages about the quality of the product, comparisons with other products, price information, or an endorsement. In addition, payments won't qualify as QSPs if the sponsor's name, logo, or products appear in your regularly scheduled and printed materials. Use in a souvenir booklet or program should qualify, but use in the monthly alumni magazine will not.

Be aware that these agreements are already facing IRS scrutiny. As 501(c)(3) organizations, colleges, universities, and institutionally related foundations must dedicate their assets at all times to charitable and educational purposes, and no part of their assets or income may inure to the benefit of individuals or entities.

Suppose a university brags that it got $30 million from a soda deal, while the soda company brags that it got $40 million in value from that deal. Will the IRS find that the $10 million difference constitutes prohibited private inurement that is sufficient enough to threaten the institution with loss of its tax exemption? Though this hasn't happened, you surely don't want your institution to be the test case.

The IRS has several other possible lines of attack. These include invoking the "commerciality doctrine" and the "exploitation doctrine." If a university that carries on a tax-exempt activity exploits it in commercial ways, the resulting income may be subject to UBIT even though the commercial activity depends in part on the exempt activity. The IRS may also scrutinize a corporate partnership for commercial exploitation of the "convenience doctrine," which permits universities to sell food, beverages, and certain other commercial products for the convenience of students, faculty, and staff without being subject to UBIT.

In short, your institution should proceed with caution, lots of tax planning, and careful preparation of IRS Form 990-T (UBIT return).