How charities should acknowledge their sponsors (donors)

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It has been my observation that charities sometimes are uncertain about how to comply with IRS regulations pertaining to sponsorship acknowledgments. The issue is whether payments made by the donor to the charity are “qualified” or not and whether an improper acknowledgment could jeopardize the “qualified” status. In this case, payments received could be deemed paid advertising and your organization could end up liable for unrelated business income tax (UBIT). 

What is a “qualified sponsorship payment”?

IRC Section 513(i) defines a “qualified sponsorship payment” as any payment made by a business without an arrangement or expectation for a substantial return benefit. The charity may, however, use the name or logo of the donor. Some details follow shortly.

However, advertising such a 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 services) go beyond an acknowledgment.

Are clickable hyperlinks allowed in the sponsorship acknowledgment?

The issue has arisen whether a clickable or ‘active’ hyperlink of the donor’s website would be objectionable, potentially crossing over to advertising. Some charities have established a policy that does not allow “active” hyperlinks. They may rest assured, the IRS regulations are clear, the following example speaks directly to hyperlinks. They do not, by themselves, jeopardize “qualified” status.

Yes, hyperlinks are allowed as long as there is no associated advertising

Example 11:

W, a symphony orchestra, maintains a Web site containing pertinent information and its performance schedule. The Music Shop makes a payment to W to fund a concert series, and W posts a list of its sponsors on its Web site, including the Music Shop’s name and Internet address. W’s Web site does not promote the Music Shop or advertise its merchandise. The Music Shop’s Internet address appears as a hyperlink from W’s Web site to the Music Shop’s Web site. W’s posting of the Music Shop’s name and Internet address on its Web site constitutes acknowledgment of the sponsorship. The entire payment is a qualified sponsorship payment, which is not income from an unrelated trade or business.”

Be careful with donor-provided verbiage in the acknowledgment

What I have also observed is that some charities, even those that disallow clickable hyperlinks, invite donors to contribute a description of their business. This, however, is risky because it is likely that the donor copy crosses over to advertising defined by Treasury Regulation 1.513-4(c)(2)(v)

“as as any message or other programming material which is broadcast or otherwise transmitted, published, displayed or distributed and which 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 associated with a product or service, an endorsement or an inducement to purchase, sell or use the sponsor’s company, service, facility or product.”

Estate Planners with a background in tax law interested in setting up charitable donations for their clients can also advise charities. Contact Wealth Care Lawyer Klaus Gottlieb with offices in Cayucos and San Luis Obispo, CA, with your questions.

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