The Proposed Corporate Sponsorship Regulations: Is the Treasury Department Sleeping with the Enemy

Abstract

In 1993, the Treasury Department issued a proposed regulation outlining when money received by a charity from a corporate sponsor would be subject to federal income tax. In defining the phrase trade or business , the proposed regulation addresses the extent to which sponsorship payments to charities will be treated by the Treasury as having been made in return for advertising on behalf of the sponsor, thus subjecting the payment to income tax. In the proposed regulation, the Treasury concludes that a charity's use of a corporate sponsor's name in the title of a charitable event is a mere acknowledgment and, thus, no advertising trade or business exists. However, if the charity - as a condition of accepting the sponsor's money - displays the sponsor's slogan at the event, an advertising trade or business exists to the extent that the slogan promotes the sponsor's product or service. So far so good.

Curiously, the Treasury's examples of acknowledgments in the proposed regulation do not logically follow from its definition of acknowledgment therein. What makes this situation even more preposterous, and rather revealing, is that the Treasury took the exact opposite position for several years preceding the proposed regulation. Why the change in position? Who knows? From a policy standpoint, the proposed regulation obviously goes too far - at least farther than what a fully informed populous would expect. If finalized, it will likely divert significant advertising revenues of businesses away from traditional advertising mediums such as non-public radio, newspaper, and television. Consequently, to the extent that these diverted dollars are treated by the Treasury as for acknowledgments, as opposed to advertisements, the Treasury will likely lose significant tax dollars.

Such political pandering by the Treasury to taxpayers is clearly bad policy - especially where the sole basis for complaint by the taxpayer is the desire to avoid legitimate Congressionally enacted tax liability. Nonetheless, the Treasury's action is perfectly legal. Analysis of relevant Supreme Court cases reveals that a federal agency's interpretation of a term or issue that Congress has failed to address in legislation will be upheld if reasonable. Indeed, treasury regulations reviewed by the Supreme Court are customarily invalidated only when Congress has defined the statutory term or issue addressed by the regulation. Here, Congress has not defined the term advertising, nor the term trade or business. Thus, the Treasury's interpretation would likely be upheld as a valid exercise of regulatory authority.

Keywords: nonprofit & philanthropy law