Q: We receive a significant amount of support from a private family foundation. Can the foundation be approached to sponsor special events such as our gala or golf tournament? If it can, are there any restrictions of which we should be aware? And lastly, can it be named the major sponsor if it comes through at that level?
A: This is an interesting question. Those of us who have been around for years have certainly seen foundations—particularly corporate foundations—sponsor events, but is it legal? A policy without restriction?
It’s a refreshing departure from the question I usually get: Will the IRS consider a donation from this foundation as a sponsorship, thus freeing our organization from potential unrelated business income tax (UBIT)? I sense you are more concerned about putting the family foundation in a position where it could incur taxes or a loss of its own exempt status for giving you money that will be used to pay event expenses instead of contributing exclusively to the charitable purpose for which your organization was established. Good for you!
I first tried contacting the IRS, which sent a response that really didn’t address your issue. Perhaps they want you to seek a ruling! That would ensure you could count on the response, but would cost you $8,700 and take six to nine months to get your answer. So I turned to trusted colleagues who graciously responded.
My primary white knight is Mark B. Weinberg of Weinberg, Jacobs & Tolani, LLPout of Maryland. Mark draws the conclusion that you can legally, and without opening the door to taxable expenditure issues or charges of self-dealing, ask the family foundation to support you, as long as certain conditions are met. First, your organization (the grantee) is a designated public charity. Second, your organization and the private foundation (the grantor) are not controlled by the same people. Third, the private foundation’s disqualified persons will still have to pay their own way to the event, should they choose to attend—that is they are not given complimentary access as a result of having made the grant. And, finally, the private foundation does not make these grants on a recurring basis.
That said, for those that want the nitty-gritty, let’s look at the why behind Mark’s conclusion. He states, “raising funds for public charities is a clearly charitable purpose.” (Emphasis mine.) He suggests the reader consider United Way, which exists for the primary purpose of raising money, yet enjoys all the benefits of being classified a public charity even though we all know some of the money raised goes toward administration and fundraising. However, he also refers the reader to Rev. Rul. 60-143, 1960-1 C.B.192 (1960). This precedent states, in part—warning, we’re going to get all lawyerly here: “Social and recreational activities carried on by an alumni association of a university, which are merely incidental to its basic purpose and objective of advancing the interests of the university, do not of themselves preclude such organization from tax exemption under section 501(c)(3) of the Internal Revenue Code of 1954 as an association organized and operated exclusively for educational and charitable purposes.” The ruling continues, “Although the statute requires that an organization claiming exemption under section 501(c)(3) be organized and operated ‘exclusively’ for one or more of the specified purposes, the section does not require that every activity performed by the organization shall per se be directly for one or more of such purposes. Thus, activities which involve social and other related features which are incidental to the primary purpose or purposes are not decisive that the organization is participating in non-exempt activities. See I.T. 3330, C.B. 1939-2, 185. The Tax Court in the Thayer case recognized, and the Service agrees, that activities which in themselves are not educational or charitable may be incidental to such purposes; if they are, such activities do not constitute a ground for denying the exemption.”
Mark clarifies that “this is not an application of the now defunct ‘destination of income test’ concept, which prior to 1950 and the introduction of UBIT held that tax could not be imposed upon income destined to support a charity. Here the question is the principal purpose to be served and that is to enable charities to have funding to do charity without conducting a regular business.”
So, go ask the private foundation for sponsorship. Just be sure, especially if it offers that sponsorship at a named level, that you are following the IRS guidelines for sponsorshipand that you are not crossing into advertising territory.
As always, I must clarify that I am neither a CPA nor an attorney. And, even though I consulted a very knowledgeable attorney, this summary should not be taken as legal advice. You should consult with your own professional advisors before proceeding down a particular path.