Advancing Philanthropy October 2020 - 11

Ethics

U

pon closer examination of sponsorships, and in
response from numerous questions from members
about this practice, the AFP Ethics Committee
(Committee) has determined that clarification is
appropriate around the application of the AFP Code's
prohibition of percentage-based compensation
and finder's fees when the sponsorship in question
is an advertising or promotional endeavor by the
paying corporation,1 more in the nature of a business
transaction than a charitable contribution with primarily
philanthropic motives.
Updated Position: The AFP Code's prohibition on
percentage-based compensation and finder's fees
only applies to corporate charitable contributions, not
corporate sponsorships.
A transaction is a corporate sponsorship if the
transaction's principal or sole motive is commercial in
nature. Such determination depends on the particular
facts and circumstances of each case. Most common
transactions deemed "sponsorships" do not meet the
above definition and remain subject to the Code's
prohibition on percentage-based compensation.
The Committee wishes to emphasize that this
position applies only to the question of commissions,
finder's fees and other transactions. The sale or
solicitation of sponsorships by charities may also
involve questions about AFP Code rules relating
to conflicts of interest, the use of aggressive sales
tactics, transparency, etc., which may still apply to
those who are subject to the AFP Code and involved in
sponsorship transactions.
Finally, the Committee also stresses that the above
narrow exception aside, the Code's prohibition on
percentage-based compensation for fundraising
activities remains as before. The Committee strongly
discourages AFP members and others who adhere to
the Code from engaging in practices that would use the
mischaracterization of transactions as "sponsorships"
in an effort to avoid the prohibition. As always, the
legitimate priorities, needs and interests of both
charities and donors/sponsors are of paramount
importance; these include that all parties adhere to the
highest standards of ethical behavior.

BACKGROUND
The Internal Revenue Service has addressed payments
made to nonprofit organizations by corporate
sponsors and similar contexts, which instructs the
Committee's decision-making and the rationale for its
position. The IRS distinguishes between payments that
October 2020 / www.afpglobal.org	

do not result in unrelated business income tax to the
nonprofit organization recipient, and those deemed
received in the course of trade or business activities
of a nonprofit organization. The latter revenues are
taxable to the nonprofit.
The test to determine whether a payment must be
treated by the nonprofit recipient as taxable revenue is
whether the payor has an expectation of a "substantial
return benefit" in exchange for the payment. According
to the IRS, substantial return benefits that render a
payment taxable to the recipient nonprofit include
transactions that:
1.	

Impose legally binding obligations on the nonprofit
that benefit the payor;

2.	

Offer benefits available only to the donor or to a
small select group, or for a fee;

3.	

Occur regularly or over extended periods;

4.	

Are similar in nature to those offered by for-profit
businesses or that are available in the for-profit
marketplace; or

5.	

Are treated by the recipient as taxable income; or
as revenue other than fundraising (under applicable
gift counting guidelines).

In the specific sponsorship context, the IRS has ruled
that taxable substantial return benefit transactions
include those that:
1.	

Require the recipient to disseminate messages
containing qualitative or comparative language,
price information, or other indications of savings
or value for the corporate sponsor's products or
services;

2.	

Contain endorsements of the corporate sponsor's
products or services; or

3.	

Include inducements to purchase, sell, or use the
corporate sponsor's products or services (although
samples and displays are permitted, as well as
hand-outs by the corporate sponsor of logoed items
of minor value, without triggering taxation for the
nonprofit recipient of the sponsorship payments).2

The IRS has noted the above list is only illustrative. The
question of whether a payment to a nonprofit constitutes
a charitable gift or taxable income is unique to every
case, and the issue must be determined upon each case's
particular facts and circumstances. The IRS has stated
that such facts as the ultimate destination or use of the
funds by the nonprofit or how a transaction is styled or
named are largely irrelevant in making the determination.
Advancing Philanthropy	

11


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Advancing Philanthropy October 2020

Table of Contents for the Digital Edition of Advancing Philanthropy October 2020

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Advancing Philanthropy October 2020 - Cover2
Advancing Philanthropy October 2020 - 1
Advancing Philanthropy October 2020 - 2
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https://www.nxtbook.com/ygsreprints/AFP/advancing-philanthropy-april-2021
https://www.nxtbook.com/ygsreprints/AFP/AFP_Jan2021
https://www.nxtbook.com/ygsreprints/AFP/AFP_Oct2020
https://www.nxtbook.com/ygsreprints/AFP/AP_July2020
https://www.nxtbook.com/ygsreprints/AFP/p26198_afp_2012techknowbrochure
https://www.nxtbook.com/ygsreprints/AFP/g24762afp_con2012
https://www.nxtbook.com/ygsreprints/AFP/g24195afp_12confbroc
https://www.nxtbook.com/ygsreprints/AFP/g18184_afp_chicago2011
https://www.nxtbookmedia.com