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University of Iowa News Release


May 3, 2007

Law Professor Researches Corporate Sponsorships Of Nonprofit Organizations

Somewhere between advertising and charity lie bowl games.

Over the past 15 years, the annual college football bowl game rituals have been transformed by corporate sponsorships, as businesses contribute money to the nonprofit organizations that oversee each game in return for having their names and logos splashed all over the field.

The same is true with other nonprofit organizations, too, such as the Olympics, public broadcasting, nonprofit hospitals and the NCAA. A nonprofit organization receives a financial contribution from a business, and in return for this sponsorship the business receives high-profile public exposure.

Ethan Stone (photo, left), a professor of law at the University of Iowa, has studied the relationships between nonprofit organizations and their sponsors. He recently re-examined the political basis for the treatment of these sponsorships under federal tax law in his paper "Halos, Billboards and the Taxation of Charitable Sponsorships," published this spring in the Indiana Law Journal.

For 30 years, businesses have increasingly used sponsorship of popular organizations and events (both for-profit and nonprofit) as part of their branding efforts to build their image with a target audience. For instance, Stone points out public broadcasting underwriting announcements that frequently provide more information than simply the name and logo of the sponsoring company.

And most college football bowl games now associate the name of their corporate sponsor in the name of the game itself. As he points out, the nonprofit Florida Citrus Sports Association changed the name of its annual bowl game from the Citrus Bowl to the Capital One Bowl when Capital One financial services agreed to pay a sponsorship fee.

The funding mechanism has opened up a lucrative source of revenue for many nonprofits, but Stone warns that too many corporate names and logos might lead to a backlash from the public and compel Congress to place new limits on this source of funding.

"Some tax exempt organizations are coming close to the line," said Stone. "As it's written now, the federal tax law tempts them to crowd the line of what is acceptable. If the public feels that too many of them have gone too far across that line, nonprofit organizations may find the political ground that supports these arrangements begin to give way."

At the heart of the issue is the question: What is the difference between a charitable gift and an advertisement? Corporations have traditionally supported nonprofit organizations, partly out of altruism and partly because they want to associate themselves publicly with the organization's good work and share in its "halo effect," Stone said. In return, the organizations publicly thank the sponsors. The "thanks" can take a number of forms, from a simple public acknowledgement to detailed co-branding arrangements. He said the benefit to the sponsor is usually some combination of association with the sponsored organization's goodwill (a "halo") and simple publicity (a "billboard").

At one point, Stone said the IRS did try to collect tax money from some tax-exempt organizations for income gained through what the agency considered unrelated business transactions. In the early 1990s, it taxed the organizations that oversee two prominent bowl games for the money they received from Mobil Oil and John Hancock in corporate sponsorship arrangements. The IRS quickly retreated from this position, however, and eventually Congress amended the Tax Code to assure that it would not recur.

Stone takes issue with the common view that this episode reflects only naked power politics. He said that the IRS got itself in trouble by assuming that Congress would disapprove of any commercial activities by nonprofits because the federal tax laws use a special income tax to discourage nonprofits from entering businesses unrelated to their nonprofit purposes.

According to Stone, this tax reflects public discomfort at seeing supposedly charitable institutions engaging in "uncharitylike" behavior.

"Congress long ago decided that ad sales were the kind of business activity it wanted to discourage," Stone said. "But sponsorships were not as similar to advertisements as the IRS initially thought."

Stone said the public and politicians generally support commercial sponsorships of nonprofits for the same reason they support less commercial support for those popular organizations. Sponsorships are deliberately designed to resemble genuine support, not advertising. Stone said the reason has nothing to do with taxes: a sponsorship that does not give the impression of genuine support provides little if any "halo effect" to the sponsor and can tarnish the sponsored organization's reputation. "Genuine supporters of cool things look cool, but obviously false fans look lame," Stone writes.

Although the distinction between selling "billboards" and "halos" explains the current rules, Stone says that they may be so broad as to tempt nonprofits to be too aggressive. The reason is that most sponsorships include both "halos" and "billboards," and sponsors naturally press for as much billboard as possible, Stone said. With no legal backstop, nonprofits are strongly tempted to accommodate more and more.

"It's hard to predict what event will push the political heat up to the point where Congress sees a need to take action," he said. "But the current rules present a constant risk that a large number of charities, or a few high-profile ones, will concurrently cross the line and jeopardize their public support."

To keep that from happening, Stone suggests nonprofit organizations take the initiative to change the law and agree to limit themselves to avoid coming too close to the line that might put sponsorship arrangements in jeopardy.

He suggests a rule conditioning tax-exemption on several clear limitations that would tend to discourage sponsors primarily interested in renting a "billboard" but would be acceptable to sponsors mainly looking for a "halo." Examples of possible limitations include requiring the nonprofit organization's name to be as prominent as the sponsor's and prohibiting the description or display of the sponsor's products.

"They might want to consider restraining themselves with rules that discourage transactions that do not look like the sorts of things that charities do, such as ad sales," he said. "If they constrain themselves a little more, they'll be better off in the long run."

STORY SOURCE: University of Iowa News Service, 300 Plaza Centre One, Suite 371, Iowa City, Iowa 52242-2500.

MEDIA CONTACT: Tom Snee, 319-384-0010,