THB, Banditos, Wayward and more confirmed for Cosmic Cocktail!

IRS sets its sights on corporate giving When is a gift really buying an ad?


In a photograph in yesterday's Business section, Beth Fertig, who was shown sitting atop a balloon gondola, was also incorrectly identified.

The Sun regrets the errors.

If the Internal Revenue Service has its way, next year's Preakness may have to do without the First National Bank of Maryland Hot Air Balloon Competition or the AT&T; Great Schooner Race.

It's not that the IRS has objections to balloons and boats. But the tax agency is beginning to take a more critical look at corporate contributions, saying some of them are really advertising expenditures, not charitable contributions.

Guidelines issued earlier this year mean not-for-profit groups could end up paying a 34 percent tax on the funds they receive from the high-profile corporate sponsorships that became familiar in the 1980s. The not-for-profit officials say that would force them into a dicey position: Give a third of their contributions to the tax man or substantially reduce the publicity given to donors and hope they will continue to contribute anyway.

It is an issue that could affect thousands of not-for-profit zoos, sporting events and festivals across the country. Some say it will put them out of business.

"This could be extremely serious," said Sandra Cuneo, executive director of Maryland Preakness Celebration Inc., the not-for-profit group that organizes the 10 days of events surrounding the Preakness. The group depends heavily on corporate contributions for its more than $500,000-a-year budget.

The IRS position became apparent in December when it imposed the 34 percent tax on the $2 million contribution of Mobil Corp. to the Mobil Cotton Bowl and the $1.6 million donation of John Hancock Mutual Insurance Co. to the John Hancock Bowl.

"Organizations that go beyond recognition and extensively promote the donor are engaging in advertising, which is unrelated to the mission of tax-exempt [not-for-profit] organizations," the IRS said in a fact sheet on the issue.

Under the tax laws, not-for-profit organizations can be taxed on income derived from activities that do not directly relate to their tax-exempt purposes. Determinations are made on a case-by-case basis. The bowls are appealing the decisions.

The IRS has begun audits of several state fairs, a few Olympic committees and at least one zoo. The Preakness has not heard from the IRS, but the Kentucky Derby Festival, a similar celebration in Louisville, Ky., is being audited, and officials are concerned.

The IRS issued proposed guidelines to its agents for implementing the policy on Feb. 2. The period for public comment was extended from April 3 to tomorrow after protests poured in from groups as wide-ranging as the Dallas Methodist Hospitals Foundation, the Gladstone, N.J., Equestrian Association and the American Heart Association.

The guidelines could be changed in response to the comments, although one lawyer for the bowl games said the IRS seemed serious about the new direction.

"There's not a lot of money in this for the IRS. All they are going to do is put these organizations out of business," said McGee Grigsby, an attorney with Latham & Watkins, a Washington firm that represents the Maryland Preakness Celebration.

The proposed tax guidelines tell auditors to consider "all the facts and circumstances of the relationship between the sponsor and exempt organizations." Among the things to look for: the value of the service provided to the donor, the terms under which the donation is made and the control over the event exercised by the donor.

For example, a university naming a professorship after a benefactor, a public radio station acknowledging an underwriter in its broadcast or a contributor to an art show being mentioned in the program would not trigger the levy, called the "unrelated business income tax."

More troublesome would be contributions made in exchange for specific promises of publicity or that link exposure of the donor's name to the amount given. In the post-Reagan era of reduced government aid, such arrangements have become increasingly common as not-for-profit organizations fight for corporate donations.

"It's not simply a logo over a scoreboard or anything. It's more than that," said Sam Serio, an IRS spokesman. "If the event you're having uses the corporation's name, that's an indication. But there's more to it."

The proposed guidelines rule out taxing youth-league teams or other organizations of a "purely local nature," or ones that receive relatively insignificant corporate donations and that operate with volunteers. But the guidelines leave a lot of room for interpretation.

"It really depends upon how strictly the IRS is going to interpret what they are writing," said Bill Carter, director of finance and administration for the Baltimore Zoo.

The zoo has launched a campaign to attract more corporate sponsorship to its $6 million-a-year budget and is actively looking for a company to underwrite a $100,000 concession stand. It is watching the IRS battle closely, Mr. Carter said.

The Maryland Science Center does not think the recent $500,000 grant from International Business Machine Corp. for a mathematics exhibit will be affected, but it is concerned about future corporate involvement, said the center's executive director, Paul J. Hanle.

"We don't know where the IRS will draw the line," Dr. Hanle said. Only about 5 percent of the center's budget comes from the state, making corporate donations all the more important, he said.

The University of Maryland at College Park athletic program is also hoping corporate sponsorships can fill its financial holes. The ultimate ruling could affect the ability of the program to obtain donations in exchange for corporate displays on scoreboards, for example, said Andy Geiger, athletic director at Maryland.

It could also affect revenues from bowl games the university's teams play in, he said.

Other local events will be unaffected. The Kemper Open golf tournament is operated as a tax-paying advertising activity of the Kemper Insurance Cos. The Tour DuPont bicycle race is a for-profit event. And the Maryland State Fair receives little corporate sponsorship.

For donors, the IRS rule would make little difference at tax time. Contributions to charities are deductible just as advertising and other business expenses are. But some donors are concerned about their contributions being siphoned off to the government.

"I wouldn't turn my back on the organization I'm giving to, but I might look for a different way to give. I don't want to see those dollars being drained into government coffers. We give enough to that," said Rick Becker, associate publisher of Yachting magazine, which will be a sponsor of the Lexus Cup boat race on the Chesapeake Bay this fall.

Joseph Coale, director of corporate communications and public affairs for Crown Central Petroleum Co., said the company wouldn't be happy to see contributions diluted by taxes, but he predicted that it would continue to support community events and causes.

And Crown would like to continue to receive recognition when it does, Mr. Coale said.

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