The Unseen Tax Risk in Collegiate Athletics Corporate Agreements

As universities navigate the shifting landscape of revenue sharing in athletics, many are turning to corporate partnerships to bridge funding gaps. These sponsorships — whether tied to stadium signage, branded events or exclusive beverage or apparel deals — can seem like a financial win. But for tax-exempt institutions, they can also be a Trojan horse, creating unrelated business income (UBI) exposure where institutions least expect it.

We’ve seen firsthand how even sophisticated institutions stumble on the nuances of IRS rules around corporate sponsorships. The difference between qualified sponsorship payments and taxable advertising income is not always intuitive. And mistakes can be costly.

A qualified sponsorship payment (also called a QSP) is one that’s made to a tax-exempt organization where the business making the payment receives in return “no substantial benefit” other than (1) the use or acknowledgment of the business’s name or logo in connection with activities conducted by the recipient organization, or (2) certain goods or services that have an “insubstantial value” under existing IRS guidelines.

A Look Back: How We Got Here

The IRS’s current approach to corporate sponsorships was shaped by a pivotal case: the  1991 Mobil Cotton Bowl ruling (TAM 9147007). In that case, the IRS determined that Mobil’s payments to the nonprofit bowl organization were taxable advertising income (not charitable support) because the company received prominent promotional benefits like naming rights, signage and media exposure.

The ruling sparked widespread concern across higher ed and nonprofit sectors. Many worried that long-standing sponsor relationships would suddenly trigger UBI. In response, Congress pushed back and the IRS softened its position — first with proposed regulations in 1993, then with the formal QSP safe harbor under IRC § 513(i) in 1997. Final regulations arrived in 2002.

The core question raised back then still applies: Are you acknowledging a sponsor, or providing them something of real value?

The Core Issues: Three Questions Every CFO Must Ask

When evaluating a corporate sponsorship agreement, you must answer three key questions:

1. Is the payment a true contribution without strings attached?

Only payments made without an expectation of significant return benefit can qualify as QSPs (which are excluded from UBI).

2. Is the sponsor receiving more than an “insubstantial return benefit”?

If the sponsor receives advertising (even embedded in an acknowledgment), exclusive provider rights or anything valued over 2% of their payment, that’s no longer QSP.

3. If QSP rules are busted, how much of the revenue is taxable?

Once you cross the threshold, the entire fair market value (FMV) of the benefit — not just the excess over 2% — may be subject to tax depending on the nature of the activity.

In practice, most universities aren’t currently treating long-standing sponsorship contracts as generating UBI, often because the usual major sponsors understand how to structure these deals to minimize tax exposure. However, that assumption can be risky when agreements change hands, renew or expand in scope. New or renegotiated contracts deserve a fresh analysis to identify potential issues early and, where possible, negotiate terms that preserve QSP treatment or plan ahead for compliance if UBI is inevitable.

Case Spotlight: Apparel Co. Sponsorship Conflict

A university’s affiliated foundation enters into a corporate sponsorship agreement with “Apparel Co.” in which it receives both cash and non-cash consideration (e.g. gear, uniforms, branding support). The value of benefits Apparel Co. received in return (e.g., signage, apparel worn by athletes, coach appearances and digital shout-outs) had never been evaluated against the 2% FMV threshold.

In conversations with leadership, two issues stood out:

• No valuation of total sponsor benefits, including any exclusivity provisions.
• No shared process between the foundation and university for assessing or reporting potential UBI.

There’s more to the story. The foundation is the contracting party, but the university delivers most of the sponsor benefits. From a tax perspective, the IRS looks at the substance (who got paid, who provided value), not just whose name is on the contract. In a situation like this, either entity (or both) could be responsible if the benefits are substantial. If not one is tracking or reporting, the IRS can disregard the split and treat it as one taxable transaction.

Without a shared valuation process, clear contact language and alignment on responsibilities, a school risks a “worst of both worlds” outcome: payments flowing to one entity, services from another… and neither in a position to defend against UBI findings.

Why This is So Tricky: The Ambiguous Nature of Value

The question of whether a sponsor receives a substantial return benefit is murky, largely because valuing those benefits is subjective and often imprecise. The IRS rules are conceptually clear but practically vague:

• A sponsor’s logo and slogan are fine, but only if they don’t include qualitative or comparative claims (saying “Best Sportswear on the Planet” triggers UBI).
• Hyperlinks to a sponsor’s website is allowed unless that page contains your endorsement.
• Combination messages (acknowledgement plus marketing) default to taxable advertising.

As one of our clients described it, “It feels like walking a tightrope in a fog.”

In the Apparel Co. example, the complexity grows when the responsibilities are split. If not one has calculated the FMV of the sponsor benefits, or if it’s unclear whether they cross the 2% threshold, there’s no way to know whether the safe harbor applies. That doesn’t automatically mean tax is owed, but it does trigger a deeper analysis under UBI rules. And if you can’t back up the valuation, you lose the ability to claim the exclusion entirely.

Institutions should bridge the gap by identifying potential UBI exposure before it becomes a problem and weighing that exposure against their own risk tolerance. This means proactively reviewing agreements, valuing sponsorship benefits and making informed decisions. That proactive step is often what keeps an ambiguous sponsorship from becoming a tax headache.

Proactive Compliance Starts with Front-End Evaluation

To avoid downstream tax surprises or IRS audits, institutions should adopt a front-end process for corporate sponsorships. Consider:

• Contractual Analysis: Review parties named, payment terms, benefit clauses and media use.
• FMV Benchmarking: Consider getting FMV appraisals for services prior to contract execution and determine whether benefits exceed the 2% threshold.
• Classification Testing: Apply IRS rules to assess QSP vs. UBI risk.
• Revenue Allocation Models: Quantify how much of the payment may be taxable versus qualified sponsorship, royalty or program-related income.
• Restructuring Guidance: Recommend language changes that preserve tax-exempt treatment.

While many legacy sponsorship agreements have been intentionally structured to avoid significant UBI exposure, every new or modified contract should be evaluated on its own merits. Even small changes like adding exclusivity provisions, expanding sponsor activations or shifting who delivers benefits can transform a safe arrangement into one with tax implications. Proactive review before signing allows you to negotiate revisions or, if UBI can’t be avoided, build a compliance plan from day one.

In an era where every dollar counts in higher education, evaluating corporate sponsorships helps you avoid tax pitfalls and protect and maximize your institution’s partnerships. CFOs, controllers and tax officers can treat sponsorship review as a strategic business function — one that supports compliance while strengthening relationships and financial outcomes.

By building transparency into the process and applying best practices, institutions can:

• Reduce the risk of unwanted IRS attention.
• Structure sponsorships that are more attractive and sustainable for both parties.
• Preserve tax-exempt integrity while supporting the growth of athletics and other programs.

The James Moore higher education team specializes in navigating the gray areas of corporate sponsorship compliance. We understand the intersection of athletics, revenue generation and tax. Let us help you clarify your exposure and protect your exempt status.

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