Contact Info
A station recently asked a question about taxes and underwriting. The details of the question are intertwined below. What follows are the reponses from a public radio listserv and a CBI list inquiry on the topic. These are posted merely for a point of reference and not legal guidance and are posted in no specific order.
**NEW** The IRS has determined that some forms of "underwriting" ARE subject to UBIT. Specifically, this means if you air "promotional" announcements (sounds like a commercial) on behalf of a non profit entity, then UBIT is LIKELY to become and issue. Some more guidance from APTS at this page.
Question
How do the stations connected to this listserve handle their books when it comes to underwriting? Our accounting department on campus currently feels that underwriting is Unrelated Business Income and according to the IRS, advanced underwriting is technically defined as Advertising and therefore a profitable service. ------------------------------------
responses
-----------------------------------
They are incorrect. Legally speaking, underwriting is a gift, not a sale of service. On-air announcements about underwriters are required and proper acknowledgments of funding sources, not sales of air time.
I won't belabor the issue, but I will point out that it is certainly to stations' advantage that the IRS and the FCC agree on this position. Otherwise, as Will suggests, we will be subject to UBIT.
Often underwriting people use the language of commercial sales. But we need to remember that from a legal standpoint that is NOT what we are doing.
This has come up before on PRADO and other lists. I am indebted to PRADO guru Walt Gillette, who wrote as follows in 1998:
"On January 17, 1992, the IRS issued a news release (IR-92-4) "Exempt Organization Donor Recognition Is Not Advertising." This release distinguished those instances wherein a corporate sponsorship payment to an exempt organization is a gift, from those in which an exempt organization provides a valuable benefit or service to the donor in return....
The IRS asserted that exempt organizations that -go beyond recognition- and extensively promote the donor are engaged in advertising, which is unrelated to the mission of tax exempt organizations.
In the former instance, however, the release also states that when a tax-exempt organization acknowledges such gifts, "Mere recognition of a contributor as a benefactor normally is of little or no value to the donor and is incidental to the contribution." ...
on-air recognition is considered to have "no value," as public radio stations are expressly forbidden to sell air time for advertising.
The IRS release offered the following specific examples of "incidental recognition that are -no- advertising:"
"A university names a professorship, scholarship or building after a benefactor;"
>>>"A public radio...station acknowledges a program underwriting on the air or in its broadcast schedule;"<<<
"A performing arts group acknowledges a contributor in the program for a performance."
The IRS continued: "Associating the name of the sponsor with the name of the exempt organization's event is not, by itself, advertising that would trigger UBIT...all the facts and circumstances of the relationship between the sponsor and the exempt organization must be considered."
===========================
Your accounting office is simply wrong. Underwriting is, according to the IRS, a donation. Therefore, it isn't earned income of any kind. It is absolutely not subject to UBIT. Even if it was, it would be totally related.
If you have a good CPA as a contributor should might talk with him/her about chapter and verse. Also a good tax attorney could help straighten them out.
Good luck.
===========================
The above post is quite specific and thorough. Underwriting is definitely not advertising and should not be taxed as advertising. The FCC imposes specific guidelines to prevent non-commercial stations from airing advertisements. Therefore, if a public radio station is airing advertising they not only have the IRS to worry about, but also the FCC and the possibility of losing their broadcast license.
If person responding above with the IRS quotes from Walt aren't enough, I suggest that this person have a meeting with the head of Accounting and the University Attorney. If they have access to an FCC attorney, that's even better (DEI member stations can contact John Crigler), but the University Attorney should be able to research the FCC guidelines for non-commercial stations enough to explain to the accountants that underwriting is NOT taxable income.
Jennifer Fusco
Corporate Relations Associate
WUNC 91.5 FM, Your NPR Station
From Greensboro to the Outer Banks
DEI Consultant, Corporate Support
919-966-5454 (234)
+++++++++++++++++++++++++++++++++++++++++
Underwriting revenue is certainly NOT subject to UBIT. Remember, the purest intent of an underwriting message is to acknowledge a corporate gift/donation. That is how the FCC sees it.
Sales of t-shirts at a station event ARE subject to UBIT. If you have "renters" on your tower, that may be subject to UBIT.
=====================================
Here is my recollection of IRS rulings regarding UBIT as it relates to underwriting. Several years ago, the IRS underwent a major effort to determine what forms of "corporate support" to various non profit organizations would be considered unrelated business income subject to UBIT. The case which launched the study was a major US corporation's support of one of the big college bowl games but the study included other forms of corporate support including corporate support of public broadcasting in the form of what we call underwriting. Both NPR and APTS prepared briefs and testified at hearings. Our industry position was that the FCC has rules in place defining commercial and non-commercial announcements. Under these regulations, public broadcasting is non-commercial, hence the on-air announcements are NOT advertising and could not be subject to UBIT. The IRS agreed. Therefore, corporate support of public broadcasting and the resulting incidental on-air acknowledgements of that support are not subject to UBIT.
_____________________________________________
After 11 years as the Director, Finance & Development for an NPR member station licensed to one of Florida's 10 state universities, I definitely feel for the initiator of this message. I'll disclose I am neither lawyer nor CPA, but I do have some professional experience with this exact same issue.
The challenge your colleague is facing distills down to the change of policy by the university's fiscal department and that department's mis-interpretation of how the IRS views on-air recognition (credits) of corporate contributions made to public broadcasting stations. While the accountants may be "up" on FASB standards and maybe know a bit about IRS requirements, it's very likely they haven't the faintest notion of the FCC regulations under which the station operates.
I do not know of any ruling or determination that validates the following assertion: "Our accounting department on campus currently feels that underwriting is Unrelated Business Income and according to the IRS, advanced underwriting is technically defined as Advertising and therefore a profitable service."
Watch out for phrases like "technically defined as...". IMO, such phrases usually indicate one is dealing with an opinion: sometimes informed, often not.
In fact, according to the IRS, the accountants "feelings" with regard to underwriting are just plain wrong.
I remember reading an IRS publication *regarding event sponsorship and UBIT* that public broadcasting underwriting credits (assuming they fully conform to the FCC's regulations regarding enhanced underwriting) are considered "mere recognition" of a contribution to a public broadcasting station...and in fact *have no tangible value.* UBIT does not apply.
I believe the distinction between underwriting credits on a public station and the sale of advertising on a commercial station was the cornerstone of the FCC's determination of what is -- or what isn't -- non-commercial broadcasting. The problem comes when one federal regulatory agency -- the IRS -- doesn't talk to another (the FCC) as they tackle the issue of defining what constitutes "advertising" for tax purposes.
Radio advertising sold by a commercial radio station is a tangible service of a for-profit business for which payments are collected from customers/clients. The contracts that set forth the conditions and terms for payment for commercial radio advertising are considered binding and enforceable under the law.
But one can't apply the same legal interpretation in non-commercial broadcasting.
Would a public broadcasting station's underwriting contract be considered legally binding and enforceable by law? I believe the answer is "no."
Despite our emphasis on sales, contracts, rate cards, costs-per-spot, etc., etc. (which is appropriate when considering the prospective corporate donor's jargon and point-of-view), underwriting credits remain mere recognition of a gift. Unfortunately, the accounting department has decided to assert its mastery of all things fiscal, by making an in-house determination that will have an immediate and extremely detrimental effect on the university broadcasting station.
One of public broadcasting's greatest benefits is our long-term appropriate and acceptable practice -- under the law -- to afford on-air recognition of underwriters over the long-term, as long as the monthly/quarterly fulfillment of a gift remains on-schedule per mutual agreement. Some of our longest-term underwriters wouldn't be on-air today if we didn't have the flexibility to afford them a schedule of deferred underwriting gift fulfillment.
Enforceable contract or not, a written agreement between a public radio station and a for-profit business serves a valuable service. It sets forth the expectations and obligations of each party with regard to the text, frequency, location and duration of on-air credits, and the schedule of "payment" of the total amount the underwriter has "pledged" to the station. The act of signing is a good-faith indication of an intent to fulfill.
To be fair to the accountants, the nature and language of the underwriting agreement may also be a problem. Many of the underwriting agreements in use by different public stations closely resemble legal contracts. The accounting department looks at an underwriting agreement with the signature of a corporate decision-maker and immediately thinks "vendor" relationship: the corporate underwriter as "vendor" is "contracting" with a university department to determine a "payment" schedule for "services rendered."
Institutional accountants understand the notion of "precedence." What one state university is doing, another could probably do. I prepared a position paper noting corporate underwriting revenue procedures used by other public broadcasting stations licensed to State of Florida universities. Of the four stations statewide, each station used a different procedure due to their local structure: one university had an incorporated, nonprofit friend's group that handled donations; one had incorporated its entire public broadcasting department as a stand-alone 501(c)(3) nonprofit; one deposited its underwriting revenue in a station-restricted account under the university foundation. Although the former two examples completely insulated station income from institutional vagaries, it's the latter model that most closely resembled our university's structure and which eventually resolved our underwriting revenue issues.
It took me more than two years of discussions involving my GM, the university comptroller, and the University foundation business manger to bring closure to this issue. Using the Allegiance database platform, we were able to redesign our underwriting agreement and randomly assign discrete invoice numbers (an audit trail requirement) for recurring underwriter payments. At the end of a fiscal year, we discontinued depositing underwriting revenue in the university (state) account for the station, and shifted all such payments into the university's nonprofit foundation.
Simply put, the folks at the university foundation understand and deal with donors every day. The accountants in the comptroller's office deal with "state taxpayer dollars" and "vendors" -- and the idealistic terms "contributions," "donative intent," "and "stewardship" are foreign concepts. By shifting the revenue to the foundation -- where all contributions individual and corporate were administered -- we moved our underwriters into a "bank" where their dollars were truly appreciated, not routinely deliberated.
In closing -- on the notion of the university broadcasting station and what constitutes "educational" purpose. Although the broadcasting station may not be an *academic* program or service (unless it is used as a lab/practicum/classroom for university communications students), public broadcasting has been defined by law to indeed be an educational institution. Check with NPR's legal department to confirm.
Please tell your colleague to take heart...and encourage him/her to obtain a local, legal opinion (state laws vary) before contemplating further actions.
Walt Gillette, CFRE
DEI Consultant, Major Giving
Pensacola, Florida
(850) 944-9500 (Telephone & Fax)
Member:
Association of Fundraising Professionals Foundation for Philanthropy, Board of Trustees
Public Radio Association of Development Officers, Board of Directors Association of Professional Researchers for Advancement
==================================
> How do the stations connected to this listserve handle their books when it > comes to underwriting? Our accounting department on campus currently > feels that underwriting is Unrelated Business Income and according to the > IRS, advanced underwriting is technically defined as Advertising and > therefore a profitable service.
Underwriting, in the legal context, is absolutely distinct from advertising. UBIT clearly does not apply to underwriting. Will's forwarding of this post to the PubRadio list has already generated many concurring responses. I'm sure he will summarize those messages and post them here.
Just last week I drafted a memo covering a similar situation. In our case, auditors questioned whether underwriting proceeds must be considered "state revenue" and therefore be deposited into a "university" account, or whether -- as "donations" -- underwriting monies could be deposited into an account with the university's foundation. The difference for me as a manager is that foundation accounts do not have to follow the state bidding process, so the use of foundation accounts can be a very critical safety net for us for emergency purchases. I've attached my memo to our vice president below. Many of my arguments will apply to your UBIT concern. I'm still waiting for the v.p.'s response.
==================================
All of our underwriting for KXXX is handled through a student Development Directory. In addition, our 'salesforce' (those who represent us to potential underwriters) are all students in a sales class, using KJHK as a lab. Our university has decided this is an academic exercise and follows the academic mission. We, therefore, take the position that this is not URBI.
As has been mentioned before, donor income to non-commercial stations is different from advertising income generated by the student newspaper. I feel your accounting folks are simply applying the same standard to you as they apply to the newspaper.
-----------------------------------------
Our situation is somewhat different as we are now legally separate from the university. But this should apply anyway: Every aspect of our operations directly supports the educational mission. Students perform all aspects of underwriting/advertising sales and business operations. When they go out to sell underwriting, they are learning skills that directly or indirectly enhance their educational experience. The IRS classified us as a 501(c)3 because of our educational mission.
========================
This is an issue we've dealt with before. There are two parts to this response:
1- The FCC doesn NOT allow non-coms to carry advertising. What can be said on the air is strictly proscribed by the FCC. So, federally-speaking, this is not a problem.
2- How the donor chooses to list the donation, whether money or gift-in-kind (eg: tickets to a rock concert) is between the donor and the IRS and state taxing agency. There is no need for the university accounting office to try to second-guess in this area. If the station is licensed as a non-commercial station, the university even might possibly be compromising that license if it continues to pursue the path of "advertising, thus taxes."
