[Federal Register Volume 65, Number 41 (Wednesday, March 1, 2000)]
[Proposed Rules]
[Pages 11012-11019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4848]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-209601-92]
RIN 1545-AR19


Taxation of Tax-Exempt Organizations' Income From Corporate 
Sponsorship

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of previous proposed rules, notice of proposed 
rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to the 
tax treatment of sponsorship payments received by exempt organizations. 
The Taxpayer Relief Act of 1997 amended the Internal Revenue Code to 
provide that unrelated trade or business does not include the activity 
of soliciting and receiving qualified sponsorship payments. This action 
affects exempt organizations that receive sponsorship payments. This 
document provides notice of a public hearing on these proposed 
regulations. This document also withdraws proposed rules published on 
January 22, 1993.

DATES: Written or electronic comments must be received by May 30, 2000. 
Outlines of topics to be discussed at the public hearing scheduled for 
June 21, 2000, at 10 a.m. must be received by May 31, 2000.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-209601-92), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
209601-92), room 5226, Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may 
submit comments electronically via the Internet by selecting the ``Tax 
Regs'' option on the IRS Home Page, or by submitting comments directly 
to the IRS Internet site at http://www.irs.gov/tax__regs/regslist.html. 
The public hearing will be held in room G-043, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Stephanie Lucas Caden, (202) 622-6080 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Exempt organizations generally must pay tax on unrelated business 
taxable income, as defined in section 512. Section 512(a)(1) defines 
unrelated business taxable income (UBTI) as the gross income derived by 
an organization from any unrelated trade or business (as defined in 
section 513) regularly carried on by it, less the deductions that are 
directly connected with the carrying on of the trade or business, both 
computed with the modifications provided in section 512(b).
    Section 513(a) defines unrelated trade or business as any trade or 
business the conduct of which is not substantially related (aside from 
the need of an organization for income or funds or the use it makes of 
the profits derived) to the exercise or performance by the organization 
of its charitable, educational, or other purpose or function 
constituting the basis for its exemption under section 501. Section 
513(c), captioned ``Advertising, Etc., Activities,'' provides that the 
term trade

[[Page 11013]]

or business includes any activity carried on for the production of 
income from the sale of goods or the performance of services, and that 
an activity does not lose identity as a trade or business merely 
because it is carried on within a larger aggregate of similar 
activities or within a larger complex of other endeavors which may, or 
may not, be related to the exempt purposes of the organization. See 
Sec. 1.513-1(b).
    The IRS first published a Notice of Proposed Rulemaking (1993 
proposed regulations) on January 22, 1993 (58 FR 5687), proposing that 
the regulations under section 513 be amended to provide guidance on the 
proper tax treatment of sponsorship payments received by an exempt 
organization. The 1993 proposed regulations focused on the nature of 
the services provided by the exempt organization rather than the 
benefit received by the sponsor. The 1993 proposed regulations 
distinguished advertising, which is an unrelated trade or business 
activity, from acknowledgments, which are the mere recognition of a 
sponsor's payment, and therefore do not result in UBTI. Advertising was 
defined as any message or other programming material, broadcast or 
otherwise transmitted, published, displayed or distributed in exchange 
for any remuneration, that promotes or markets any company, service, 
facility or product. Acknowledgments were defined as mere recognition 
of sponsorship payments or identification of the sponsor rather than 
promotion of its products, services or facilities. Under the 1993 
proposed regulations, the term acknowledgment included: sponsor logos 
and slogans that do not contain comparative or qualitative 
descriptions; locations and telephone numbers; value-neutral 
descriptions including displays or visual depictions; and sponsor brand 
or trade names and product or service listings.
    In a so-called ``tainting rule,'' the 1993 proposed regulations 
provided that if any activities, messages or programming material 
constituted advertising with respect to a sponsorship payment, then all 
related activities, messages or programming material that might 
otherwise be acknowledgments would be considered advertising.
    The 1993 proposed regulations clarified that the rules regarding 
corporate sponsorship apply uniformly to all sponsorship activities, 
both broadcast and nonbroadcast activities, unless otherwise expressly 
stated, without regard to the local nature of the organization or 
activities or to the amount of the sponsorship payment. The 1993 
proposed regulations expressly did not apply to qualified convention 
and trade show activities or to the sale of advertising in exempt 
organization periodicals.
    The 1993 proposed regulations also proposed to amend the 
regulations under section 512(a) by adding examples of the allocation 
rule governing exploitation of exempt activities in cases involving 
sponsorship income.
    A public hearing on the 1993 proposed regulations was held on July 
8, 1993.
    Public comments received by the IRS generally welcomed the guidance 
as an important step in clarifying this area of the law, but suggested 
modifications. Several comments concerned the effective date of the 
amendments, but there was no consensus as to an appropriate effective 
date. In addition, numerous comments requested elimination of the 
tainting rule. One comment expressed concern that the approach taken in 
the 1993 proposed regulations to the exploitation rules of 
Sec. 1.512(a)-1(d) was likely to create confusion and could lead to 
application of the exploitation exception in a manner far broader than 
was intended.
    The Taxpayer Relief Act of 1997, Public Law 105-34, section 965 
(111 Stat. 788, 893-94), amended the Internal Revenue Code by adding 
section 513(i). Section 513(i) governs the treatment of certain 
sponsorship payments by providing that qualified sponsorship payments 
are not subject to the unrelated business income tax (UBIT). Section 
513(i) defines qualified sponsorship payments as payments made by a 
person engaged in a trade or business with respect to which there is no 
arrangement or expectation that such person will receive any 
substantial return benefit other than the use or acknowledgment of the 
name or logo (or product lines) of the person's trade or business in 
connection with the exempt organization's activities. Section 513(i) 
further provides that use or acknowledgment does not include 
advertising (including messages containing qualitative or comparative 
language, price information or other indications of savings or value, 
or an endorsement or other inducement to purchase, sell, or use a 
sponsor's products or services). The legislative history to section 
513(i) indicates that the use of promotional logos or slogans that are 
an established part of the sponsor's identity does not, by itself, 
constitute advertising. H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess. 
476 (1997). Section 513(i)(2)(B)(i) provides that qualified sponsorship 
payments do not include payments where the amount is contingent upon 
the level of attendance at an event, broadcast ratings, or other 
factors indicating the degree of public exposure to an activity. 
However, the fact that a payment is contingent upon a sponsored 
activity actually being conducted or broadcast does not, by itself, 
cause the payment to fail to be a qualified sponsorship payment. The 
legislative history to section 513(i) further indicates that mere 
display or distribution, whether for free or remuneration, of a 
sponsor's products by the sponsor or the organization to the general 
public at a sponsored event is not considered advertising. H.R. Conf. 
Rep. No. 220, 105th Cong., 1st Sess. 474 (1997).
    Section 513(i) differs from the 1993 proposed regulations in that 
section 513(i) has no tainting rule. Instead, section 513(i) 
specifically provides that, to the extent a portion of a payment would 
(if made as a separate payment) be a qualified sponsorship payment, 
that portion of such payment and the other portion of such payment are 
treated as separate payments. For example, if a sponsorship arrangement 
entitles the sponsor to both product advertising and use or 
acknowledgment of the sponsor's name or logo by the organization, the 
section 513(i) safe harbor applies only to the amount, if any, of the 
payment that exceeds the fair market value of the product advertising 
provided to the sponsor. Similarly, providing facilities, services or 
other privileges to a sponsor or the sponsor's designees (e.g., 
complimentary tickets, pro-am playing spots in golf tournaments, or 
receptions for major donors) in connection with a sponsorship 
arrangement is evaluated as a separate transaction in determining 
whether the organization has UBTI. A license granted to a sponsor as 
part of a sponsorship arrangement that allows a sponsor to use an 
intangible asset of the organization (e.g., the organization's 
trademark, patent, logo, or designation) is likewise treated as a 
separate transaction. H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess. 
475 (1997). Whether a separate transaction that falls outside of the 
section 513(i) safe harbor is subject to the UBIT depends on the 
application of existing rules under sections 512, 513, and 514.
    Section 513(i) applies to payments solicited or received after 
December 31, 1997. Section 513(i) does not apply to qualified 
convention and trade show activities (described in section 
513(d)(3)(B)) or to the sale of an acknowledgment or advertising in 
exempt organization periodicals. For this purpose, the term periodicals 
means regularly scheduled and printed

[[Page 11014]]

material published by or on behalf of an exempt organization that is 
not related to and primarily distributed in connection with a specific 
event conducted by the exempt organization.
    Although section 513(i) codifies the 1993 proposed regulations in 
many respects, there are significant differences, including the 
elimination of the tainting rule. To reflect these differences, and in 
response to comments submitted on the 1993 proposed regulations, a 
number of changes are made in these proposed regulations, and some 
additional areas are addressed, such as exclusivity arrangements. In 
light of these changes, the IRS and the Treasury Department decided to 
issue regulations in proposed form, rather than final form, to provide 
an opportunity for further comment.

Discussion of Proposed Regulations

    These proposed regulations amend the regulations under section 513 
to provide guidance in the area of corporate sponsorship. Following 
section 513(i), these proposed regulations provide that qualified 
sponsorship payments are not UBTI. These proposed regulations define 
the term qualified sponsorship payments to mean payments made by any 
person engaged in a trade or business with respect to which there is no 
arrangement or expectation that such person will receive any 
substantial return benefit in exchange for making the payment.
    These proposed regulations define the phrase substantial return 
benefit to mean any benefit other than (1) a use or acknowledgment of 
the payor's name or logo in connection with the exempt organization's 
activities, or (2) certain goods or services that have an insubstantial 
value under existing IRS guidelines. Generally, benefits such as 
complimentary tickets, pro-am playing spots, and receptions for donors 
have an insubstantial value only if they have a fair market value of 
not more than 2% of the payment, or $74 (for tax years beginning in 
calendar year 2000), whichever is less. See Sec. 1.170A-13(f)(8)(i)(A); 
Rev. Proc. 90-12 (1990-1 C.B. 471), as adjusted for inflation (see Rev. 
Proc. 99-42, 1999-46 I.R.B. 568 (November 15, 1999)). If a payor 
receives a substantial return benefit (such as complimentary tickets 
having a fair market value in excess of $74) in exchange for a payment, 
the section 513(i) safe harbor does not apply to the payment (or 
portion thereof) attributable to the substantial return benefit. In 
that case, whether the payment (or portion thereof) is subject to UBIT 
must be determined under existing principles and rules. Thus, the 
payment may not be subject to UBIT because the exempt organization's 
activity is not an unrelated trade or business within the meaning of 
section 513(a) (for example, because substantially all of the work in 
carrying on the trade or business is performed by volunteers) or is not 
``regularly carried on'' within the meaning of section 512(a)(1), or 
because one of the section 512(b) modifications applies.
    These proposed regulations clarify that sponsored activities within 
the scope of the section 513(i) safe harbor may include a single event 
(such as a bowl game, a walkathon or a television program); a series of 
related events (such as a concert series or a sports tournament); an 
activity of extended or indefinite duration (such as an art exhibit); 
or continuing support of an exempt organization's operation. A payment 
(or portion thereof) may be a qualified sponsorship payment regardless 
of whether the sponsored activity conducted by the organization is 
substantially related to its tax exempt purpose. H.R. Conf. Rep. No. 
220, 105th Cong., 1st Sess. 474 n.44 (1997).
    Consistent with section 513(i)(3), the tainting rule of the 1993 
proposed regulations has been removed. However, these proposed 
regulations clarify that for an exempt organization to avail itself of 
the section 513(i) safe harbor, it must establish that some portion of 
the payment exceeds the fair market value of any substantial return 
benefit received by a payor in return for making the payment. In a 
sponsorship arrangement, the fair market value of the substantial 
return benefit may equal the entire amount of the sponsorship payment. 
The burden of establishing the fair market value of any substantial 
return benefit falls on the exempt organization because the exempt 
organization has superior access to relevant information regarding its 
sponsorship arrangements. These proposed regulations state that the 
exempt organization's determination of the fair market value of a 
substantial return benefit provided to the payor will not be set aside 
for purposes of applying the section 513(i) safe harbor so long as the 
organization makes a reasonable and good faith valuation of the 
substantial return benefit received by the payor.
    These proposed regulations provide that the right to be the only 
sponsor of an activity, or the only sponsor representing a particular 
trade, business or industry is generally not a substantial return 
benefit. Any portion of the payment attributable to the exclusive 
sponsorship arrangement, therefore, may be a qualified sponsorship 
payment. However, if in return for a payment, the exempt organization 
agrees that products or services that compete with the payor's products 
or services will not be sold or provided in connection with one or more 
activities of the exempt organization, the payor has received a 
substantial return benefit and the portion of the payment attributable 
to the exclusive provider arrangement is not a qualified sponsorship 
payment. Consistent with the allocation rule described above, when a 
payor receives both exclusive sponsorship and exclusive provider rights 
in exchange for making a payment, the fair market value of the 
exclusive provider arrangement and any other substantial return benefit 
is determined first (i.e., without regard to the existence of the 
exclusive sponsorship arrangement).
    The IRS and the Treasury Department have concluded that the 
examples included in the 1993 proposed regulations interpreted 
Sec. 1.512(a)-1(d) too broadly by allowing exempt organizations to 
apply excess expenses directly connected with the conduct of an exempt 
activity (such as the conduct of a bowl game) to offset income from a 
separate, unrelated business activity (such as the sale of clothing 
featuring the name and logo of the bowl game) which does not have a 
proximate and primary relationship to the exempt activity. An example 
in these proposed regulations clarifies that Sec. 1.512(a)-1(d) applies 
only in circumstances where the unrelated business activity and the 
exempt activity are closely connected, such that a taxable entity 
pursuing the same business activity would normally also conduct the 
exempt activity. The example involves the sale of advertising in a 
museum's exhibition catalog. In this example, the sale of advertising 
exploits an activity--the publication of editorial material--normally 
conducted by taxable entities that sell advertising. Therefore, the 
example concludes that any net loss related to the museum's publication 
of its exhibition catalog (after taking into account any income derived 
from or attributable to publication of the catalog) may be applied to 
offset any net unrelated business income from the museum's sale of 
advertising in the catalog. In contrast, expenses related to the costs 
of the exhibition itself are not directly connected with the unrelated 
advertising activity and cannot be applied to offset income from the 
advertising activity.
    As discussed above, existing principles and rules will determine 
the UBIT consequences of any portion of a payment that falls outside 
the section

[[Page 11015]]

513(i) safe harbor. Existing principles and rules will also determine 
the non-UBIT consequences of sponsorship arrangements, including 
benefits to the payor. For example, see Rev. Rul. 77-367 (1977-2 C.B. 
193), and Rev. Rul. 66-358 (1966-2 C.B. 218), regarding inurement and 
private benefit.
    These proposed regulations do not specifically address the Internet 
activities of exempt organizations. However, the IRS and the Treasury 
Department are reviewing the application of existing tax laws governing 
exempt organizations, including the UBIT rules, to Internet activities. 
Comments are specifically requested on the application of the rules 
governing periodicals and trade shows in section 513(i)(2)(B)(ii) to an 
exempt organization's Internet sites, and on whether providing a link 
to a sponsor's Internet site is advertising within the meaning of 
section 513(i)(2)(A) and Sec. 1.513-4(c)(2)(iv).
    These proposed regulations clarify that qualified sponsorship 
payments in the form of money or property (but not services) are 
treated as contributions received by the exempt organization for 
purposes of determining public support to the organization under 
section 170(b)(1)(A)(vi) or section 509(a)(2). The exclusion of 
contributed services for purposes of determining public support is 
consistent with the general rule regarding donated services. See 
Secs. 1.509(a)-3(f), 1.170A-9(e)(7)(i), 1.170A-1(g). Thus, qualified 
sponsorship payments in the form of money or property are treated as 
contributions for purposes of Part I (Revenue, Expenses, and Changes in 
Net Assets or Fund Balances) of Form 990, ``Return of Organization 
Exempt from Income Tax.'' The fact that a payment is a qualified 
sponsorship payment that is treated as a ``contribution'' to the payee 
organization does not determine whether the payment is deductible by 
the payor under section 162 or section 170.

Proposed Effective Date

    These regulations are proposed to apply on the date they are 
published as final in the Federal Register, although organizations may 
rely on these proposed regulations for payments received between 
January 1, 1998, and the date the regulations are published as final in 
the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Therefore, a Regulatory Flexibility Analysis is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of 
proposed rulemaking will be submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) and electronic comments that are submitted timely 
to the IRS. The IRS and Treasury Department request comments on the 
clarity of the proposed regulations and how they may be made easier to 
understand. In particular, the IRS and the Treasury Department request 
comments on whether further clarification is needed regarding the 
application of Sec. 1.512(a)-1(d) in the context of corporate 
sponsorship payments or other unrelated business activities. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for June 21, 2000, at 10 a.m. 
in room G-043, Internal Revenue Building, 1111 Constitution Avenue, 
NW., Washington, DC. Due to building security procedures, visitors must 
enter at the 10th Street entrance, located between Constitution and 
Pennsylvania Avenues, NW. In addition, all visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 15 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit timely written 
comments and an outline of the topics to be discussed and the time to 
be devoted to each topic (a signed original and eight (8) copies) by 
May 31, 2000.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.
    Drafting information: The principal author of these regulations is 
Stephanie Lucas Caden, Office of Associate Chief Counsel (Employee 
Benefits and Exempt Organizations), Internal Revenue Service. However, 
personnel from other offices of the Service and the Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Withdrawal of Proposed Amendments

    Accordingly, under the authority of 26 U.S.C. 7805, the proposed 
amendments to 26 CFR part 1, relating to Sec. 1.512(a)-1 and 
Sec. 1.513-4, published in the Federal Register for January 22, 1993 
(58 FR 5687), are withdrawn.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAX

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. In Sec. 1.170A-9, a sentence is added to the end of 
paragraph (e)(6)(i) to read as follows:


Sec. 1.170A-9  Definition of section 170(b)(1)(A) organization.

* * * * *
    (e) * * *
    (6) Definition of support; meaning of general public--(i) In 
general. * * * For purposes of this paragraph (e), the term 
contributions includes qualified sponsorship payments (as defined in 
Sec. 1.513-4) in the form of money or property (but not services).
* * * * *
    Par. 3. In Sec. 1.509(a)-3, a sentence is added to the end of 
paragraph (f)(1) to read as follows:


Sec. 1.509(a)-3  Broadly, publicly supported organizations.

* * * * *
    (f) Gifts and contributions distinguished from gross receipts--(1) 
In general. * * * For purposes of section 509(a)(2), the term 
contributions includes qualified sponsorship payments (as defined in 
Sec. 1.513-4) in the form of money or property (but not services).
* * * * *

[[Page 11016]]

    Par. 4. In Sec. 1.512(a)-1, paragraph (e) is amended by:
    1. Revising the heading and introductory text for paragraph (e);
    2. Redesignating the current Example. as Example 1;
    3. Adding Example 2.
    The revisions and additions read as follows:


Sec. 1.512(a)-1  Definition.

* * * * *
    (e) Examples. This section is illustrated by the following 
examples:

    Example 1. * * *
    Example 2. (i) P, a manufacturer of photographic equipment, 
underwrites a photography exhibition organized by M, an art museum 
described in section 501(c)(3). In return for a payment of $100,000, 
M agrees that the exhibition catalog sold by M in connection with 
the exhibit will advertise P's product. The exhibition catalog will 
also include educational material, such as copies of photographs 
included in the exhibition, interviews with photographers, and an 
essay by the curator of M's department of photography. For purposes 
of this example, assume that none of the $100,000 is a qualified 
sponsorship payment within the meaning of section 513(i) and 
Sec. 1.513-4, that M's advertising activity is regularly carried on, 
and that the entire amount of the payment is unrelated business 
taxable income to M. Expenses directly connected with generating the 
unrelated business taxable income (i.e., direct advertising costs) 
total $25,000. Expenses directly connected with the preparation and 
publication of the exhibition catalog (other than direct advertising 
costs) total $110,000. M receives $60,000 of gross revenue from 
sales of the exhibition catalog. Expenses directly connected with 
the conduct of the exhibition total $500,000.
    (ii) The computation of unrelated business taxable income is as 
follows:
    (A) Unrelated trade or business (sale of advertising):

Income........................................     $100,000  ...........
Directly-connected expenses...................     (25,000)  ...........
                                               -------------
      Subtotal................................       75,000       75,000
 

    (B) Exempt function (publication of exhibition catalog):

Income (from catalog sales)...................       60,000  ...........
Directly-connected expenses...................    (110,000)  ...........
                                               -------------
Net exempt function income (loss).............     (50,000)     (50,000)
                                                            ------------
      Unrelated business taxable income.......  ...........       25,000
 

    (iii) Expenses related to publication of the exhibition catalog 
exceed revenues by $50,000. Because the unrelated business activity 
(the sale of advertising) exploits an exempt activity (the 
publication of the exhibition catalog), and because the publication 
of editorial material is an activity normally conducted by taxable 
entities that sell advertising, the net loss from the exempt 
publication activity is allowed as a deduction from unrelated 
business income under paragraph (d)(2) of this section. In contrast, 
the presentation of an exhibition is not an activity normally 
conducted by taxable entities engaged in advertising and publication 
activity for purposes of paragraph (d)(2) of this section. 
Consequently, the $500,000 cost of presenting the exhibition is not 
directly connected with the conduct of the unrelated advertising 
activity and does not have a proximate and primary relationship to 
that activity. Accordingly, M has unrelated business taxable income 
of $25,000.

    Par. 5. Section 1.513-4 is added to read as follows:


Sec. 1.513-4  Certain sponsorship not unrelated trade or business.

    (a) In general. Under section 513(i), the receipt of qualified 
sponsorship payments by an exempt organization which is subject to the 
tax imposed by section 511 does not constitute receipt of income from 
an unrelated trade or business.
    (b) Exception. The provisions of this section do not apply with 
respect to payments made in connection with qualified convention and 
trade show activities. For rules governing qualified convention and 
trade show activity, see Sec. 1.513-3. The provisions of this section 
also do not apply to income derived from the sale of advertising or 
acknowledgments in exempt organization periodicals. For this purpose, 
the term periodical means regularly scheduled and printed material 
published by or on behalf of the exempt organization that is not 
related to and primarily distributed in connection with a specific 
event conducted by the exempt organization. For rules governing the 
sale of advertising in exempt organization periodicals, see 
Sec. 1.512(a)-1(f).
    (c) Qualified sponsorship payment--(1) Definition. The term 
qualified sponsorship payment means any payment of money, transfer of 
property, or performance of services by any person engaged in a trade 
or business with respect to which there is no arrangement or 
expectation that the person will receive any substantial return 
benefit. In determining whether a payment is a qualified sponsorship 
payment, it is irrelevant whether the sponsored activity is related or 
unrelated to the recipient organization's exempt purpose. It is also 
irrelevant whether the sponsored activity is temporary or permanent.
    (2) Substantial return benefit--(i) In general. For purposes of 
this section, a substantial return benefit means any benefit other than 
goods, services or other benefits of insubstantial value that are 
disregarded under paragraph (c)(2)(ii) of this section, or a use or 
acknowledgment described in paragraph (c)(2)(iii) of this section.
    A substantial return benefit includes advertising as defined in 
paragraph (c)(2)(iv) of this section, providing facilities, services or 
other privileges to the payor or persons designated by the payor 
(except as provided in paragraph (c)(2)(ii) of this section), and 
granting the payor or persons designated by the payor an exclusive or 
nonexclusive right to use an intangible asset (e.g., trademark, patent, 
logo, or designation) of the exempt organization.
    (ii) Certain goods or services disregarded. (A) For purposes of 
paragraph (c)(2)(i) of this section, goods, services or other benefits 
are disregarded if--
    (1) The goods, services or other benefits provided to the payor or 
persons designated by the payor have an aggregate fair market value of 
not more than 2% of the amount of the payment, or $74 (adjusted for tax 
years beginning after calendar year 2000 by an amount determined under 
section 1(f)(3), by substituting ``calendar year 1999'' for ``calendar 
year 1992'' in section 1(f)(3)(B)), whichever is less (or such other 
amount(s) as may be specified in a revenue procedure or other form of

[[Page 11017]]

guidance issued by the Commissioner); or
    (2) The only benefits provided to the payor or persons designated 
by the payor are token items (e.g., bookmarks, calendars, key chains, 
mugs, posters, tee shirts) bearing the exempt organization's name or 
logo that have an aggregate cost within the limit established for low 
cost articles under section 513(h)(2) (or such other limit as may be 
specified in a revenue procedure or other form of guidance issued by 
the Commissioner); however, token items (as described above) provided 
to employees of the payor, or to partners of a partnership that is the 
payor, are disregarded if the combined total cost of the token items 
provided to each employee or partner does not exceed the limit stated 
in this paragraph (c)(2)(ii)(A)(2).
    (B) If the fair market value of the benefits (or the cost, in the 
case of token items) exceeds the amount or limit specified in paragraph 
(c)(2)(ii)(A) of this section, then (except as provided in paragraph 
(c)(2)(iii) of this section) the entire fair market value (as opposed 
to cost) of such benefits, not merely the excess amount, is a 
substantial return benefit.
    (iii) Use or acknowledgment. For purposes of this section, a 
substantial return benefit does not include the use or acknowledgment 
of the name or logo (or product lines) of the payor's trade or business 
in connection with the activities of the exempt organization. Use or 
acknowledgment does not include advertising as described in paragraph 
(c)(2)(iv) of this section, but may include the following: logos and 
slogans that do not contain qualitative or comparative descriptions of 
the payor's products, services, facilities or company; a list of the 
payor's locations, telephone numbers, or Internet address; value-
neutral descriptions, including displays or visual depictions, of the 
payor's product-line or services; and the payor's brand or trade names 
and product or service listings. Logos or slogans that are an 
established part of a payor's identity are not considered to contain 
qualitative or comparative descriptions. Mere display or distribution, 
whether for free or remuneration, of a payor's product by the payor or 
the exempt organization to the general public at the sponsored activity 
is not considered an inducement to purchase, sell or use the payor's 
product for purposes of this section and, thus, will not affect the 
determination of whether a payment is a qualified sponsorship payment.
    (iv) Advertising. For purposes of this section, the term 
advertising means any message or other programming material which is 
broadcast or otherwise transmitted, published, displayed or 
distributed, and which promotes or markets any trade or business, or 
any service, facility or product. Advertising includes messages 
containing qualitative or comparative language, price information or 
other indications of savings or value, an endorsement, or an inducement 
to purchase, sell, or use any company, service, facility or product. A 
single message that contains both advertising and an acknowledgment is 
advertising. This section does not apply to activities conducted by a 
payor on its own. For example, if a payor purchases broadcast time from 
a television station to advertise its product during commercial breaks 
in a sponsored program, the exempt organization's activities are not 
thereby converted to advertising.
    (v) Exclusivity arrangements--(A) Exclusive sponsor. An arrangement 
that acknowledges the payor as the exclusive sponsor of an exempt 
organization's activity, or the exclusive sponsor representing a 
particular trade, business or industry, generally does not, by itself, 
result in a substantial return benefit. For example, if in exchange for 
a payment, an organization announces that its event is sponsored 
exclusively by the payor (and does not provide any advertising or other 
substantial return benefit to the payor), the payor has not received a 
substantial return benefit.
    (B) Exclusive provider. An arrangement that limits the sale, 
distribution, availability, or use of competing products, services, or 
facilities in connection with an exempt organization's activity 
generally results in a substantial return benefit. For example, if in 
exchange for a payment, the exempt organization agrees to allow only 
the payor's products to be sold in connection with an activity, the 
payor has received a substantial return benefit.
    (d) Allocation of payment--(1) In general. If there is an 
arrangement or expectation that the payor will receive a substantial 
return benefit with respect to any payment, then only the portion, if 
any, of the payment that exceeds the fair market value of the 
substantial return benefit (determined on the date the sponsorship 
arrangement is entered into) is a qualified sponsorship payment. 
However, if the exempt organization does not establish that the payment 
exceeds the fair market value of any substantial return benefit, then 
no portion of the payment constitutes a qualified sponsorship payment. 
The unrelated business income tax (UBIT) treatment of any payment (or 
portion thereof) that is not a qualified sponsorship payment is 
determined by application of sections 512, 513 and 514. For example, 
payments related to an exempt organization's providing facilities, 
services, or other privileges to the payor or persons designated by the 
payor, advertising, exclusive provider arrangements described in 
paragraph (c)(2)(v)(B) of this section, a license to use intangible 
assets of the exempt organization, or other substantial return 
benefits, are evaluated separately in determining whether the exempt 
organization realizes unrelated business taxable income. The fair 
market value of any substantial return benefit provided as part of a 
sponsorship arrangement is the price at which the benefit would be 
provided between a willing recipient and a willing provider of the 
benefit, neither being under any compulsion to enter into the 
arrangement, and both having reasonable knowledge of relevant facts, 
and without regard to any other aspect of the sponsorship arrangement.
    (2) Anti-abuse provision. To the extent necessary to prevent 
avoidance of the rule stated in paragraph (d)(1) of this section, where 
the exempt organization fails to make a reasonable and good faith 
valuation of any substantial return benefit, the Commissioner (or the 
Commissioner's delegate) may determine the portion of a payment 
allocable to such substantial return benefit and may treat two or more 
related payments as a single payment.
    (e) Special rules--(1) Written agreements. The existence of a 
written sponsorship agreement does not, in itself, cause a payment to 
fail to be a qualified sponsorship payment. The terms of the agreement, 
not its existence or degree of detail, are relevant to the 
determination of whether a payment is a qualified sponsorship payment. 
Similarly, the terms of the agreement and not the title or 
responsibilities of the individuals negotiating the agreement determine 
whether a payment (or any portion thereof) made pursuant to the 
agreement is a qualified sponsorship payment.
    (2) Contingent payments. The term qualified sponsorship payment 
does not include any payment the amount of which is contingent, by 
contract or otherwise, upon the level of attendance at one or more 
events, broadcast ratings, or other factors indicating the degree of 
public exposure to the sponsored activity. The fact that a payment is 
contingent upon sponsored events or activities actually being conducted 
does not, by itself, cause the payment to fail to be a qualified 
sponsorship payment.
    (3) Determining public support. Qualified sponsorship payments in 
the form of money or property (but not

[[Page 11018]]

services) are treated as contributions received by the exempt 
organization for purposes of determining public support to the 
organization under section 170(b)(1)(A)(vi) or section 509(a)(2). See 
Secs. 1.509(a)-3(f)(1) and 1.170A-9(e)(6)(i). The fact that a payment 
is a qualified sponsorship payment that is treated as a contribution to 
the payee organization does not determine whether the payment is 
deductible by the payor under section 162 or section 170.
    (f) Examples. The provisions of this section are illustrated by the 
following examples. The tax treatment of any payment (or portion of a 
payment) that does not constitute a qualified sponsorship payment is 
governed by general UBIT principles. In these examples, the recipients 
of the payments at issue are section 501(c) organizations. The only 
benefits received by the payors are those specifically indicated in the 
example. The examples are as follows:

    Example 1. M, a local charity, organizes a marathon and 
walkathon at which it serves to participants drinks and other 
refreshments provided free of charge by a national corporation. The 
corporation also gives M prizes to be awarded to winners of the 
event. M recognizes the assistance of the corporation by listing the 
corporation's name in promotional fliers, in newspaper 
advertisements of the event and on T-shirts worn by participants. M 
changes the name of its event to include the name of the 
corporation. M's activities constitute acknowledgment of the 
sponsorship. The drinks, refreshments and prizes provided by the 
corporation are a qualified sponsorship payment, which is not income 
from an unrelated trade or business.
    Example 2. N, an art museum, organizes an exhibition and 
receives a large payment from a corporation to help fund the 
exhibition. N recognizes the corporation's support by using the 
corporate name and established logo in materials publicizing the 
exhibition, including banners, posters, brochures and public service 
announcements. N also hosts a dinner for the corporation's 
executives. The fair market value of the dinner exceeds the amount 
specified in paragraph (c)(2)(ii) of this section. N's use of the 
corporate name and logo in connection with the exhibition 
constitutes acknowledgment of the sponsorship. However, the dinner 
for corporate executives is a substantial return benefit. Only that 
portion of the payment, if any, that N can demonstrate exceeds the 
fair market value of the dinner is a qualified sponsorship payment.
    Example 3. O coordinates sports tournaments for local charities. 
An auto manufacturer agrees to underwrite the expenses of the 
tournaments. O recognizes the auto manufacturer by including the 
manufacturer's name and established logo in the title of each 
tournament as well as on signs, scoreboards and other printed 
material. The auto manufacturer receives complimentary admission 
passes and pro-am playing spots for each tournament that have a fair 
market value in excess of the amount specified in paragraph 
(c)(2)(ii) of this section. Additionally, O displays the latest 
models of the manufacturer's premier luxury cars at each tournament. 
O's use of the manufacturer's name and logo and display of cars in 
the tournament area constitute acknowledgment of the sponsorship. 
However, the admission passes and pro-am playing spots are a 
substantial return benefit. Only that portion of the payment, if 
any, that O can demonstrate exceeds the fair market value of the 
admission passes and pro-am playing spots is a qualified sponsorship 
payment.
    Example 4. P conducts an annual college football bowl game. P 
sells to commercial broadcasters the right to broadcast the bowl 
game on television and radio. A major corporation agrees to be the 
exclusive sponsor of the bowl game. The detailed contract between P 
and the corporation provides that the name of the bowl game will 
include the name of the corporation. The contract further provides 
that the corporation's name and established logo will appear on 
players' helmets and uniforms, on the scoreboard and stadium signs, 
on the playing field, on cups used to serve drinks at the game, and 
on all related printed material distributed in connection with the 
game. The agreement is contingent upon the game being broadcast on 
television and radio, but the amount of the payment is not 
contingent upon the number of people attending the game or the 
television ratings. The contract provides that television cameras 
will focus on the corporation's name and logo on the field at 
certain intervals during the game. P's use of the corporation's name 
and logo in connection with the bowl game constitutes acknowledgment 
of the sponsorship. The exclusive sponsorship arrangement is not a 
substantial return benefit. The entire payment is a qualified 
sponsorship payment, which is not income from an unrelated trade or 
business.
    Example 5. Q organizes an amateur sports team. A major pizza 
chain gives uniforms to players on Q's team, and also pays some of 
the team's operational expenses. The uniforms bear the name and 
established logo of the pizza chain. During the final tournament 
series, Q distributes free of charge souvenir flags bearing Q's name 
to employees of the pizza chain who come out to support the team. 
The flags cost $2 each. The flags are not a substantial return 
benefit because they are token items that qualify as low cost 
articles under paragraph (c)(2)(ii) of this section. Q's use of the 
name and logo of the pizza chain in connection with the tournament 
constitutes acknowledgment of the sponsorship. The funding and 
supplied uniforms are a qualified sponsorship payment, which is not 
income from an unrelated trade or business.
    Example 6. R is a liberal arts college. A soft drink 
manufacturer makes a substantial payment to the college's English 
department, and in exchange, R names a writing competition after the 
soft drink manufacturer. In addition, R agrees to limit all soft 
drink sales on campus to the manufacturer's brand of soft drink. R's 
use of the manufacturer's name in the writing competition 
constitutes acknowledgment of the sponsorship. However, limiting all 
soft drink sales on campus to the manufacturer's brand of soft 
drink, i.e., the exclusive provider arrangement, is a substantial 
return benefit. Only that portion of the payment, if any, that R can 
demonstrate exceeds the fair market value of the exclusive provider 
arrangement is a qualified sponsorship payment.
    Example 7. S is a noncommercial broadcast station that airs a 
program funded by a local music store. In exchange for the funding, 
S broadcasts the following message: ``This program has been brought 
to you by the Music Shop, located at 123 Main Street. For your music 
needs, give them a call today at 555-1234. This station is proud to 
have the Music Shop as a sponsor.'' Because this single broadcast 
message contains both advertising and an acknowledgment, the entire 
message is advertising and constitutes a substantial return benefit. 
Unless S establishes that the amount of the payment exceeds the fair 
market value of the advertising, none of the payment is a qualified 
sponsorship payment.
    Example 8. T, a symphony orchestra, performs a series of 
concerts. A program guide that contains notes on guest conductors 
and other information concerning the evening's program is 
distributed by T at each concert. The Music Shop makes a payment to 
T in support of the concert series. As a supporter of the event, the 
Music Shop is recognized in the program guide and on a poster in the 
lobby of the concert hall. The Music Shop receives complimentary 
tickets to the concert series. The fair market value of the 
complimentary tickets exceeds the amount specified in paragraph 
(c)(2)(ii) of this section. The lobby poster states that ``The T 
concert is sponsored by the Music Shop, located at 123 Main Street, 
telephone number 555-1234.'' The program guide contains the same 
information and also states, ``Visit today for the finest selection 
of music CDs and cassette tapes.'' T's use of the Music Shop's name 
and address in the lobby poster constitutes acknowledgment of the 
sponsorship. However, the promotion in the program guide and 
complimentary tickets are a substantial return benefit. Only that 
portion of the payment, if any, that T can demonstrate exceeds the 
fair market value of the promotion in the program guide and 
complimentary tickets is a qualified sponsorship payment.
    Example 9. U, a national charity dedicated to promoting health, 
organizes a campaign to inform the public about potential cures to 
fight a serious disease. As part of the campaign, U sends 
representatives to community health fairs around the country to 
answer questions about the disease and inform the public about 
recent developments in the search for a cure. A pharmaceutical 
company makes a payment to U to fund U's booth at a health fair. U 
places a sign in the booth displaying the pharmaceutical company's 
name and slogan, ``Better Research, Better Health,'' which is an 
established part of the company's identity. In addition, U grants 
the pharmaceutical company a license to use U's logo in

[[Page 11019]]

marketing its products to health care providers around the country. 
U's display of the pharmaceutical company's name and slogan 
constitutes acknowledgment of the sponsorship. However, the license 
granted to the pharmaceutical company to use U's logo is a 
substantial return benefit. Only that portion of the payment, if 
any, that U can demonstrate exceeds the fair market value of the 
license granted to the pharmaceutical company is a qualified 
sponsorship payment.
    Example 10. V, a trade association, publishes a monthly 
scientific magazine for its members containing information about 
current issues and developments in the field. A textbook publisher 
makes a large payment to V to have its name displayed on the inside 
cover of the magazine each month. Because the monthly magazine is a 
periodical within the meaning of paragraph (b) of this section, the 
section 513(i) safe harbor does not apply. See Sec. 1.512(a)-1(f).

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 00-4848 Filed 2-29-00; 8:45 am]
BILLING CODE 4830-01-U