Taxation of Tax-Exempt Organizations'
Income from Corporate Sponsorship

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-209601-92] RIN 1545-AR19

TITLE: 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.

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 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 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 �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.5 approach taken in the 1993 proposed regulations
to the exploitation rules of �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, 105 th Cong., 1 Sess. 476
(1997). Section 513(i)(2)(B)(i) provides that qualified sponsorship
st 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, 105 Cong., 1 Sess. 474 (1997). th st
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, 105 Cong., 1 Sess. 475 (1997). th st.7 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 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 Regulation

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 �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, 105 Cong., 1 Sess. 474 n.44
(1997). th st 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 �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 �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 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
�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
��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 �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 10 Street entrance, th 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 Amendment

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are withdrawn.

Propo ed Amendment 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 �1.170A-9, a sentence is added to the end of paragraph
(e)(6)(i) to read as follows:

�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
�1.513-4) in the form of money or property (but not services).

* * * * *

Par. 3. In �1.509(a)-3, a sentence is added to the end of paragraph
(f)(1) to read as follows:

�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
�1.513-4) in the form of money or property (but not services).

* * * * *

Par. 4. In �1.512(a)-1, paragraph (e) is amended by:

1. Revising the heading and introductory text for paragraph (e);

2. Redesignating the current Example to read Example 1;

3. Adding Example 2.

The revisions and additions read as follows: �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
�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. 4. Section 1.513-4 is added to read as follows: �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 �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 �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 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 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 ��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, address and
telephone number 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 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 �1.512(a)-1(f).

Robert E. Wenzel
Deputy Commissioner of Internal Revenue

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