[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.513-4]

[Page 174-179]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
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 this purpose, printed material 
includes material that is published electronically. 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 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. For purposes 
of this section, payment means the payment of

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money, transfer of property, or performance of services.
    (2) Substantial return benefit--(i) In general. For purposes of this 
section, a substantial return benefit means any benefit other than a use 
or acknowledgment described in paragraph (c)(2)(iv) of this section, or 
disregarded benefits described in paragraph (c)(2)(ii) of this section.
    (ii) Certain benefits disregarded. For purposes of paragraph 
(c)(2)(i) of this section, benefits are disregarded if the aggregate 
fair market value of all the benefits provided to the payor or persons 
designated by the payor in connection with the payment during the 
organization's taxable year is not more than 2% of the amount of the 
payment. If the aggregate fair market value of the benefits exceeds 2% 
of the amount of the payment, then (except as provided in paragraph 
(c)(2)(iv) of this section) the entire fair market value of such 
benefits, not merely the excess amount, is a substantial return benefit. 
Fair market value is determined as provided in paragraph (d)(1) of this 
section.
    (iii) Benefits defined. For purposes of this section, benefits 
provided to the payor or persons designated by the payor may include:
    (A) Advertising as defined in paragraph (c)(2)(v) of this section.
    (B) Exclusive provider arrangements as defined in paragraph 
(c)(2)(vi)(B) of this section.
    (C) Goods, facilities, services or other privileges.
    (D) Exclusive or nonexclusive rights to use an intangible asset 
(e.g., trademark, patent, logo, or designation) of the exempt 
organization.
    (iv) 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)(v) of this section, but may include the following: exclusive 
sponsorship arrangements; 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.
    (v) 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.
    (vi) 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

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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 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.
    (i) Treatment of payments other than qualified sponsorship payments. 
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)(vi)(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.
    (ii) Fair market value. 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.
    (iii) Valuation date. In general, the fair market value of the 
substantial return benefit is determined when the benefit is provided. 
However, if the parties enter into a binding, written sponsorship 
contract, the fair market value of any substantial return benefit 
provided pursuant to that contract is determined on the date the parties 
enter into the sponsorship contract. If the parties make a material 
change to a sponsorship contract, it is treated as a new sponsorship 
contract as of the date the material change is effective. A material 
change includes an extension or renewal of the contract, or a more than 
incidental change to any amount payable (or other consideration) 
pursuant to the contract.
    (iv) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. On June 30, 2001, a national corporation and Z, a 
charitable organization, enter into a five-year binding, written 
contract effective for years 2002 through 2007. The contract provides 
that the corporation will make an annual payment of $5,000 to Z, and in 
return the corporation will receive no benefit other than advertising. 
On June 30, 2001, the fair market value of the advertising to be 
provided to the corporation in each year of the agreement is $75, which 
is less than the disregarded benefit amount provided for in paragraph 
(c)(2)(ii) of this section (2% of $5,000 is $100). In 2002, pursuant to 
the sponsorship contract, the corporation makes a payment to Z of 
$5,000, and receives the specified benefit (advertising). As of January 
1, 2002, the fair market value of the advertising to be provided by Z 
each year has increased to $110. However, for purposes of this section, 
the fair market value of the advertising benefit is determined on June 
30, 2001, the date the parties entered into the sponsorship contract. 
Therefore, the entire $5,000 payment received in 2002 is a qualified 
sponsorship payment.
    Example 2. The facts are the same as Example 1, except that the 
contract provides for an initial payment by the corporation to Z of 
$5,000 in 2002, followed by annual payments of $1,000 during each of 
years 2003-2007. In 2003, pursuant to the sponsorship contract, the 
corporation makes a payment to Z of $1,000, and receives the specified 
advertising benefit. In 2003, the fair market value of the benefit 
provided ($75, as determined on June 30, 2001) exceeds 2% of the total 
payment received (2% of $1,000 is $20). Therefore, only

[[Page 177]]

$925 of the $1,000 payment received in 2003 is a qualified sponsorship 
payment.

    (2) Anti-abuse provision. To the extent necessary to prevent 
avoidance of the rule stated in paragraphs (d)(1) and (c)(2) 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 509(a)(2). See Sec. Sec. 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 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 
expectations or arrangements of the parties 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, which include 
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 2% of the total payment. N's use of the corporate 
name and logo in connection with the exhibition constitutes 
acknowledgment of the sponsorship. However, because the fair market 
value of the dinner exceeds 2% of the total payment, the dinner 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 combined fair market value in excess of 2% 
of the total payment. Additionally, O displays the latest models of the 
manufacturer's premier luxury

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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 in exchange for a $1,000,000 payment, the name 
of the bowl game will include the name of the corporation. In addition, 
the contract provides that the corporation's name and established logo 
will appear on player's 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. P also agrees to give the corporation a block of game passes 
for its employees and to provide advertising in the bowl game program 
book. The fair market value of the passes is $6,000, and the fair market 
value of the program advertising is $10,000. 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. Because the fair market value of the game passes and 
program advertising ($16,000) does not exceed 2% of the total payment 
(2% of $1,000,000 is $20,000), these benefits are disregarded and 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 are valued at less 
than 2% of the combined fair market value of the uniforms and 
operational expenses paid. Q's use of the name and logo of the pizza 
chain in connection with the tournament constitutes acknowledgment of 
the sponsorship. Because the fair market value of the flags does not 
exceed 2% of the total payment, the entire amount of 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 
enters into a binding, written contract with R that provides for a large 
payment to be made to the college's English department in exchange for R 
agreeing to name a writing competition after the soft drink 
manufacturer. The contract also provides that R will allow the soft 
drink manufacturer to be the exclusive provider of all soft drink sales 
on campus. The fair market value of the exclusive provider component of 
the contract exceeds 2% of the total payment. R's use of the 
manufacturer's name in the writing competition constitutes 
acknowledgment of the sponsorship. However, 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. The fair market value of the advertising exceeds 2% of the 
total payment. Thus, the advertising is 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 $1,000 payment to T in support of the 
concert series. As a supporter of the event, the Music Shop receives 
complimentary concert tickets with a fair market value of $85, and is 
recognized in the program guide and on a poster in the lobby of the 
concert hall. 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 the Music Shop today for the finest selection of music CDs and 
cassette tapes.'' The fair market value of the advertisement in the 
program guide is $15. T's use

[[Page 179]]

of the Music Shop's name, address and telephone number in the lobby 
poster constitutes acknowledgment of the sponsorship. However, the 
combined fair market value of the advertisement in the program guide and 
complimentary tickets is $100 ($15 + $85), which exceeds 2% of the total 
payment (2% of $1,000 is $20). The fair market value of the advertising 
and complimentary tickets, therefore, constitutes a substantial return 
benefit and only that portion of the payment, or $900, that exceeds the 
fair market value of the substantial return benefit 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. 
The fair market value of the license exceeds 2% of the total payment 
received from the company. 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).
    Example 11. W, a symphony orchestra, maintains a Web site containing 
pertinent information and its performance schedule. The Music Shop makes 
a payment to W to fund a concert series, and W posts a list of its 
sponsors on its Web site, including the Music Shop's name and Internet 
address. W's Web site does not promote the Music Shop or advertise its 
merchandise. The Music Shop's Internet address appears as a hyperlink 
from W's Web site to the Music Shop's Web site. W's posting of the Music 
Shop's name and Internet address on its Web site constitutes 
acknowledgment of the sponsorship. The entire payment is a qualified 
sponsorship payment, which is not income from an unrelated trade or 
business.
    Example 12. X, a health-based charity, sponsors a year-long 
initiative to educate the public about a particular medical condition. A 
large pharmaceutical company manufactures a drug that is used in 
treating the medical condition, and provides funding for the initiative 
that helps X produce educational materials for distribution and post 
information on X's Web site. X's Web site contains a hyperlink to the 
pharmaceutical company's Web site. On the pharmaceutical company's Web 
site, the statement appears, ``X endorses the use of our drug, and 
suggests that you ask your doctor for a prescription if you have this 
medical condition.'' X reviewed the endorsement before it was posted on 
the pharmaceutical company's Web site and gave permission for the 
endorsement to appear. The endorsement is advertising. The fair market 
value of the advertising exceeds 2% of the total payment received from 
the pharmaceutical company. Therefore, only the portion of the payment, 
if any, that X can demonstrate exceeds the fair market value of the 
advertising on the pharmaceutical company's Web site is a qualified 
sponsorship payment.

[T.D. 8991, 67 FR 20438, Apr. 25, 2002]