PLR 1049003: University venue agreement does not trigger the private business use test

Plain-English summary

A university and a public authority asked whether a media company's rights under an agreement would create private business use of improvements financed with tax-exempt bonds. The agreement covered sports broadcasting and telecasts, advertising and sponsorships, tickets, game programs, and related vending at university athletic venues. The IRS treated the company's limited physical presence and incidental activities as disregarded incidental uses because they were nonpossessory and stayed within the applicable 2.5 percent limits. It also found that public parking and generally available ticket purchases were uses on the same basis as the general public. The agreement therefore did not cause the private business use test to be met.

Ruling snapshot

• Question: Do the media company's rights under the agreement create private business use of the bond-financed improvements?
• Outcome: approved
• Key authorities: IRC §§ 103 and 141; Treas. Reg. § 1.141-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201049003 Third Party Communication: None
Release Date: 12/10/2010 Date of Communication: Not Applicable
Index Number: 141.01-01
Person To Contact:
------------------------------------------------------------ ----------------------------------------- -----------
------------ -----------------
---------------------------------- Telephone Number:
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--------------- Refer Reply To:
---------------------------- CC:FIP:5
------------------------------------------ PLR-106477-09
Date:
July 6, 2010

LEGEND

Corporation = ------------------------------------------

University = ------------------------------------------------

Authority = ------------------------------------------------------------

Stadium A = -----------------------

Stadium B = --------------------------------

Stadium C = -----------------------------------

Arena = --------------------------------

Conference = ----------------------------------

Date 1 = ----------------

Date 2 = ----------------

a = ----

b = ----

c = ----
PLR-106477-09 2

d = --

Dear --------------:

This responds to your request for a ruling that the rights exercisable by Corporation
under the agreement described below will not cause the private business use test in
§ 141(b)(1) of the Internal Revenue Code (the “Code) to be met with respect to the
proposed bonds and the improvements financed thereby.

FACTS AND REPRESENTATIONS

The University, part of a statewide system of higher education, conducts its football,
basketball, baseball, and softball intercollegiate athletics (collectively, the “Sports”) in
Stadium A, Arena, Stadium B, and Stadium C, respectively. The Authority has
temporarily financed certain improvements to Stadium A, Arena, Stadium B, and
Stadium C (collectively, the “Venues”) with taxable commercial paper. The University
proposes to permanently refinance most of that taxable commercial paper using tax-
exempt bonds (the “Bonds”) to be issued by the Authority.

The Bond-Financed Improvements

The Bonds will refinance the following improvements (the “Bond-Financed
Improvements”) in the Venues.

The Stadium A Bond-Financed Improvements include (1) club seats and an improved
food service area, (2) widening and adding lighting to the pedestrian concourses,
(3) field area improvements, (4) improvements to the Letterman’s Club,
(5) improvements to the public entrance plaza, (6) renovations to the press box
(7) possible reconditioning of the concourse surface areas just inside Stadium A, and
(8) minor repair to the tunnel walkway to the playing field used by the team.

The Arena Bond-Financed Improvements include (1) club seats, (2) replacement of
seating throughout public seating areas, (3) a pedestrian bridge, (4) refurbishment of
corridors and vestibule areas, and (5) improvements to the electrical infrastructure.

The Stadium B Bond-Financed Improvements include (1) seats along the first base line,
(2) new home and visitor dressing rooms, (3) the enclosure of open space beneath
Stadium B to create storage rooms, (4) additional club seats, (5) an upgrade to the
hospitality area, including an improved food service area, and (6) a new batting cage.

The Stadium C Bond-Financed Improvements consist of a new softball stadium and a
parking lot.
PLR-106477-09 3

The Agreement

As of Date 1, the University and Corporation entered into an agreement (the
“Agreement”) for a term of a years.1 Corporation’s rights under the Agreement generally
can be categorized as (1) radio broadcast and telecast rights, (2) advertising sales and
corporate sponsorship program rights, and (3) publishing and vending rights. The
Agreement does not give Corporation any rights to control the teams, ticket sales,
security, personnel management, or general management of the Venues. Corporation
also has certain responsibilities with respect to these rights. Rights and responsibilities
relevant to the Bond-Financed Improvements are described below.2

Generally, Corporation has the right to the revenues resulting from the exercise of its
rights under the Agreement and pays certain of the related expenses. For these rights,
Corporation must (1) pay a stated annual fee to the University in semi-annual
installments over the term of the Agreement, (2) pay the University a royalty in each
contract year, equal to b percent of certain net revenues (as particularly defined in the
Agreement) in excess of specified threshold amounts, (3) make investments in signage
and technological upgrades, and (4) promote the University’s athletics scholarship fund
by providing a media package with a specified value.

Broadcast and Telecast Rights

The Agreement provides Corporation with the right and the responsibility to produce,
distribute, and syndicate radio broadcasts and telecasts of certain of the Sports games
(the “Productions”). Corporation’s rights to televise particular games are subject to the
University’s approval, and to any telecast agreements of the Conference, the National
College Athletic Association (“NCAA”), or the University and to Conference guidelines.
As of Date 2, Corporation has been precluded by the Conference from televising home
football games except for one per season. The University sets the game schedules for
the Sports in conjunction with other members of its division of the NCAA, in accordance
with the rules of the Conference and the NCAA, and without the participation of
Corporation.

Corporation arranges contracts with radio stations (the “Radio Affiliates”) to broadcast
the games. It may create a television network to telecast the games, subject to the
University’s approval of the participating television stations (the “TV Affiliates”). The
University will own the copyrights to the Productions.

1
Subsequently, the Agreement was extended but no other material changes were made.
2
The rights and responsibilities under the Agreement are much more extensive than described herein.
The representations provided by the Authority indicate that Corporation’s other rights and responsibilities
relate to property other than that included in the Bond-Financed Improvements (for example, facilities
other than the Venues or portions of the Venues financed with taxable bonds).
PLR-106477-09 4

Under the Agreement, Corporation must furnish specified personnel in connection with
the Productions. These personnel, including those employed outside the Venues, are
subject to the University’s approval. The University must furnish free admission passes
to allow Corporation’s employees access to and egress from the site of each game for
productions or recordings and to remove equipment. One such employee is a sideline
reporter, who is not stationary and is assigned no fixed space. Currently, in Stadium A,
Corporation broadcasts the games from a small portion comprising about 2 percent of
the new press box, using 3 broadcast personnel. In Arena, Corporation broadcasts
basketball games from a folding courtside table. In Stadium B, Corporation broadcasts
baseball games from an existing press box that is not part of the Bond-Financed
Improvements. In Stadium C, Corporation broadcasts softball games from a space
comprising about 3 percent of the press box, using the services of 5 or fewer broadcast
personnel. The University also must furnish free parking passes for Corporation’s
employees, if needed. However, the parking lot at Stadium C is open to the general
public on a first-come, first served basis without charge during softball games, which is
when Corporation’s employees would be parking there.

Advertising Sales and Corporate Sponsorship Program Rights

Corporation has the exclusive right to obtain agreements for sponsorships, promotions,
and advertising related to the games and productions. This includes advertising
displayed on signage; on food containers and/or drink cups used by the University or its
concessionaires; on ticket backs, ticket envelopes, and parking passes; and on the
official game programs and print items described in the publishing and vending rights
section below. None of the signage itself will be financed with proceeds of the Bonds
While generally the tickets, concession, and program sales or distribution occur outside
of the improved areas, some of these sales or distribution in certain Venues do occur in
or on areas included in the Bond-Financed Improvements.

Corporation has the exclusive right to develop, market, and promote a corporate
sponsorship program for the University home games. The corporate sponsorship
program includes advertising, marketing, and promotional activities. Specifically,
Corporation may conduct promotional activities. Issuer expects the activities to occur
for no more than a couple of minutes per game.

Corporation has the option to purchase at face value specified numbers of game tickets
for the games in Stadium A, Arena, and Stadium B, respectively, for distribution to
advertisers, sponsors, and Radio and TV Affiliates. Corporation also has the option to
purchase additional tickets to any sports games in the Venues, if available.
PLR-106477-09 5

Publishing and Vending Rights

Corporation has the exclusive right to produce and sell official game programs for the
Sports. Corporation also has the exclusive right to produce promotional schedules,
posters, pocket schedule cards, and any other agreed upon promotional print items.
Corporation must provide minimum quantities of the various game programs and other
publications; the University may purchase additional programs at cost. Corporation is
responsible for the design, layout, and production of the game programs, subject to the
University’s approval. Corporation is responsible for all program vending operations
including staffing, selling, collections and accounting for the programs. Corporation will
bear all costs and retain all revenues from the sale of the programs. Corporation has
the right to vend the programs inside and outside of each Venue, and must maintain a
minimum of c program vendor booths at each home football game and d program
vendor booths at each home men’s and women’s basketball game. The program
vendor booths currently used by Corporation are temporary, portable booths with the
footprint of each booth being approximately 9 square feet. The University must provide
for a small number of public address announcements and scoreboard announcements
at each game to promote the vending sales. Issuer expects these announcements to
occur for no more than one minute per game.

The Authority has represented that Corporation’s use of the Bond-Financed
Improvements within each respective Venue related to the broadcast equipment and
personnel used by Corporation; the presence of signs on which the advertisements
secured by Corporation appear; the sale or other distribution of tickets, parking passes,
programs and other print items, and cups and food containers with advertisements
secured by Corporation; the promotional activities and announcements; and the seats
associated with specified numbers of game tickets (as applicable to the specific Venue)
when added to nonpossessory uses (as defined in § 1.141-3(d)(5) of the Income Tax
Regulations) of the Bond-Financed Improvements within each respective Venue by
private business users other than Corporation, if any, does not exceed 2.5 percent of
the Bond proceeds allocable to the Bond-Financed Improvements in such Venue.
Further, the Authority has represented that the uses of the Bond-Financed
Improvements within each respective Venue by Corporation and other users as
described in this paragraph do not involve the use of more than 2.5 percent of such
respective Bond-Financed Improvements.

LAW AND ANALYSIS

Section 103(a) of the Code provides that gross income shall not include interest on any
state or local bond. Section 103(b)(1) provides that § 103(a) shall not apply to any
private activity bond which is not a qualified bond (within the meaning of section 141).
PLR-106477-09 6

Section 141(a) defines the term private activity bond to mean any bond issued as part of
an issue which meets either (1) the private business use test and the private security or
payment test (the “private business tests”), or (2) the private loan financing test.

Section 141(b)(1) states that except as otherwise provided, an issue meets the private
business use test if more than 10 percent of the proceeds of the issue are used for any
private business use.

Section 141(b)(6)(A) defines private business use to mean use (directly or indirectly) in
a trade or business carried on by any person other than a governmental unit. Section
141(b)(6)(B) clarifies that any activity carried on by a person other than a natural person
shall be treated as a trade or business.

Section 1.141-(2)(d)(1) provides that, in general, an issue is an issue of private activity
bonds if the issuer reasonably expects, as of the issue date, that the issue will meet
either the private business tests or the private loan financing test. An issue is also an
issue of private activity bonds if the issuer takes a deliberate action, subsequent to the
issue date, that cause the conditions of either the private business tests or the private
loan financing test to be met.

Section 1.141-3(a)(1) provides that use of financed property is treated as the direct use
of proceeds. Section 1.141-3(b) provides that both actual and beneficial use by a
nongovernmental person may be treated as private business use. Section 1.141-
3(b)(1) provides that, in most cases, the private business use test is met only if a
nongovernmental person has special legal entitlements to use the financed property
under an arrangement with the issuer. In general, a nongovernmental person is treated
as a private business user of proceeds and financed property as a result of ownership;
actual or beneficial use of property pursuant to a lease, or a management or incentive
payment contract; or certain other arrangements such as a take or pay or other output-
type contract. Under § 1.141-3(b)(7)(i), any other arrangement that conveys special
legal entitlements for beneficial use of bond proceeds or of financed property that are
comparable to special legal entitlements described in § 1.141-3(b)(2) through (6) results
in private business use.

Section 1.141-3(b)(3) provides that, except as provided in § 1.141-3(d), the lease of
financed property to a nongovernmental person is private business use of that property.
For this purpose, any arrangement that is properly characterized as a lease for Federal
income tax purposes is treated as a lease. In determining whether a management
contract is properly characterized as a lease, it is necessary to consider all the facts and
circumstances, including the following factors – (i) The degree of control over the
property that is exercised by the nongovernmental person; and (ii) Whether the
nongovernmental person bears the risk of loss of the financed property.
PLR-106477-09 7

Section 1.141-3(b)(4) provides that, except as provided in § 1.141-3(d), a management
contract (within the meaning of § 1.141-3(b)(4)(ii)) with respect to financed property may
result in private business use of that property, based on all of the facts and
circumstances. Section 1.141-3(b)(4)(ii) defines a management contract as a
management, service, or incentive payment contract between a governmental person
and a service provider under which the service provider provides services involving all,
a portion of, or any function of, a facility.

Section 1.141-3(c)(1) provides that use as a member of the general public (general
public use) is not private business use. Use of financed property by nongovernmental
persons in their trades or businesses is treated as general public use only if the property
is intended to be available and in fact is reasonably available for use on the same basis
by natural persons not engaged in a trade or business. Section 1.141-3(c)(2) provides
that, in general, use under an arrangement that conveys priority rights or other
preferential benefits is not use on the same basis as the general public. Arrangements
providing for use that is available to the general public at no charge or on the basis of
rates that are generally applicable and uniformly applied do not convey priority rights or
other preferential benefits.

Under § 1.141-3(d)(5), certain incidental uses of a financed facility are disregarded to
the extent that those uses do not exceed 2.5 percent of the proceeds of the issue used
to finance the facility. A use of a facility is incidental if: (A) Except for vending
machines, pay telephones, kiosks, and similar uses, the use does not involve the
transfer to the nongovernmental person of possession and control of space that is
separated from other areas of the facility by walls, partitions, or other physical barriers,
such as a night gate affixed to a structural component of a building (a nonpossessory
use); (B) The nonpossessory use is not functionally related to any other use of the
facility by the same person (other than a different nonpossessory use); and (C) All
nonpossessory uses of the facility do not, in the aggregate, involve the use of more than
2.5 percent of the facility. Section 1.141-3(d)(5)(ii) provides that incidental uses may
include pay telephones, vending machines, advertising displays, and use for television
cameras, but incidental use may not include output purchases.

The Agreement gives Corporation a variety of rights and responsibilities with respect to
the multi-media functions associated with the Sports. We analyze the Agreement to
determine whether it gives rise to private business use of the Bond-Financed
Improvements and, if so, whether the private business use test is met. In doing so, we
consider whether the Agreement conveys special legal entitlements for Corporation’s
use of the Bond-Financed Improvements that are comparable to ownership, leases,
management contracts, output contracts, or research agreements.

First, the Agreement does not give Corporation ownership rights to the Bond-Financed
Improvements.
PLR-106477-09 8

Certain aspects of the Agreement resemble a management contract as Corporation is
providing services for various functions of the Venues among other services it provides
to the University. For example, Corporation uses its expertise to vend the official game
programs and other promotional print items and is responsible for developing,
marketing, and promoting the corporate sponsorship program. Other aspects of the
Agreement resemble a lease in that Corporation retains certain revenues, pays certain
expenses, and pays the University, among other amounts, a stated annual fee in
exchange for the right to use certain University property. Yet, the lease-like rights set
forth in the Agreement concern mainly intangible property, such as the right and
responsibility of Corporation to produce, distribute, and syndicate radio broadcasts and
telecasts of certain of the Sports games and to sell advertisements to be aired during
the broadcasts and telecasts. Further, even where Corporation’s right is to use certain
tangible property of the University, like the advertising signs and other articles on which
the advertisements appear, these items themselves are not part of the Bond-Financed
Improvements. However, regardless of how we characterize the Agreement, as
discussed below, it does provide Corporation with special legal entitlements to use
portions of the Bond-Financed Improvements. Therefore, we must analyze these uses
to determine if they cause private business use.

Corporation’s right to broadcast and telecast certain of the Sports games is a valuable,
intangible legal entitlement that goes beyond the right to use the necessary equipment
and personnel within the Venues. However, the value of these broadcast and telecast
rights lies in Corporation’s right to sell the advertisements that air during such
broadcasts and telecasts. We think that the airing, distribution, and syndication of the
Productions and the sale of the advertisements to be aired during the Productions are
too remote to be considered use of the Bond-Financed Improvements. Importantly,
while we think that possession is not necessary to finding private business use where
there is control of the bond-financed facility, cf. § 1.141-3(f), Example 5, the Agreement
does not give Corporation control over the teams, ticket sales, security, personnel
management, or general management of the Venues. Corporation does not have
control over any element of the game schedules, such as the number of games, the
dates games are played, or the selection of opposing teams. Corporation’s rights to
televise particular games are subject to the University’s approval and to any telecast
agreements of the Conference, the NCAA, or the University and to Conference
guidelines. The University owns the copyrights to the Productions.

In addition to the intangible uses of the Venues, the Agreement specifically provides
Corporation with certain rights to tangible use of the Bond-Financed portions of the
Venues. Corporation uses broadcast equipment and certain personnel at the Venues.
These include the personnel broadcasting courtside or from the press boxes and the
sideline reporter. Corporation has the exclusive right to sell advertising displayed on the
tickets, parking passes, programs and other print items, cups, food containers, and
signs within the Venues. Corporation’s rights also include the right to conduct
promotional home game activities. Corporation has the right to vend the official game
PLR-106477-09 9

programs and other game-related publications within the Venues. Corporation has the
right to a small number of public address announcements and scoreboard
announcements at each game to promote program vending sales. To the extent that
the equipment, personnel, or signs are present; tickets, parking passes, programs, other
print items, cups, or food containers are sold or otherwise distributed; or promotional
activities or announcements occur in or on the Bond-Financed Improvements, these are
uses of the Bond-Financed Improvements. Corporation also has the right to obtain the
specified numbers of game tickets for the Radio and TV Affiliates, advertisers, and
sponsors.

However, these tangible uses are incidental uses within the meaning of § 1.141-3(d)(5).
The use of television cameras and advertising displays are specifically mentioned as
examples of an incidental use in § 1.141-3(d)(5), as are kiosks. Corporation’s use of
broadcast equipment and temporary vendor booths are similar to these examples. It
broadcasts from the press room with many other broadcasters or courtside. The
promotional activities and announcements occur during the games and involve no
physical barriers. Corporation’s right to purchase the game tickets is solely for the use
of the Radio and TV Affiliates, advertisers, and sponsors, and not its own possessory
use. Thus, these uses are nonpossessory (as defined in § 1.141-3(d)(5). These uses
are not functionally related to any other possessory use of the Bond-Financed
Improvements. The Authority has represented that the nonpossessory uses of the
Bond-Financed Improvements within each respective Venue do not exceed 2.5 percent
of the Bond proceeds allocable to the Bond-Financed Improvements in such Venue.

The Authority has further represented that the incidental uses of the Bond-Financed
Improvements within each respective Venue do not involve the use of more than 2.5
percent of such respective Bond-Financed Improvements. Accordingly, the incidental
uses by Corporation of the Bond-Financed Improvements may be disregarded.

In addition to the above incidental uses, Corporation has the right to free parking
passes, if needed, for Corporation’s employees. However, the parking lot at Stadium C
(the only parking lot included in the Bond-Financed Improvements) is open to the
general public on a first-come, first served basis without charge during softball games
when Corporation’s employees would be parking there. Accordingly, Corporation’s right
to park on the Stadium C parking lot is on the same basis as the general public and,
therefore, does not give rise to private business use. Similarly, Corporation has the
option to purchase game tickets at face value in addition to the specified numbers of
tickets if such tickets available. This use of the Venues is on the same basis as the
general public and accordingly is not private business use.

CONCLUSION
PLR-106477-09 10

The rights exercisable by Corporation under the Agreement do not give rise to private
business use of the Bonds, and therefore, do not cause the private business use test to
be met.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. In particular, no opinion is expressed or implied concerning the private
business use of areas of the Venues or other University facilities that are not part of the
Bond-Financed Improvements, of the Bonds by parties other than the Corporation, or of
any other bonds issued to finance the University’s facilities.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                   Sincerely,

                                   Associate Chief Counsel
                                   (Financial Institutions & Products)



                                By: __________________________
                                   Johanna Som de Cerff
                                   Senior Technician Reviewer
                                   Branch 5

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes