Beginning the third week in December and extending through the second week of January, thirty-five NCAA sanctioned bowl games will be played. Either you have already had enough or you want more. Most bowls are broadcast on ESPN. An estimated 103.9 million viewers tuned into a college football bowl games in 2010. In the 2010-2011 season, college football’s post-season bowl games hosted a record 1,813,219 fans, according to the Football Bowl Association (“FBA”), a Texas based, not-for-profit membership organization that promotes the business interests of the bowl industry. (Yes, there is a bowl industry!) In fact, most of the bowl game revenues inure to the major conferences and schools.
The gross revenues reported by the 5 BCS (“Bowl Championship Series”) games’ sponsors, which pay out approximately $ 17 million to participating schools and their conferences, will book over $ 150 million in gross revenues. The 11 BCS conferences and member schools have a $125 million dollar multi-year broadcast contract with ESPN to televise the games through the 2013-14 season.
Payouts for all but the biggest bowl games, however, seldom match teams’ expenses, according to financial records obtained by Bloomberg News. There were 33 bowls played in 2009, not including the National Championship game. At least 13 schools spent more to play in the game than their conferences received in compensation. Losses totaled more than $3.8 million.
Think about how much money is involved in bowl games. Six Texas schools participating in bowls expect to earn over $9.5 million for their conferences. The FBA projects $281.8 million in potential bowl payouts. Like the National Football League, the schools, conferences, most bowl committees and the NCAA are tax-exempt.
Turning College Football into a Big Business
The landmark 1984 NCAA v. Board of Regents of the University of Oklahoma (“Regents”) decision played a major role in expanding the business of college football when the U.S. Supreme Court struck down the NCAA’s TV monopoly on football contracts with television as an illegal restraint of trade. This ended the NCAA’s control of the college football television market and freed the football schools and conferences to sell their games, without sharing revenues. “We eat what we kill,” one official at the University of Texas bragged. In this spirit, the UT established the “Longhorn Network™ -- a partnership between UT Austin, ESPN, and IMG College, and operated by ESPN. The network boasts “unprecedented access to your favorite Longhorn sports, letting you put your eyes upon Texas, 24/7.”
In addition to bowl revenues, the Big 12, ACC, Big East, and SEC conferences report over $300 million in TV and radio revenues thanks to the Regents decision. What does all this mean to the football teams at Texas, Florida, Georgia, Michigan, and Penn State? Each earn between $40 million and $80 million in profits a year, even after paying coaches multimillion-dollar salaries. Not surprisingly, critics of big-time college athletics, like the Knight Commission , point to the increasing commercialization of these programs.
Did You Say Bowl Game Revenues Were Tax-Free?
Recently the Congressional Budget Office produced a report on the economics of college sports at the request of Senator Charles Grassley (R-Iowa), who questioned the impact of the tax-exemption on college sports.
The, NCAA, conferences, and schools are Section 501(c)(3) education-related organizations and pay no federal income tax on most football revenues. The BCS purports to be simply a contractual arrangement between members and does not have tax-exempt status, although it has operational arrangements with the tax-exempt National Football Foundation and Football Hall of Fame. ESPN Regional Television (“ERT”), a taxable business, owns, manages, and stages 6 “made-for –TV” bowl games – Gildan New Mexico Bowl, Beef “O” Brady Bowl, MAACO Las Vegas Bowl, Sheraton Hawai’i Bowl, Bell Helicopter Armed Forces Bowl, and BBVA Compass Bowl – which put them in a special class.
The NCAA’s mission is to maintain intercollegiate athletics and athletes as an integral part of the education program, but it generates large amounts of money and exercises significant power. In 2010, the NCAA reported gross revenues of $ 741 million dollars to the IRS, largely from basketball revenues. The NCAA readily admits that it engages in commercial advertising, branding, promotions, etc., and retains a five percent (5%) fee. It also earns revenues from NCAA Football, licensed by the NCAA through IMG and EA Sports, which is one of the world’s largest video-game manufacturers.
The NCAA, according to 2009 IRS filings, is a corporation for tax purposes, with various operations in disregarded entities (LLCs) and partnerships. In a 2005 Indiana Court of Appeals decision, the NCAA was described as “an unincorporated voluntary association of colleges, universities, athletic conferences and other affiliated members.” According Richard Johnson and the Atlantic Magazine, incorporating the NCAA as a nonprofit would subject it to regulation by the state of incorporation’s attorney general, but, as it is now, no state or federal agency regulates it.
Public universities technically are exempt either under the broad doctrine of intergovernmental tax immunity and are also eligible to receive tax deductible contributions under Section 170(c)(1). (Nevertheless, many public universities also opt for an exemption under Section 501(c)(3)). Just like their private brethren, public universities are subject to the unrelated business income tax (“UBIT”).
Exemption under Section 501(c)(3) requires an organization to meet two broad requirements. First, the entity must be properly organized as a charitable organization. The second general requirement is the “operational test,” which requires that the entity engage “primarily” in charitable activities, such as education. A “private inurnment” limitation also applies that prohibits an organization from “siphoning off” money or other assets to “insiders” such as by paying excessive compensation. Also, lobbying and political contributions must be avoided.
Even if an organization is tax-exempt under Code Section 501(c), it may be required to pay the corporate income tax on net revenues from its “unrelated” business activities (i.e., UBIT). Moreover, there is a commerciality limitation that can apply when charities run significant commercial businesses; they risk losing their tax exemption, even if they also have significant charitable activities. ..
Although the IRS briefly considered in 1997 taxing colleges’ broadcast revenues, the Service quickly reversed itself and ultimately issued two formal rulings (Rev. Rul. 80-295 and Rev. Rul. 80-296), concluding that such revenues were not subject to the UBIT. Since then, the IRS has given up efforts to tax college football revenues, with the exception of “sponsorship” payments (IRS Tech. Adv. Mem. 9147007, (Aug. 16, 1991)), the so-called “Cotton Bowl” ruling.), which concluded that these fees were taxable advertising. Congress responded by amending the rules to eliminate “corporate sponsorship payments” from UBIT (I.R.C. § 513(i)). Today, each of the Division 1 football bowls has a corporate sponsor and sponsorship revenues are earned at all levels of amateur sports.
Is it time to tax college athletics? Current tax-exemption and UBIT law makes intervention by the IRS in the college athletics world difficult, according to Prof. John D. Polombo of the University Of Illinois College Of Law. In 1976, however, Congress made clear that promoting amateur athletics is charitable purpose by passing an amendment that specifically declares fostering “national or international amateur sports competition” as a charitable purpose. Any legal challenge to the status quo requires a finding that college football is not an amateur activity.
The BCS, a Controversial Alliance
Each year, as bowl season approaches, criticism begins regarding the selection of schools eligible for post-season play. The BCS, or Bowl Championship Series, is a complicated legal arrangement between the NCAA, major bowl organizers, college football conferences, major media outlets, and individual universities. In simple terms, the BCS determines which teams can earn a spot in one of the most prestigious postseason bowl games- the Fiesta Bowl, the Sugar Bowl, the Orange Bowl, and the Rose Bowl. The sole purpose of the BCS is to match the two best teams in the national championship game. After that, the BCS is charged with attempting to get the most interesting matchups in four other bowl games, but that is a secondary responsibility. The BCS is an enigmatic organization, despite its prominence in post-season bowl match-ups.
“BCS selection” assures a $17 million dollar payout, plus all the other perks of a major bowl appearance. As the selection process has worked out, a mid-major team can earn a spot is through a complicated set of circumstances, and even when they meet these conditions, only one mid-major is guaranteed a spot.
The BCS is managed by the commissioners of the 11 NCAA Football Bowl Subdivision ("FBS") (formerly Division I-A) conferences, the director of athletics at the University of Notre Dame, and representatives of the bowl organizations. (The conferences are Atlantic Coast, Big East, Big Ten, Big 12, Conference USA, Mid-American, Mountain West, Sun Belt, Pac-12, Southeastern and Western Athletic.) Decisions are made in consultation with an advisory group and are subject to the approval by an oversight committee representing 120 FBS programs. The Big 12 Conference's office served as the coordinating office for the Bowl Championship Series in 2005 and it has rotated every two years among the managing conferences that are part of the BCS arrangement. In IRS filings in 2009, the Big 10 Conference and the PAC12 reported payments of $ 845,000 and $360,000 to the BCS, an entity that apparently does not even have an IRS EIN.
Big political hitters are taking on the BCS and are challenging the tax exempt status of certain bowls. Playoff PAC has filed this complaint with the IRS, alleging that the three organizations behind the Fiesta, Orange, and Sugar Bowls have abused their tax-exempt status by using charitable contributions to (i) pay excessive compensation to their executives, (ii) make undisclosed lobbyist contributions, (iii) intervene in political campaigns, and (iv) provide substantial private benefit to insiders. The complaint is based on this 29-page report, Public Dollars Serving Private Interests: Tax Irregularities of Bowl Championship Series Organizations. After review, the NCAA Postseason Bowl Licensing Subcommittee on May 17th reaffirmed bowl licenses for the Tostitos Fiesta and Insight bowls on a one-year probationary period.
In April of 2011, the NCAA established a task force to review the licensing of bowls. That Task Force is going to be asked to look at the criteria by which we currently license bowls, including making sure that each of the bowl organizations have appropriate oversight and governance that's being conducted by the bowl sponsoring agencies, that they have established conflict of interest rules and policies, that we address the issues of advertising and title sponsorship standards, and that the oversight and transparency of the financial management of bowls is understood and explained. The task force recommended a new certification process that would put more responsibility on the CEOs and boards of the sponsoring bowl organization, with the NCAA staff conducting periodic audits to determine if the criteria are being met
BCS remains vulnerable to anti-trust scrutiny. Sen. Orrin Hatch (R-Utah) believes the BCS is biased, secretive and harmful to schools and competitors and in 2009 Sen. Hatch requested that the Department of Justice’s Antitrust Division look into the legality and fairness of the system. (Hatch is motivated by the BCS’s treatment of Mountain West (MWC) and Western Athletic (WAC) conferences, which do not have automatic bids to the play-offs and have had difficulty qualifying for a bid despite their records.) In May of 2011, the NCAA responded to questions raised by the Department of Justice regarding the BCS bowls indicating that the BCS does not fall under its purview. In June, 2011, Executive Director Hancock remains optimistic after a meeting with the Department of Justice.
For most of us, college football is about entertainment and long-standing rivalries, for others it is big business and a source of tax-free revenues.
by William Leary, Director
MFR, PC
wleary@mfrpc.com |
