The Unrelated Business Income Tax and Its Effects Upon Collegiate Athletics

The University of Akron IdeaExchange@UAkron Akron Tax Journal Akron Law Journals 1992 The Unrelated Business Income Tax and Its Effects Upon Collegiate Athletics Frank James Vari Please take a moment to share how this work helps you through this survey. Your feedback will be important as we plan further development of our repository. Follow this and additional works at: https://ideaexchange.uakron.edu/akrontaxjournal Part of the Tax Law Commons Recommended Citation Vari, Frank James (1992) "The Unrelated Business Income Tax and Its Effects Upon Collegiate Athletics," Akron Tax Journal: Vol. 9 , Article 7. Available at: https://ideaexchange.uakron.edu/akrontaxjournal/vol9/iss1/7 This Article is brought to you for free and open access by Akron Law Journals at IdeaExchange@UAkron, the institutional repository of The University of Akron in Akron, Ohio, USA. It has been accepted for inclusion in Akron Tax Journal by an authorized administrator of IdeaExchange@UAkron. For more information, please contact , . Vari: UBIT and College Athletics THE UNRELATED BUSINESS INCOME TAX AND ITS EFFECTS UPON COLLEGIATE ATHLETICS by FRANK JAMES VARI* INTRODUCTION On August 16, 1991, the Internal Revenue Service (IRS) sent shockwaves throughout the tax-exempt organization community when it issued Technical Advice Memorandum (TAM) 91-47-007 applying the Unrelated Business Income Tax (UBIT) to the organizers of two corporate-sponsored college football bowl games.' Although TAM 91-47-007 applies only to the organizers of two bowl games, 2 it will potentially affect numerous tax-exempt organizations that rely upon corporate sponsors for their funding. 3 TAM 91-47-007 was primarily directed at the Cotton Bowl Athletic Association (CBAA).4 The IRS is concerned with the sponsorship payments the CBAA receives from its primary corporate sponsor, the Mobil Corporation. 5 The CBAA operates on an $8 million budget, 6 including a $1.5 million contribution from Mobil. 7 This contribution puts Mobil's name and logo in front of thousands of fans in the stadium and millions more at home via television and radio. The Cotton Bowl is one of nineteen corporate-sponsored college football bowl games which annually collect $64 million in corporate sponsorships. 8 The IRS wishes to tax $19.6 million of this amount which represents corporate title sponsorships. 9 The remaining $44.4 million represents royalty income 10 which is not subject to the UBIT. " An estimated $5 million of federal revenue would be * B.S. in Accounting, University of Akron (1986); M.Tax., University of Akron (1993); J.D., University of Akron (1993); C.P.A. (Ohio). I Tech. Adv. Mem. 91-47-007 (Aug. 16, 1991); see also Michael Hiestand, Non-Profits Events FretAbout Tax Ruling, USA TODAY, Jan. 21, 1992, at 2C. Tech. Adv. Mem. 91-47-007 deleted the names of the parties involved, but the organizations have been identified as the Mobil Cotton Bowl and the John Hancock Bowl. 2 Richard Sandomir, Tax Ruling Worries Officials of Bowls, N.Y. TImEs, Dec. 6, 1991, at B9. 3 See. e.g., Joanne Lipman, IRS Ruling Threatens Firms'Sponsorship, WALLS T.J., Dec. 5, 1991, at B8; Paul Streckfus, Cotton Bowl Ruling Draws Fire at ASAE Roundtable Discussion,92 TAx NomS TODAY 12-16, Jan. 17, 1992, available in LEXIS, Fedtax Library, TNT File. 4 Mobil Cotton Bowl Hit in IRS Technical Advice, 10 TAx MGMT. WEEKLY REP. 1476, Dec. 9, 1991, available in LEXIS, Fedtax Library, TMWEEK File. 5 Id 6 Edward P. Jones, IRS Wants Share of Bowl Game Funding, TAX NOTES, Feb. 4, 1991, available in LEXIS, Fedtax Library, TXNOTE File. 7 Sports-Event TaxIs Opposed, N.Y. TiMES, July 29,1992 at D3. 8 See Dennis Zimmerman. Corporate Title Sponsorship Payments to Nonprofit College Football Bowl Games: Should They Be Taxed?, CONGRESSIONAL RESEARCH SERVICE 92-157E, Doc. 92-1744 (Feb. 11, 1992), reprinted in 92 TAx Nomxs TODAY 41-18, available in LEXIS, Fedtax Library, TNT File. 9 Id 10 Id. 1" I.R.S. § 512(b)(2) (1990); Rev. Rul. 81-178, 1981-2 C.B. 135. 111 Published by IdeaExchange@UAkron, 1992 1 Akron Tax Journal, Vol. 9 [1992], Art. 7 AKRON TAX JouRNAL [Vol. 9 generated if the UB1T were applied to the bowl games.', Significantly more would be generated if the UBIT were applied to the $1.1 billion which corporate sponsors contribute annually to exempt organizations. 3 Historically, corporate sponsorship of exempt organizations has avoided IRS scrutiny. However, due to shrinking public and private financial support, exempt organizations have turned to corporate sponsors for their funding.1 4 The IRS claims its policy has not changed, but that the exempt organization's increasingly aggressive fund-raising methods have drawn the IRS's unwelcomed t5 attention. The implications of the IRS's memorandum are far reaching. In addition to corporate-sponsored bowl games, exempt organizations ranging from local ballet companies to environmental groups may incur UBIT liability. Public concern over such tax liability has prompted the introduction of legislation which supports both 16 the IRS and the exempt organizations. This article examines the UBIT and its application to corporate sponsorship of college football bowl games and other exempt organizations likely to be affected by TAM 91-47-007. Thereafter, the article will consider the IRS's proposed examination guidelines of corporate sponsorship income, the public policy concerns regarding such income, and the proposed legislation introduced to address the competing concerns. THE UBIT AND ITS APPLICATION To COLLEGE FOOTBALL BOWL GAMES Generally, the Internal Revenue Code (the "Code" or "I.R.C.") grants taxexempt status to qualifying charitable organizations. Prior to 1950, this grant of tax-exempt status permitted qualified charitable organizations to enter indiscriminately into non-charitable, for-profit activities, thereby allowing those organizations to compete unfairly with non-tax-exempt enterprises. 17 12 Zimmerman, supra note 8. $91.6 million of the $64 million received annually by college football bowl games represents corporate title sponsorships. Assuming 25% of the sponsorship amount is properly expensed by the exempted organization, the remaining $14.7 million is subject to a 34% tax rate which would generate approximately $5 million of federal tax revenue. 13 Id 14 Id Total corporate sponsorships of exempt organizations' sports, arts, music, community, and causerelated events was $1.1 billion in 1991. IS See. e.g., Exempt Organizations:IRS Official Discusses Recent UBIT Developments, 11 TAX MGMT. WEEKLY REP. 579, May 4, 1992, available in LEXIS, Fedtax Library, TMWEEK File; Albert B. Crenshaw, Separating CharityFrom Ads: IRS Shift on CorporateSponsorship Alarms Nonprofit Groups, WASH. POST, July 21, 1992, at Cl. 16 See Zimmerman, supra note 8. 17 Donald C. Haley, The Taxation Of The Unrelated Business Activities Of Exempt Organizations: Where Do We Stand? Where Do We Seem To Be Headed?, 7 AKRON TAX i 61,62 (1990); see (...truncated)