COLLEGE ATHLETIC BUSINESS MANAGEMENT ASSOCIATION 58th Annual Convention Dallas Hilton Anatole Hotel Dallas, TX June 8, 2008 Bertrand M. Harding, Jr. Law Offices of Bertrand M. Harding, Jr. Alexandria, Virginia
OVERVIEW Difference Tax Treatment of Public and Private Institutions Unrelated Business Income Tax Issues Compensation/Fringe Benefit Issues
Difference Tax Treatment of Public and Private Institutions For the most part, treated the same, but some differences Private schools are exempt under section 501(c)(3), but state schools look to section 115 (although many also have section 501(c)(3) status) Therefore, section 501(c)(3) issues (e.g., private inurement) ) not a concern to state schools State schools not subject to intermediate sanctions provisions (excise tax imposed on excess benefit transactions ), even those that have their own section 501(c)(3) status
State schools not required to file Form 990 State schools are, however, subject to unrelated business income tax and are required to file Form 990-T And, state schools that have section 501(c)(3) status are required to make Form 990-T T available for public disclosure; state schools without such status are not
Unrelated Business Income Tax Issues History of UBI tax and why imposed In order for income to be UBI, it must be in connection with an activity that is (i) a trade or business, (ii) regularly carried on, and (iii) not substantially related to the organization s s exempt purposes
Trade or business virtually all income-producing activities will qualify, but there must be a profit motive Regularly carried on looks to frequency and continuity Substantially related subjective test and most difficult to apply
Congress has set forth a number of specific UBI exemptions, for example: Interest and dividends Capital gains Rents and royalties
Exemption will not be applicable if income- producing property is debt-financed For example, university purchases building for $1M and borrows $400,000. University leases property and receives rent. 40% of rent will not qualify for rental income exclusion and will be subject to UBI tax
Common UBI Activities Entered into by Athletic Departments
Advertising As a general rule, all income from advertising in game programs, media guides, etc. is UBI
Sponsorship Payments Not treated as taxable advertising if message meets qualified sponsorship rules OK to include sponsor s s (i) logo/ slogan, (ii) location, (iii) telephone number, (iv) Internet address, (v) value-neutral description of products or services, (vi) brand/trade names Not OK to include (i) qualitative or comparative descriptions, (ii) price information or other indication of savings or value, (iii) endorsement, or (iv) inducement to buy Issue regarding exclusive provider agreements
How Sponsorship Agreements Are Taxed Step No. 1 Identify all income and benefits flowing to university (cash + FMV of product) Step No. 2 Identify all benefits flowing to sponsor (advertising, qualified sponsorships, free tickets, right to use name/logo, right to have coaches make speaking engagements, exclusive right to sell product/service, etc.) Step No. 3 Allocate income received to each benefit provided to sponsor Step No. 4 Test each separate sale under UBI rules
Participation in Partnerships Be very careful about entering into partnership or limited liability company (LLC) arrangement with for-profit entity IRS may reclassify non-partnership agreement (license, lease) as partnership agreement IRS says distributions will result in UBI unless (i) partnership/llc is operated exclusively for charitable/educational purposes, and (ii) university controls partnership/llc
Summer Sports Camps If operated by university, UBI will depend on nature of camp If open to general public, taxable. If integral part of academic program or if charitable in nature (e.g., disadvantaged youth), not taxable
Summer Sports Camps (cont d) If leased to third party to operate, payments received by third party may qualify for rental income exclusion Rent must not be based on percentage of net income from the camp University must not provide substantial services to third party as part of the arrangement
Summer Sports Camps (cont d) In some cases, camp is conducted by coach (or coach s s corporation) University must lease facility to coach at FMV If not, income is not UBI, but value of benefit provided to coach can result in additional wage income to coach If coach is major figure at university, possible that transaction could result in intermediate sanctions violation 25% excise tax imposed on coach
Use of Athletic Facilities Fees paid by students, faculty, staff are not taxable because use is a related But fees paid by general public are taxable IRS says that use of facilities by alumni is also unrelated activity If faculty/staff pay substantially less than general public, difference may be additional to faculty/staff
Agreements with Sports Marketing Companies University enters into agreement with company to produce game programs, produce radio and TV broadcasts, sell advertising and sponsorships, etc. Company makes royalty payment to university in return for these rights University treats payment as nontaxable royalty But possible recharacterization as agency agreement under Arkansas State Police Association case; if so, all payments received by company (e.g., advertising) treated as received directly by university
Internet Activities Generally, same rules that apply to print also apply to Internet Same advertising and qualified sponsorship rules apply to Internet messages Possible issue with banner ads Internet sales generally treated the same as bookstore sales Changing area of the law
Compensation/Fringe Benefit Issues
Issue No. 1: Third Party Payments to Coaches Potential issue arises anytime a third party makes a payment to a coach For example, cars provided by dealers to coaches or TV/radio contracts entered into with major sports coaches If payment is based on contractual relationship between university and third party, IRS says that payment will be deemed as if made by university directly
Issue No. 2: Employee/Independent Contractor Classifications Major focus of any IRS audit Depends on ability of university to direct and control worker IRS looks to behavioral control, financial control, and relationship between the parties Will ask to see list of (i) all individuals who received both W-2 W 2 and 1099 in same year, and (ii) all independent contractors who live in close proximity to university (e.g., 25 miles)
Issue No. 3: Buyout of New Coach s Contract with Former University Situation: University A wants to hire new coach. But coach must pay $X to University B if leaves before end of contract. University A pays $X to University B Issue: Is coach taxed on $X? Answer: Yes, if coach had legally binding obligation to pay $X to University B
Issue No. 4: Deferred Compensation As a general rule, section 501(c)(3) organizations and state colleges and universities cannot pay deferred compensation to employees If they try to do so, the deferral is ignored and treated as taxable to the individual in the year deferred Very complicated area make sure to check all employment agreements for deferred compensation provisions
Issue No. 5: Spousal Travel Spouse not required to be classified as university employee Employee will be taxed on value of spousal travel unless there is a bona fide business purpose for spousal presence Good idea to document business activities on trip
Issue No. 6: Scholarship Payments to Nonresident Aliens Non-tuition portion of scholarships (room, board, etc.) is taxable to recipient No withholding/no reporting if provided to U.S. citizen or resident alien 14% tax must be withheld if paid to nonresident alien (unless exempt under tax treaty) Payment of this tax by university can result in NCAA violation, but there are ways to allow the student to earn or receive additional sums to repay university for tax
Issue No. 7: Salary Payments By Related Foundations In some cases, a related foundation makes salary other payments to coach As a general rule, such payments are treated as if made by university directly Possible different result if payments are in return for services provided by the coach to the foundation
Cell Phones Cell phones, blackberries, etc, are listed property and therefore subject to strict substantiation rules regarding business use Major focus of IRS audit IRS will require recipients of university- provided phones to substantiate business purpose for each call -- virtually impossible to do Proposed legislation, if enacted, intended to resolve issue