Journal of Sport Management. 1994. 8. 36-48 1994 Human KineUcs Publishers, Inc.

Collegiate Athletics and the Unrelated Business Income Tax

Caroline Kern Craig Illinois State University Karen Weisman Amateur Sofftball Association

in recent years, many university athletic programs have turned to program and Scoreboard advertisements, corporate sponsorships, and other nomraditionai sources of revenue to supplement their operating budgets. As confirmed by several high-profile court cases, these nontraditional revenue sources can be subject to federal unrelated business income taxa consequence often overlooked by athletic administrators and those involved in sport management programs. This article discusses the unrelated business income tax and its impact on collegiate athletic programs. Court cases and Internal Revenue Service pronouncements are reviewed, where applicable. Compliance and planning issues are also briefly addressed.

As state funding for university athletic program.s continues to decline, many athletic administrators are finding it necessary to seek alternative sources of revenue. As noted by F. Miller (1989) and Stotlar and Johnson (1989), these alternative sources often involve corporate sponsorships, program and Scoreboard advertisements, and merchandise sales. For the most part, these fund-raising activities have been successful iti generating much-needed revenues for deficitplagued programs. However, as several high-profile court cases have confirmed, many of these activities can be subject to federal unrelated business income taxa consequence often overlooked by athletic administrators and those involved in sport management programs. The unrelated business income tax (UBIT) can have far-reaching implications for how university athletic programs conduct their revenue-generating activities. This article discusses the unrelated business income tax and it.s impact on collegiate athletics. Select background information is briefly reviewed. A detailed analysis of relevant court cases and Internal Revenue Service (IRS) pronouncements is then provided. The article concludes with a brief discussion of compliance and planning issues.

Background Jttformation
The U.S. federal tax laws are derived from three sources: statutor>', administrative, and judicial. The Internal Revenue Code (I.R.C.) is a compilation of the tax
Caroline Kern Craig is with the Department of Accounting, 5520 Illinois State University, Normal. IL 61790-5520. Karen Weisman is with the Amateur Softball AssociaUon, 2801 N.E. 50th St., Oklahoma City, OK 73111. 36

Unrelated Business Income Tax

37

Statutes and, therefore, serves as the backbone of the federal tax system. In addition to the I.R.C., regulations and other administrative pronouncements issued by the IRS aiso influence the tax law. For example, Treasur>' Regulations (Treas. Reg.) are issued by the IRS to aid in the interpretation of the Intemal Revenue Code. Technical advice memoranda (Tech. Adv. Mem.), revenue rulings (Rev. Rul.), and private letter rulings (Priv. Ltr. Rul.) are issued to provide taxpayers with information concerning the position of the IRS on a particular matter. Finally, the federal courts also influence the tax law by adjudicating disputes between the IRS and taxpayers. Several federal courts hear tax ca.ses, including the Tax Court, the Court of Claims, Appellate Courts (regional and federal circuits), and the U.S. Supreme Court. The precedential value of these tax sources varies. The Intemal Revenue Code and Treasury Regulations possess strong precedential value. Other administrative pronouncements, particularly private letter rulings, carry less weight. Finally, court opinions are important sources of the tax law, with the greatest value placed on Supreme Court decisions. As nonprofit entities, universities and their athletic programs are eligible for tax-exempt status under Intemal Revenue Code (I.R.C.) Section () 501(c)(3). This Code section permits organizations that are formed and operated exclusively for religious, charitable, scientific, literary, or educational purposes to be exempt from most federal and state taxes. This favorable treatment is long-standing and exists in order to foster activities that serve some typ)e of common good. Nevertheless, it is important to note that tax exemption under I.R.C. 501(c)(3) applies only to those activities that are "substantially related" to the entity's exempt purpwse (i.e., religious, charitable, scientific, literar}', or educational activities). In the case of universities, activities that promote the educational mission are considered to be substantially related to the exempt purpose. Activities that are unrelated to an organization's exempt purpose can produce adverse consequences, ranging from some measure of taxation to complete loss of exempt status. It is the taxation of these unrelated activities for university athletic programs that is the focus of this article. The unrelated business income tax, originally enacted in 19.S0, is assessed only on organizations that would otherwise be exempt from federal and state taxation (e.g., educational institutions, churches, and charitable organizations). As the name suggests, the tax is assessed on trade or business income that is unrelated to the entity's exempt purpose. This tax exists in order to prevent nonprofit entities from having an unfair competitive advantage over their forprofit counterparts. That is, if it were not for some form of UBIT, nonprofit entities could engage in business activities outside the scope of their exempt purposes, not pay any typie of tax on their earnings, and have considerable competitive advantage over for-profit entities that must pay tax on their incomes. Interestingly, the UBIT stems from a case involving a university with "outside" revenue sources. In the case in question, the New York University (NYU) School of Law purchased CF. Mueller and Co. (a macaroni maker) in order to generate additional monies to support the university's otherwise taxexempt programs. The taxability of these "outside" funds was questioned by the IRS, and the case eventually prompted Congress to pass legislation aimed at forcing nonprofit entities to pay tax on their "unrelated" income. (See Mueller, C.F. V. Commissioner, 190 F2d 120, 3rd Cir. 1951, rev'd 14 T.C. 922, 1950,

38

Craig cmd Weisman

discussed in J.W. Miller, 1989.) The NYU case demonstrates that there is a longstanding precedent for taxing universities on unrelated trade or business income. Factors That Trigger XJBIT I.R.C. 513 enumerates three factors that must be present in order for UBIT to be imposed;' The organization must conduct a trade or business, the trade or business must be conducted on a regular basis, and the trade or business must be substantially unrelated to the entity's exempt purpose. These requirements are discussed next. Oxganization Conducts a Trade or Business. A trade or business exists if there is a sale of goods or jjerformance of services carried on for the production of income. Given this broad definition, it is important to note that not all revenue-generating activities constitute trades or businesses. For example, a university that receives tuition payments from its students is not conducting a trade or business since no profit motive is present. In contrast, the IRS ruled recently that university-sponsored rock concerts did indeed generate trade or business income since the university's principal motive for sponsoring the concerts was profitability (Tech. Adv. Mem. 91-47-008, August 19, 1991, discussed in "Rock Concerts," 1992). As a fmal point, it should be noted that trade or business income exists only when there is "active participation" in the sale of goods or performance of services. Income generated from a passive activity is not considered to be trade or business income. Examples of passive income include dividends, interest, and royalties (Jacobs & Goedert, 1990). As discussed subsequently, the exclusion of royalty income from the trade or business classification can be of particular importance to athletic programs. Trade or Business Conducted on a Regular Basis. In order for UB IT to be imposed, the trade or business must be conducted by the nonprofit entity on a regular basis. For the most part, activities that are conducted only sporadically will avoid tax. The IRS evaluates this "regularly carried on" condition by comparing the activity in question to those conducted by for-profit entities. As noted by Ciccolella (1991), "(the) condition is met if the activity is reasonably similar in frequency, continuity, and manner" to those conducted by the private sector (p. 24). This requirement exists largely for the convenience of would-be taxpayers and, as a consequence, permits nonprofit organizations to conduct sporadic fund-raising activities without being subject to taxatkm. Trade or Business Substantially Unxelated to Exempt Purpose. A nonprofit entity will only pay UBIT if it is regularly conckcting a trade or business that i.s substantially unrelated to its exempt purpose. As one might expect, the interpretation of "substantially unrelated" has been the subject of considerable debate and controversy over the years. While noi^profit entities may consider most (if not all) of their activities to be related to their exempt function, the IRS tends to defme the exempt function much more narrowly. Not surprisingly, the IRS has the authority to decide, on a case-by-case basis, \*ether an activity is substantially related to Ae exempt function of an organiz^on. As a result, this issue has been the focus of several prominent court cases, many of which have implications for athletic programs.

Unrelated Business Income Tax

39

DBIT inceptions. Several noteworthy exceptions exist with respect to the applicability of the UBIT. In essence, these exceptions permit nonprofit entities to conduct unrelated trades or businesses within narrowly defined guidelines and to avoid payment of UBIT .^ For example, state colleges and universities may avoid UBIT by conducting trades or businesses for the convenience of their students or employees. (A university bookstore is an example of a trade or business that could fall under this exception.) In addition, UBIT may also be avoided if volunteers do "substantially all" of the work associated with the production of income, or if the trade or business involves the sale of donated merchandise or distribution of low-cost items. Finally, funds generated through the rental or exchange of donor membership lists can also be exempt from UBIT. As discussed subsequently, these exceptions have some applicability to university athletic fund-raising. Two additional points also warrant comment. First, if a nonprofit entity regularly conducts an unrelated trade or business, and the activity does not fall under an exception category, then UBIT must be paid. In recent years, approximately .35,000 nonprofit entities have filed UBIT returns annually C'UBI Revisited," 1988). The tax is assessed on net income generated for the year in excess of SI,000. (The $1,O(X) amount operates as an exemption and exists for administrative convenience.) The entity's "net income" is defined as gross income less allowable expenses. The tax is computed using the regular corporate income tax rates, which can be as high as 35%. Details concerning the UBIT calculation will be discussed in a subsequent section. Second, it is important to remember that general guidelines exist to restrict the scope of a nonprofit entity's trade or business activities. Unrelated trades or businesses may be conducted by nonprofit entities (with the payment of UBIT, where applicable) as long as the trade or business does not represent a substantial pan of the organization's activities. Under I.R.C. 501(c)(3), nonprofit entities must exist primarily to promote charitable, religious, scientific, literary, or educational activities. If the unrelated trade or business activities become too prominent, the organization runs the risk of losing its exempt status and becoming a forprofit, tax-paying entity. It is therefore essential that unrelated trade or business activities be monitored closely.

UBIT and Collegiate Athletics

Given the size and scojje of university athletic programs, many athletic directors are spending considerable time and effort dealing with budgetary and financial management issues. As noted by Hatfield, Wrenn, and Bretting (1987), collegiate athletic directors continue to be "highly occupied with monetary concerns" (p. 141). With this emphasis on revenue generation and "profitability," it is important for athletic administrators and those involved in sport management to have some familiarity with UBIT and its consequences. The remainder of this article addresses the UBIT implications of revenue sources common to collegiate athletic programs. As discussed earlier, UBIT is assessed on nonprofit entities that regularly conduct trades or businesses diat are substantially unrelated to the entity's exempt purpose. Consequently, collegiate athletic programs will be subject to UBIT on

40

O a ^ and Weisman

those activities that do />/further the institution's educational mission. Typically, athletic programs generate operating funds from a wide variety of sources, ranging from student fees and ticket sales to signage and television rights. Many of these activities are clearly related to the university's mission and do not create UBIT problems. However, as several court cases have confirmed, certain revenuegenerating activities conducted by athletic programs do indeed have UBIT consequences. The following discussion addresses the likely UBIT implications by revenue source for collegiate athletic programs. Court cases and IRS pronouncements will also be reviewed, where applicable. Key elements of the discussion are summarized in Table 1.

Related Sources and Activities

As one might expect, the more commonplace sources of revenue for collegiate athletic programs are indeed related to the university's exempt purpose. These related sources and activities are enumerated as follows. Fr>' (1991) provides an excellent overview of the UBIT consequences for many revenue-generating activities.
Table 1 Summary of UBIT Implications by Revenue Source for Collegiate Athletic Programs Revenue source Comments

Panel ARevenue sources without UBIT implications Tuition, student fees, and state No profit motive present funds Cash and in-kind contributions Exempt provided donor not receiving comparable value in return Ticket sales Exempt since related activity Program sales and concessions Exempt unless generated from advertising or merchandise sales Television and radio rights Tax exemption not available to university-owned stations Tournament and bowl revenues Sponsoring organization may have UBIT problem Royalty income Sales agreement can aifect taxation Endowment income Exempt since passive activity Panel BRevenue sources with UBIT implications Advertising income American College of Phy.siciMis and NCAA coun cases noteworthy Corporate sponsorships Cotton Bowl ruling made sponsorships taxable; proposed regulations provide some relief Merchandise sales Taxable if competing with fop-profit enterprises Rental income Tax treatment depend.s on type of rental property Unrelated debt-financed income Taxable becau.se of profit motive

Unrelated Business Income Tax

41

Tuition Waivers. Student Fees, and Other State Monies. The receipt of tuition waivers, student fees, and other state monies does not in any way create a UBIT problem for university athletic programs. These funds are provided to further the institution's educational mission and, as a result, do not produce tax consequences to the university or its programs. Of course, somewhat ironically, it is the decline in state funding that has forced many athletic programs to seek outside support, which in tum has created the potential UBIT problems.

Cash and In-kind ChariUble Contributions. Similarly, the receipt

of cash and in-kind charitable contributions will not create UBIT problems for athletic programs. (Examples of in-kind contributions include transportation and the provision of meals and hotel accommodations for team members at "away" games.) These charitable donations are solicited from individuals and businesses to help support various athletic programs offered by universities. Such donations are obviously encouraged since the tax law permits donors to take charitable contribution deductions on their income tax returns. However, this favorable treatment assumes that the donor is not receiving goods or serv ices of comparable value in return for the contribution. Ticket Sales. It is well established that revenues generated from the sale of tickets to university sporting events are related to the university's exempt purpose and are therefore not subject to UBIT. University sporting events contribute to the overall mission of the institution and clearly enhance the quality of the educational experience for many students. Program Sales and Concessions, Revenues generated from the sale of programs and concessions at university sporting events are also considered to be related to the university's exempt purpose. Since it has become customary to sell programs and refi-eshments at virtually all sporting events, the associated revenues may be exempt from tax. However, as discus.sed subsequently, revenues generated from the sale of merchandise (e.g.. clothing, mugs, etc.) and program advertising space will ver>' likely be taxed under the UBIT provisions. Television and Radio Rights. Currently, funds received from the sale of television and radio rights to collegiate sporting events are also considered to be related to the university's exempt purpose. These activities promote the general welfare of the institution by publicizing the university and its athletic programs. However, it should be noted that this tax exemption does not apply to universityowned television and radio stations. In the case of university-owned stations, the income generated may be subject to UBIT since a profit motive is typically present (Iowa State University of Science and Technology v. Commissioner, 500 F2d 508, Ct.Cls. 1974). Tournament and Bowl Revenues. Revenues generated from a university's participation in postseason tournaments and bowls (e.g., conference tournaments, NCAA and NIT championships) will also be exempt from UBIT. These events enhance the reputations of the comp)eting universities and their athletic programs. Interestingly, it is the sponsoring organization, rather than the participating universities, that may have some exposure to UBIT.' Royalty Income. The tax law sp>ecifically exempts royalty income from UBIT.'' Consequently, athletic programs that receive royalties from the sale of team names and logos will not pay tax on those funds. In this regard, it is important to distinguish between royalty income and other types of income related to the sale of an organization's name and logo. In a recent private letter ruling

42

Craig and Weisman

(Priv. Ltr. Rul. 90-29-047, April 27, 1990), the IRS determined that payments from an insurance company to an educational organization for the use of its name and logo in connection with the company's solicitation of the organization's members was a payment for services as opposed to royalty income. The IRS reached this conclusion since the "(educatiotial) organization was directly and extensively involved in the promotion of the insurance plan" ("Payments," 1991, p. 133). This IRS ruling suggests that revenues generated frwn the sale of an organization's name and logo will be treated as royalty income (and will be exempt from UBIT) as long as the oi^anization is not actively involved in the solicitation of revenues. Endowment Income. Finally, income generated from mi athletic program endowment fund may also be exempt from taxation. Common examples of endowment income include dividends, interest, and capital gains.' These income items are not subject to UBIT since they are "passive" in nature and are not generated in connection with an active trade or business.

Unrelated Sources and Activities

Under the current U.S. tax system, collegiate athletic programs will be liable for UBIT on revenue-generating activities that are unrelated to the university's exempt purpose. For most programs, these activities involve what could be described as nontraditional sources of revenue. In recent years, many programs have generated nontraditional revenues from the sade of advertising space and merchandise, the solicitation of corporate sponsorships, and the leasing of equipment and facilities. Given the budgetary pressures facing many programs, it is quite likely that athletic administrators will continue to seek nontraditional financing. By narrowly defining a university's exempt function, the IRS often characterizes nontraditional revenue-raising activities as unrelated trades or businesses. As a consequence, universities must pay UBIT on their outside eamings in order to ensure an "even playing field" with for-profit enterprises. In this regard, it is impxsrtant to note that UBIT will be assessed on unrelated trades or businesses, regardless of the ultimate use of the funds. The following discussion addresses the likely UBIT consequences by source for many nontraditional revenue-generating activities conducted by university athletic programs. Advertising Income. Most major collegiate athletic programs generate revenues from the sale of advertising space in game programs and other published materials. Recently, several prominent court cases have confirmed that this income may indeed be subject to UBIT. Qearly, the most noteworthy case in the area involved the sale of advertising space in a professional medical joumal published by the American College of Physicians, a nonprofit organization. In that case (United States v. American College of Physicians, 475 U.S. 834, 1986), the U.S. Supreme Court held that income generated from me(fical product adverti.sements was substantially unrelated to die organization's exempt purpose and therefore taxable. The Court based its decision on the fact,.dial the American College of Physicians had not solicited the advertisements "for the purpose of contributing to the educational value of the journal." The Cenrt then suggested that the advertising income could have been exempt from lax had the college coordinated "the content of the advertisements with the editarial content of the

Unrelated Business Income Tax

43

issue, or (pubiished) only advertisements reflecting new developments in the pharmaceutical markets" <Huffaker & Gut, 1986, p. 3). The American College of Physicians case has far-reaching implications for university athletic programs, as evidenced by a recent IRS ruling involving the sale of programs at university football games. In a technical advice memorandum (Tech. Adv. Mem. 91-37-002, April 29, 1991), the IRS ruled that amounts received in connection with the sale of advertising space in state university football programs were unrelated to the university's educational mission. The IRS reached this conclusion since the only guideline established concerning program content was a prohibition against "political or objectionable advertisements" ("Football Program," 1992, p. 58). Schnee and Brock (1991) offer several suggestions concerning ways to avoid UBIT on program advertising. For example, they suggest that (a) the advertisements should appear in a set form dictated by the university, (b) the advertisements should appear in the program a limited number of times, unless new information is included, and (c) perhaps most importantly, the advertisements must be coordinated with the content of the program (e.g., athletic equipment or health club advertisements). Admittedly, it may prove somewhat difficult for university athletic programs to coordinate their advertisements with program content. Nevertheless, any effon made in that regard will help reduce the potential UBIT problem. A .second prominent case involving university athletics and advertising income is National Collegiate Athletic Association v. Commissioner, 914 F2d 1417 (10th Cir. 1990), action on decision, 1991-15 (July 3, 1991), rev'd, 92 T.C. 456 (1989). This case turned principally on the interpretation of the "regularly carried on" conditiona requirement that must be met in order for UBIT to be imposed. In the NCAA case, the Tenth Circuit Court of Appeals reversed the Tax Court finding and held that revenues generated by the NCAA from the sale of advertisements in their championship basketball tournament programs were not subject to UBIT, since the advertising activity was not conducted on a regular basis. The programs were sold during a 3-week period once a year at tournament games. The court ruled that preliminary time spent in soliciting advertisements and preparing them for publication was "not to be considered in determining whether (the) NCAA regularly carried on its program advertising business" (Webster, 1991, p. 143). The Tenth Circuit's interpretation of the "regularly carried on" requirement has not been without controversy. The IRS has indicated that it will not follow the Tenth Circuit's decision in the NCAA case (Action on Decision 91-15, July 3, 1991). Moreover, in a subsequent ruling (Tech. Adv. Mem. 91-47-007, August 16, 1991)known as the "Cotton Bowl" ruling, the IRS also stated that, with respect to the NCAA decision, the "court's factual analysis is faulty and its legal conclusions erroneous." It is interesting to note that the IRS's position on this issue also contradicts an earlier Tax Court case involving the taxability of revenues generated from program sales. In than earlier case (Suffolk County Patrolmen's Benevolent Association v. Commissioner, 77 T.C. 1314, 1981), the Tax Court ruled that reveiMies generated from the sale of tickets and program guides at an annual vaudeville show were iax-xempt, evai though considerable time was spent planaing the eveitt.

44

Craig and

Given the mix of case law and IRS rulings in this area, it is quite likely that the IRS will continue to litigate cases involving the tax treatment of advertising revenues generated by nonprofit organizations. Consequently, university athletic programs remain at risk with respect to the taxability of program advertising, even if the underlying activity is held only sporadically and for a short period of time. (Of course, in any event, the content of the advertisements must be substantially related to the university's exempt purpose in order to comply with the American College of Physicians ruling.) Corporate Sponsorships. In recent years, many nonprofit organizations, including university athletic programs, have turned to corporate sponsorships in an attempt to generate additional operating revenues. Not surprisingly, the tax treatment of these sponsorships ha.s been the subject of considerable debate between the IRS and nonprofit entities. For example, in the recent Cotton Bowl ruling (which involved several tax issues), the IRS took the position that 52.5 million in sponsorship fees received by organizers of the "Mobil Cotton Bowl" and the "John Hancock Bowl" was subject to UBIT. The IRS supported its position by demonstrating that bowl organizers were not receiving a charitable contribution since they provided a quid pro quo to sponsors in the form of commercial advertising (Crawford, 1992). As detailed in the American College of Physicians case, such advertising revenues may indeed be characterized as unrelated trade or business income. In an attempt to address the controversy in this area, the IRS has issued proposed regulations concerning the tax treatment of corporate sponsorship revenues (Prop. Treas. Reg. 1.513-4, 58 Fed. Reg. 5690. 1993). (If finalized, these regulations will apply to payments received by nonprofit organizations after January 19, 1993.) The regulations enumerate several factors that will be considered by the IRS in assessing whether corporate sponsorships constitute unrelated trade or business income to nonprofit entities. For example, sponsorship revenue will be tax-exempt provided the sponsor logos and slogans do not contain comparative or qualitative descriptions of the sponsor's products or services, sponsor locations and telephone numbers, or sponsor brand or trade names. In addition, the regulations permit the sponsor's name and logo to be included in promotional fliers, newspap>er advertisements of the event, banners, signs, posters, brochures, and, quite importantly, on scoreboards. Conversely, the sponsorships will be taxed under the UBIT provisions if, among other factors, the spon.sorship includes an inducement to buy sell, rent, or lease the spon.sor's product or service or if the sponsorship payment is contingent upon attendance or broadcast ratings. If finalized, these regulations will help clarify the tax treatment of corporate sponsorship revenues and provide some relief to nonprofit organizations. In this regard, it is important to note that legislation exempting amateur athletic organizations from these corporate sponsorship rules is currently under review by the U.S. Congress.* University athletic administrators will need to monitor this legislation closely. Merchandise Sales. Frequently, athletic programs rase funds through the .sale of merehandise at sporting events and other university-sponsored competitions. The sale of these merchandise items (e.g., mugs, penna^s, clothing, etc.) generates revenue that is very likely taxable under the UBIT provisions. By selling this merchandise, the athletic program is competing wilh local bu.sinesses

Unrelated Business Income Tax

45

that operate as for-profit entities. The university must therefore pay tax on eamings generated from the merchandise sales. Rental Income. Many athletic programs are now leasing their equipment and facilities to extemal parties in order to generate additional operating funds. Oftentimes, the equipment and facilities are rented in connection with athletic camps and clinics. The tax treatment of this rental income is a function of the type of property being leased (i.e., real vs. personal) and the nature of the lease agreement. Generally, rental income from real property (buildings, practice fields, etc.) will be exempt from UBIT, provided more than 50% of the total rents received under the lease relate to real property (as opposed to personal property). Rents from personal property (e.g., athletic equipment) will be taxed under the UBIT provisions if the personal property rents are more than 10% of the total rents received under the lease.^ Not surprisingly, universities and the IRS have not always agreed as to the interpretation of these requirements. For example, the IRS ruled that the rental of a university stadium to a professional football team was not income from the rental of real property (and was therefore subject to UBIT) since the university also provided utilities, ground maintenance, linens, and stadium security (Rev. Rul. 80-298, 1980-2, CB 197). The technical nature of the tax law in this area highlights the importance of careful planning when structuring lease agreements with extemal parties. Unrelated Debt-Financed Income. Finally, income generated from debt-financed prop)erty is also considered to be unrelated trade or business income and will be taxed accordingly.* Debt-financed property is defined as ali incomeproducing property on which there is "acquisition indebtedness" at any time during the year. In the case of athletic programs, a prominent example of such property would be stadium skyboxes constructed with borrowed funds (Fr>', 1991). Any income received in connection with skybox rentals would be characterized as unrelated debt-financed income. This income is considered to be unrelated to the university's exempt purpose since profit generation is the principal motive underlying the acquisition of the property.

Compliance and Planning Issues

University athletic administrators and those involved in sport management programs also need to be aware of compliance and planning issues involving UBIT. Familiarity with these issues will ease the compliance burden and also facilitate effective tax planning.

Compliance Issues
As noted earlier, UBIT is assessed on the net unrelated trade or business income generated during the year in excess of $1,000. (Recall that the $1,000 amount operates a.s an exemption and exists for administrative convenience.) Net income is defined as gross revenues less allowable expenses. The tax is assessed using the regular corporate income tax rates, which start at 15% and may reach 35% depending on the level of taxable income. Since UBIT is assessed on net income (rather than gross revenues), the proper allocation of expenses to UBIT activities is critically important. Typically,

46

Cra^ and Weisman

allocable expenses are characterized as either direct or indirect expenses. Direct expenses are those that relate exclusively to the unrelated trade or business, including, for example, salaries of personnel who work only for the trade or business activity, and utilities and maintenance costs incurred for trade or busitjess facilities. Indirect expenses are those that benefit both related and unrelated activities. Examples of indirect expenses include salaries of administration personnel who oversee all athletic department activities, and depreciation on buildings that hou.se both related and unrelated activities. Only those expenses allocated to the unrelated trade or business may be used in computing unrelated trade or business net income.' Given the complexities surrounding the UBIT calculation, it is essential that university athletic programs maintain accounting systems that are capable of generating the necessary revenue and expen.se data. Finally, it is important to note that if a nonprofit organization regularly carries on two or more unrelated trades or businesses, UBIT is assessed on the aggregate net income derived from all unrelated activities. In the case of collegiate athletic programs, the UBIT liability will be determined at the university' level (in the aggregate) and paid accordingly. The aggregate nature of the UBIT calculation reinforces the importance of properly allocating expanses to related and unrelated activities. The federal UBIT is paid with Form 990-T, Exempt Organization Business Income Tax Return.

Planning Issues
Given the continued emphasis on revenue generation and profitability by university athletic programs, many administrators are now encountering UBIT problems. It is therefore important to structure revenue-raising activities with this potential UBIT liability in mind. For example, as a guiding principle, athletic programs should attempt to raise funds through related activities. For example, renewed emphasis should be placed on soliciting charitable contributions from individual and business donors. In addition, attempts should be made at increasing revenues from ticket sales, program sales, and concessions. (Of course, winning teams contribute significantly to this effort!) Athletic programs should also focus on generating additional funds through the sale of television and radio broadcast rights. Importantly, athletic programs should also attempt to increase their share of royalty income derived from the sale of team names aad logos. As a final example in this regard, athletic administrators may also want to consider taking advantage of the exception categories present under the UBIT guidelines. In particular, tax-free revenues may be generated by selling donated merchandise, distributing low-co.st items, and renting or exchanging donor membership lists. Planning possibilities also exist for revenues generated from what wotjld otherwise be unrelated activities. For example, some advertising income may be exempt from UBIT if it can be demonstrated that the content f the advertisements is educational and therefore substantially related to the university's mission. In addition, it is very important to structure leasing agreements with external p>arties so that the rental income will be exempt from UBIT. Also, as noted earlier, since UBIT is assessed on net income generated fixjm unrelated activities, it is essential that all allocable costs be accounted for and attributed to ilie trade or business activity. The timing of these expanses should also be monitored closely (e.g., if possible, incur expenses in years when the UBIT exposare h greatest). By taking

Unrelated Business Income Tax

47

advantage of these planning opportunities, athletic programs should be able to manage their UBIT positions effectively.

Conclusion
This article has discussed the unrelated business income tax and its implications for collegiate athletic programs. As demonstrated, many revenue-raising activities conducted by university athletic programs do indeed have UBIT consequences. It is therefore essential that athletic administrators and those involved in sport management programs have some familiarity with this tax and its potential impact on revenue generation.

References
Ciccolella. M. (1991). A taxing question. Collegiate Athletic Management, 3(1), 24, 26. Crawford, CT. (1992). IRS anacks exempt organization income from corporate sponsorship fees. The Journal of Taxation, 76, 230-234. Football program advertising is UBL (1992). The Journal of Taxation, 76, 58. Fry. K. (1991). Certain revenue-producing activities in your department may be subject to the UBfT. Collegiate Athletic Management, 3(1), 25. Hatfield, B.D., Wrenn, J.P., & Bretting, M.M. (1987). Comparison of job responsibilities of intercollegiate athletic directors and professional sport general managers. Journal of Sport Management, 1, 129-145. Huffaker, J.B., & Gut, E.L. (1986). Supreme court holds advertising revenue was not substantially related income. The Journal of Taxation, 65. 2-5. I.R.C. 501. 512, 513. and 514. Iowa State University of Science and Technology v. Commissioner. 500 F2d 508 (Ct.Cls. 1974). Jacobs. J.A.. & Goedert, P.C. (1990). Tax issues for exempt organizations: A primer. .Association Management, 42( 1), 47-54. Miller. F. (1989). Increased revenue plan for division \-.\ institutions. Athletic Administration, 24{3), 14-16. Miller, J.W., Jr. (1989). The unrelated business income trap. The National Public Accountant, M{9), 16-17. Mueller, C.F. v. Commissioner, 190 F2d 120 (3rd Cir. 1951), rev'd, 14 T.C. 922 (1950). National Collegiate Athletic Association v. Commissioner, 914 F2d 1417 (10th Cir. 1990), action on decision, 1991-15 (July 3, 1991), rev'd. 92 T.C. 456 (1989). Payments for name and logo are UBTI. (1991). The Journal of Taxation, 74, 132-133. Priv. Ltr. Rul. 90-29-047 (April 27. 1990). Prop. Treas. Reg. 1.513^, 58 Fed. Reg. 5690 (1993). Rev. Rul. 80-298, 1980-2 CB 197. Rock concerts at university resulted in UBTI. (1992). The Journal of Taxation, 76, 185186. Schnee, EJ., & Brock, E.A. (1991). Opponunities exist to reduce unrelated business income from advertising revenue. The Journal of Taxation, 74, 240-245. Stotlar, D.K., & Johnson, n.A. (1989). Stadium ads get a boost. Athletic Business, 13(9), 49-51.

48

Craig and Weisman

Suffolk Country Patrolmen's Benevolent .Association v. Commissioner. 77 T.C. 1314 (1981). Tech. Adv. Mem. 91-37-002 (April 29. 1991). Tech. Adv. Mem. 91-47-007 (August 16. 1991). Tech. Adv. Mem. 91-47-008 (August 19. 1991). Treas. Reg. l..'iI3. UBI revisited. (1988). A.ssoc.iation Management, 40(5). 16. 18. United States v. .i^erican College of Physicians, 475 U.S. 834 (1986). Webster, G.D. (1991). Advertising income rumbles. Association Management, 43(3), 136,
143.

Notes
'Details concerning these factors may be found in Treas. Reg. 1.5)3-1. 'I.R.C. ."513 enumerates the various exceptions to the UBIT. Jacobs and Goedert (1990) provide a thorough analysis of the more routine exceptions. 'These problems are exemplified by the recent IRS ruling involving the Cotton Bowl and taxability of corporate sponsorships. Details concerning this ruling are discus.sed in connection with the review of "unrelated" revenue sources and activities. This exemption is enumerated in I.R.C. 512(bK2). ''Under limited circumstances, capital gain income may be subject to UBIT. Details concerning these circumstances may be found in I.R.C. 512 and 513. "Rep. Bill Brewster (D.. OK) introduced legislation in the U.S. House of Representatives (H.R. 1551) during summer 1993 to exempt amateur athletic events from the corporate sponsorship rules. The legislation is pending at the time of this writing. ^See I.R.C. 512(b)(3) for further details concerning the tax treatment of rental income for nonprofit entities. *1.R.C. 514 enumerates several exceptions involving the nontaxability of unrelated debt-financed income. For the most part, these exceptions do not apply to university athletic programs. ''It should be noted that certain technical requirements exist concerning the allocation of expenses to unrelated trade or business activities, particularly with respect to the computation of net income from advertising. See Schnee and Brock (1991) for further details.

Acknowledgments
The authors would like to acknowledge Larry Lyons. CP.A., Assistant Athletic Director-Finance, Illinois State University, for his assistance in the preparation of this manuscript. Thanks also go to the editor and two anonymous reviewers for their helpful comments.