The NCAA, tax exemption, and college athletics

University of Illinois Law Review

Volumn 2010, Issue 1, 2010, Pages 109-163

  Colombo, John D ^a  

^a UNIVERSITY OF ILLINOIS AT URBANA CHAMPAIGN   (United States)

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EID: 78650685341     PISSN: 02769948     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (356)

1. See, e.g., Elana Schor, Rep. Thomas Seeks Answers from NCAA, HILL, Oct. 5, 2006, at 3;
2. Steve Wieberg, NCAA's Tax-Exempt Status Questioned, USA TODAY, Oct. 5, 2006, at 3C, available at http://www.usatoday.com/sports/college/2006-10-04- ncaa-tax-status-x.htm?POE=SPOISVA;
3. see also Letter from Bill Thomas, Chairman, House Comm. on Ways & Means, to Dr. Myles Brand, President, NCAA (Oct. 2, 2006), available at http://www.usatoday.com/sports/college/2006-10-05-congress-ncaatax-letter-x.htm
4. [hereinafter Thomas Letter].
5. Letter from Myles Brand, President, NCAA, to William Thomas, Chairman, House Comm. on Ways & Means (Nov. 13, 2006), http://coia.comm.psu.edu/ News%20of%20interest/NCAA% 20response%20to%20Thomas%20letter%2013%20Nov%2006.pdf
6. [hereinafter NCAA Response].
7. George F. Will, Tax Breaks for Football, WASH. POST, Oct. 25, 2006, at A17, available at http://www.washingtonpost.com/wp-dyn/content/article/2006/10/ 24/AR2006102400911.html. Will, of course, was just one of many to opine on the subject. The blogosphere quickly picked up on the issue; a Google blog search of "NCAA Tax Exemption" for the period from Oct. 5, 2006 to June 1, 2007, revealed some 2145 entries on the subject.
8. NCAA Division I is the domain of the big-time college sports programs; prior to 2006, Division I was further subdivided for men's football into Division I-A (the "highest" division) and Division I-AA. These two subdivisions had their names officially changed to the "Football Bowl Subdivision" (formerly Division I-A) and the "Football Championship Subdivision" (formerly Division I-AA).
9. See generally NCAA, What's the Difference Between Divisions I, II and III?, Feb. 1, 2007, http://www. ncaa.org/wps/ncaa?ContentID=418;
10. NCAA, NCAA Members by Division, http://web1.ncaa.org/ onlineDir/exec/divisionListing (click on "Run Report"). As of 2009, 120 universities participated in Football Bowl Subdivision (FBS) football, while over 300 schools participated in Division I basketball. The programs at the heart of the debate over amateurism and commercialism of college athletics tend to be those that have FBS football programs, though a few schools that do not participate in FBS football may have highly commercialized basketball programs part of Division I-for example, Georgetown University, which competes in the Big East conference in basketball but does not have a FBS football program. Similarly, some FBS football schools have relatively modest programs (e.g., Western Kentucky University). Nevertheless, for the sake of brevity this Article often will refer to the pro-grams in question by the general "Division I" moniker, and I think it is safe to assume that if the reader has any familiarity with college athletics, she will know whom I am talking about.
11. See, e.g., Will, supra note 3 ("Also, tax exemption is financing an escalation of coaches' salaries.").
12. Treas. Reg. § 53.4958-4(b)(1)(ii)(A) (2002) ("The value of services is the amount that would ordinarily be paid for like services by like enterprises (whether taxable or tax-exempt) under like circumstances (i.e., reasonable compensation). Section 162 standards apply in determining reasonableness of compensation...."). In fact, the regulations under § 4958 provide a safe-harbor provision for compensation arrangements if the arrangement is approved by an independent board or compensation committee of the board that relies on "appropriate data as to comparability prior to making its determination" and documents the basis for its decision. Id. § 53.4958-6(a)(2)-(3) (2002). For further discussion, see infra text accompanying notes 44-62.
13. Monty Burke, The Most Powerful Coach in Sports, FORBES, Sept. 1, 2008, at 92, available at http://www.forbes.com/forbes/2008/0901/092.html.
14. Associated Press, Calipari Accepts Kentucky's Offer, MSNBC.COM, Mar. 31, 2009, http://nbcsports.msnbc.com/id/29956570/.
15. See Donovan Takes Big-Money Deal to Coach Magic, ESPN.COM, June 4, 2007, http://sports. espn.go.com/nba/news/story?id=2888555.
16. For example, question three of the letter questions the "tax-exempt status of college sports" even though, as discussed below in the text accompanying notes 12-22, our law does not exempt activities but rather the entities themselves. Thomas Letter, supra note 1. Of course, in a broad sense, individual activities can be tax-exempt or not, depending on (1) whether the organization itself is taxexempt and (2) whether the activity is subject to the UBIT. But it is generally not helpful to the underlying analysis to confuse distinct concepts. For a discussion of the UBIT, see infra notes 23-32 and accompanying text, and infra Part IV.
17. The term "nonrevenue sports" generally describes those sports that receive little, if any, revenue from gate receipts or media contracts. Gymnastics (both men's and women's), golf, tennis, soccer, lacrosse, rowing, and similar sports generally fall into this category. College baseball does attract some level of revenue from both gate receipts and television contracts (for the College World Series), as does women's basketball, but these revenues are insignificant in comparison to those generated by Division I college basketball and FBS football. For purposes of this Article, the term "nonrevenue sports" should be viewed as encompassing all sports programs on college campuses other than men's Division I basketball and FBS football.
18. I.R.C. § 501(c) (2006).
19. Id. § 501(c)(3). Although the statute seems to make "charitable" one of several possible purposes that are exempt under § 501(c)(3), in fact an organization must conform to common law definitions of charity to obtain exemption under this subsection. The listing of religious, educational, and other purposes is best thought of as a sort of presumptive list-that is, religious organizations are presumed to be charitable organizations, but in fact simply being a religious (or educational) organization standing alone is insufficient to be exempt. Rather, an entity must prove it is a charitable religious organization, or a charitable educational organization in order to obtain § 501(c)(3) exemption.
20. See generally Bob Jones Univ. v. United States, 461 U.S. 574, 586-89 (1983) (rejecting argument of Bob Jones University that it need not meet common law standards of charity as long as it was a legitimate educational institution).
21. Public universities technically are exempt either under the broad doctrine of intergovernmental tax immunity or under Code § 115, which exempts from federal taxation the income of States or "any political subdivision thereof" derived from "the exercise of any essential governmental function." I.R.C. § 115;
22. see infra notes 110-12 and accompanying text. Donations to a government unit, moreover, are tax deductible under § 170(c)(1). Nevertheless, many public universities request recognition of exemption under § 501(c)(3) simply to avoid confusion in the minds of potential donors and because grants from private foundations are often limited to "charitable" organizations exempt under § 501(c)(3). Just like their private brethren, moreover, public universities are subject to the unrelated business income tax discussed in the text at Part IV. See I.R.C. § 511(a)(2)(B).
23. Section 170(c) lists the organizations eligible to receive deductible donations. Subsection (c)(2) essentially adopts the language defining a § 501(c)(3) organization as one of the organizations eligible to receive deductible contributions. Government units, certain veterans organizations, and certain cemetery societies are the other eligible organizations, which means that public universitiesas units of state government-qualify for deductible donations without regard to § 501(c)(3). Section 501(c)(3) status is likely somewhat less important to the NCAA; in its 2006 Form 990 (the most recent Form 990 available from Guidestar), the NCAA reported receiving only $318,939 from donations, as opposed to "program service revenue" of more than $584,000,000. NCAA, Return of Organization Exempt from Income Tax Return (Form 990) (2006), http://www.guidestar.org/FinDocuments/2007/ 440/567/2007-440567264-0484608e-9.pdf [hereinafter Form 990 Filing]. Qualification for exemption as a social welfare organization under § 501(c)(4), or even as a trade association under § 501(c)(6) (which, by the way, is the Section that provides tax exempt status for the NFL, NBA, MLB, and NHL), would probably provide the NCAA with as much federal tax benefit as § 501(c)(3) status. Nevertheless, § 501(c)(3) status carries a certain cachet for exempt organizations, and may be important to establishing exemption from local property taxes, which often limit exemption to "charitable" organizations.
24. See Janne Gallagher, The Legal Structure of Property-Tax Exemption, in PROPERTYTAX EXEMPTION FOR CHARITIES: MAPPING THE BATTLEFIELD 3,3-4 (Evelyn Brody ed., 2002). Given that the NCAA has a very nice office building in Indianapolis, it is probable that § 501(c)(3) status is of some financial import to the organization.
25. Treas. Reg. § 1.501(c)(3)-1(a), 1(b) (as amended in 2008).
26. Id. § 1.501(c)(3)-1(b).
27. Id. § 1.501(c)(3)-1(c)(1). Although the statute states that an exempt entity must be "organized and operated exclusively" for charitable purposes, I.R.C. § 503(c)(3), "exclusively" actually means "primarily" in this context. Treas. Reg. § 1.501(c)(3)-1(c)(1). Remember, folks, that this is the IRC, where a "person" includes a partnership, corporation, etc. See I.R.C. § 7701(a)(1).
28. I.R.C. § 501(c)(3).
29. Id.
30. Bob Jones Univ. v. United States, 461 U.S. 574, 591 ("A corollary to the public benefit principle is the requirement, long recognized in the law of trusts, that the purpose of a charitable trust may not be illegal or violate established public policy.");
31. Rev. Rul. 75-384,1975-2 C.B. 204 (stating that an educational organization that promoted civil disobedience was not exempt because it violated prohibition on engaging in illegal activity).
32. See JAMES J. FISHMAN & STEPHEN SCHWARZ, TAXATION OF NONPROFIT ORGANIZATIONS 237-45 (2d ed. 2006);
33. FRANCES R. HILL & DOUGLAS M. MANCINO, TAXATION OF EXEMPT ORGANIZATIONS ¶ 4.02 (2009);
34. BRUCE R. HOPKINS, THE LAW OF TAX-EXEMPT ORGANIZATIONS § 19.10 (8th ed. 2003);
35. John D. Colombo, In Search of Private Benefit, 58 FLA. L. REV. 1063, 1064-65 (2006).
36. FISHMAN & SCHWARZ, supra note 21, at 355-57;
37. HOPKINS, supra note 21, § 25;
38. John D. Colombo, Commercial Activity and Charitable Tax Exemption, 44 WM. & MARY L. REV. 487, 491 (2002).
39. FISHMAN & SCHWARZ, supra note 21, at 356;
40. Colombo, supra note 22, at 498-99.
41. C. F. Mueller Co. v. Comm'r, 190 F.2d 120,121-22 (3d Cir. 1951).
42. The theory surrounding the UBIT and how college athletics fits with that theory is discussed in detail in Part V.B. As explained more fully there, our current tax laws do not permit corporations to "zero-out" their income via charitable contributions. Though it may come as a surprise to those not steeped in the technicalities of our tax laws, neither individuals nor corporations can eliminate their tax liability by giving their income to charity. Individuals cannot deduct more than 50 percent of their adjusted gross income for charitable contributions. I.R.C. § 170(b)(1)(A) (2006). On the corporate side, unless a corporation is itself considered a charity, and thus exempt from the corporate tax, it can reduce its taxable income by only 10 percent through charitable contributions. Id. § 170(b)(2)(A). Thus a corporation like Newman's Own, which operates a business but donates all its profits to charity, must still pay tax on 90 percent of its net revenues. Why this is so is a matter of some academic debate, although the tax laws have had a limit on charitable contributions deductions virtually since the inception of the income tax. For a thorough discussion of this point and the various policy reasons that have been offered to justify the charitable contribution deduction limits,
43. see Miranda Perry Fleischer, Generous to a Fault? Fair Shares and Charitable Giving, 93 MINN. L. REV. 165 (2008). I have used the word "ostensibly" in the text because some academics have suggested that forces other than unfair competition and tax-base protection were at work in the adoption of the UBIT. See infra text accompanying notes 169-81 for a further discussion.
44. Revenue Act of 1950, Pub. L. No. 81-814, §§ 301, 331, 64 Stat. 906, 947, 957.
45. I.R.C. §§ 501(b), 511-513. Code § 513(a) states, "The term 'unrelated trade or business' means . .. any trade or business the conduct of which is not substantially related (aside from the need of such organization for income or funds or the use it makes of the profits derived) to the exercise or performance by such organization of its charitable, educational, or other purpose . .. ." Note the parenthetical in this quotation, which makes clear that a business cannot be substantially related simply because it provides a source of funds to carry on charitable activities. The regulations define a "substantially related" activity as one that has a "causal relationship" to the achievement of the exempt purpose. Treas. Reg. § 1.513-1(d)(2) (as amended in 1983).
46. See I.R.C. § 501(b).
47. Id. §§ 511-13.
48. The fragmentation rule comes from Code § 513(c).
49. See, e.g., United States v. Am. Coll. of Physicians, 475 U.S. 834, 849-50 (1986) (finding advertising revenue from tax-exempt medical journal subject to the UBIT).
50. See, e.g., Rev. Rul. 73-105, 1973-1 C.B. 264 ("[S]ales of a particular line of merchandise may be considered separately to determine their relatedness to the exempt purpose."). In this ruling, the IRS found that sales of art reproductions were substantially related to the museum's exempt purpose of promoting public understanding of art, but sales of science books and general souvenir items relating to the city in which the art museum was located were not substantially related.
51. See also Rev. Rul. 73-104, 1973-1 C.B. 263 (finding that sales of greeting cards with art reproductions are not subject to UBIT).
52. See supra note 13 and accompanying text.
53. The IRS requires that separate corporations "stand on their own" for exemption purposes and separately justify tax exemption. Although there are some very narrow exceptions, in general, one corporation cannot claim "derivative" exemption via its relationship with another exempt organization. See Colombo, supra note 22, at 514-17 (discussing the IRS' separate-identity principle for corporations and their subsidiaries). Nevertheless, a separately incorporated athletic department just might be a kind of entity that would fit under the narrow exception that we in the tax exemption world call the "integral part" test (from the regulations under § 502 of the Code). In general, the "integral part" test permits derivative exemption for "captive" subsidiaries, such as a subsidiary corporation that generates electrical power for a parent charity. See Treas. Reg. § 1.502-l(b) (as amended in 1970). At least one case has applied the integral part doctrine to a captive university book store,
54. Squire v. Students Book Corp., 191 F.2d 1018 (9th Cir. 1951), so it is reasonable to assume that a captive athletic department might also come within this test.
55. Treas. Reg. § 1.501(c)(3)-1(d)(3)(i)(a) (as amended in 2008).
56. Id. § 1.501(c)(3)-1(d)(3)(i)(a), (b).
57. See, e.g., id. § 1.501(c)(3)-1(d)(3)(ii) ex. 4 (listing "museums, zoos, planetariums, symphony orchestras, and other similar organizations" as educational);
58. Rev. Rul. 65-271, 1965-2 C.B. 161 (holding jazz festival exempt as educational organization).
59. See NCAA v. Comm'r, 914 F.2d 1417, 1418-19 (10th Cir. 1990). Media licensing and sports championships account for 98.51 percent of the NCAA's budgeted revenue for the fiscal year-end August 31, 2009. NCAA, Revised Budget for Fiscal Year End August 31, 2009, http://www.ncaa.org/wps/ ncaa?key=/ncaa/ncaa/about+the+ncaa/budget+and+finances/budget+information/ 2008-09+budget+ detail.
60. See FISHMAN & SCHWARZ, supra note 21, at 210-16.
61. Tax Reform Act of 1976, Pub. L. No. 94-455, § 1313(a), 90 Stat. 1520, 1730 (codified as amended at I.R.C. § 501(c)(3) (2006)). This Act added "foster[ing] national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment)" to the list of exempt purposes in § 501(c)(3). The parenthetical limitation on sports equipment was thought necessary to prevent private gyms and athletic clubs from gaining exemption under § 501(c)(3), but it also potentially affected "legitimate" amateur athletic organizations (such as Olympic training). So in 1982, Congress added § 501(j) to provide exemption for "real" amateur athletic organizations, even if they provided equipment or facilities. Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, § 286(a), 96 Stat. 324, 569-70 (codified as amended at I.R.C. § 501(j)).
62. See generally FISHMAN & SCHWARZ, supra note 21, at 216 (discussing the 1976 amendment to § 501(c)(3)).
63. 696 F.2d 757 (10th Cir. 1982).
64. Id. at 762.
65. Though academics debate what the scope of "established public policy" is in this context, so far the IRS has applied the doctrine only to cases of racial discrimination against a minority class. See Bob Jones Univ. v. United States, 461 U.S. 574, 598-99 (1983) (holding that a school that discriminated against African Americans violated an established fundamental public policy and was not eligible for exemption).
66. See generally FISHMAN & SCHWARZ, supra note 21, at 172-74;
67. Donald C. Alexander, Validity of Tax Exemptions & Deductible Contributions for Private Single-Sex Schools, 70 TAX NOTES 225, 225-27 (1996);
68. David A. Brennen, The Power of the Treasury: Racial Discrimination, Public Policy, and "Charity" in Contemporary Society, 33 U.C. DAVIS L. REV. 389, 394-97 (2000);
69. Miriam Galston, Public Policy Constraints on Charitable Organizations, 3 VA. TAX REV. 291, 293-97 (1984);
70. Johnny Rex Buckles, Do Law Schools Forfeit Federal Income Tax Exemption When They Deny Military Recruiters Full Access to Career Services Programs?: The Hypothetical Case of Yale University v. Commissioner, 41 ARIZ. ST. L. REV. 1 (2009).
71. I.R.C. § 501(c)(3). The 1909 version of this language permitted exemption only if "no part of the profit of [the organization] inures to the benefit of any private stockholder or individual." 44 CONG. REC. 4157 (1909),
72. quoted in Harvey P. Dale, The Crux of Charity: Inurement, Private Benefit, and Excess Benefit Transactions, in NAT'L CTR. ON PHILANTHROPY & THE LAW, DIVERSIONS OF CHARITABLE ASSETS: CRIMES AND PUNISHMENTS 3 (2004 conference materials), http://www1.law. nyu.edu/ncpl/pdfs/2004/Conf2004-Dale- DRAFT.pdf.
73. See United Cancer Council, Inc. v. Comm'r, 165 F.3d 1173,1176 (7th Cir. 1999) ("A charity is not to siphon its earnings to its founder, or the members of its board, or their families, or anyone else fairly to be described as an insider, that is, as the equivalent of an owner or manager.");
74. HILL & MANCINO, supra note 21, ¶, 4.03;
75. HOPKINS, supra note 21, § 19.1.
76. HILL & MANCINO, supra note 21, ¶ 4.03 [5] [a].
77. See, for example, HILL & MANCINO, supra note 21, ¶ 4.03[7], for a convenient list of, and case citations for, common inurement transactions beyond paying excessive compensation.
78. See, e.g., FISHMAN & SCHWARZ, supra note 21 at 246-47.
79. See Taxpayer Bill of Rights 2, Pub. L. No. 104-168, § 1311(a), 110 Stat. 1452,1475 (1996) (codified as amended at I.R.C. § 4958). Section 4958 provides for excise taxes on an "excess benefit transaction," defined as a transaction in which "the value of the economic benefit provided exceeds the value of the consideration ... received." I.R.C. § 4958(c). This is the § 4958 analog to the "siphoning off" concept in private inurement. See id.;
80. HILL& MANCINO, supra note 21, ¶ 4.03. Excess benefit transactions can occur only between an exempt organization and a "disqualified person," defined as a person who, during the preceding five years, was "in a position to exercise substantial influence over the affairs of the organization." I.R.C. § 4958(f).
81. The legislative history indicates that the excise tax sanction would be used exclusively unless the violations were so egregious as to call into question an organization's charitable purpose. See H.R. REP. NO. 104-506, at 59 n.15 (1996). In 2008, the IRS finalized regulations under § 4958 that detail when the agency might still invoke revocation of exemption as an inurement sanction. T.D. 9390, 2008-18 I.R.B. 855 (codified at Treas. Reg. § 1.501(c)(3)-1(f) (as amended in 2008)).
82. See supra text accompanying notes 7-8.
83. See, e.g., FISHMAN & SCHWARZ, supra note 21, at 234 ("At several major universities, employees other than the president, such as football and basketball coaches ... are the highest paid.").
84. Thomas Letter, supra note 1, at 2 (question 2), 7 (question 11).
85. See, e.g., Will, supra note 3.
86. Treas. Reg. § 53.4958-4(b)(1)(ii)(B) (2002) ("[Compensation for purposes of determining reasonableness under section 4958 includes all economic benefits provided by an applicable tax-exempt organization in exchange for the performance of services." (emphasis added)).
87. Id. § 53.4958-4(b)(1)(ii)(A) ("The value of services is the amount that would ordinarily be paid for like services by like enterprises (whether taxable or tax-exempt)...."). The House Report on § 4958 also confirms that "reasonableness" should be measured by a comparison to both the forprofit and nonprofit markets. H.R. REP. No. 104-506, at 56 n.5 (1996) ("[T]he Committee intends that an individual need not necessarily accept reduced compensation merely because he or she renders services to a tax-exempt, as opposed to a taxable, organization.").
88. Although one can argue that the job responsibilities of a Division I college football head coach and an NFL head coach are somewhat different, there are enough similarities in duties that NFL salaries likely would be probative comparisons. The fact that coaches often move from the college ranks to the pro ranks and vice-versa (as in Saban's case) is additional evidence that the pro market is a useful comparison for reasonable salaries. In fact, the most recent confirmation of this was the Orlando Magic's hiring of Billy Donovan, the head basketball coach of the University of Florida. Though Donovan ultimately changed his mind about taking the Magic job and returned to the University of Florida, the Orlando Sentinel reported that Donovan's new contract would have paid him an average of $5.5 million per season, about $2.5 million more than what he stood to make at Florida. See Brian Schmitz, How Magic Pulled Shocker, ORLANDO SENTINEL, June 1, 2007, at Al;
89. see also Associated Press, Very Apologetic Donovan Returns to Florida, MSNBC.COM, June 7, 2007, http://nbcsports.msnbc.com/id/18965269/ns/sports- college-basketball/.
90. The general standard for "reasonable compensation" under § 4958 is the same as the standard of comparison in § 162. Treas. Reg. § 53.4958-4(b)(1)(ii)(A);
91. see also 4A BORIS I. BITTKER & LAWRENCE LOKKEN, FEDERAL TAXATION OF INCOME, ESTATES AND GIFTS ¶ 100.4 (2d ed. 1992);
92. HILL & MANCINO, supra note 21, ¶ 4.03[6][b] (listing twelve factors from the Internal Revenue Manual that the IRS and courts consider in § 162 cases, including the "[e]mployee's contribution to profitmaking," "[t]ime devoted by employee to the business," and "[c]haracter and amount of responsibility of the employee" (citing I.R.M. 4233, § 232.2)).
93. See generally 1 BITTKER & LOKKEN, supra, ¶ 22.2.2 (3d ed. 1999) (listing the same reasonableness criteria as the Internal Revenue Manual and discussing each in depth). While courts have not determined which reasonableness factors are more important than others, see id., the Tax Court has noted that "[p]erhaps the most significant factor in passing upon the reasonableness of compensation in a tax case is a comparison between the compensation that is under consideration and the prevailing rates of compensation paid to the holders of comparable positions by comparable companies within the same industry." HILL & MANCINO, supra note 21,
94. ¶ 4.03[6][b] (quoting John Marshall Law Sch. v. United States, 81-2 U.S. Tax Cas. (CCH) ¶ 9514 (Ct. Cl. Trial Div.), aff'd, 228 Ct. Cl. 902 (1981)).
95. Associated Press, Saban's $4 Million Salary Raises Questions, MSNBC.COM, Jan. 4, 2007, http://www.msnbc.msn.com/id/16472828/.
96. USA Today, Compensation for Div. I-A College Football Coaches, http://www.usatoday. com/sports/graphics/coaches-contracts/flash.htm (last visited Nov. 10, 2009).
97. Saban actually took a pay cut from his $4.5 million annual salary as the head coach of the NFL Miami Dolphins in order to take the Alabama job. Associated Press, supra note 58. NFL coach salary data is harder to come by, but one story pegged Mike Holmgren's salary at $7 million and Mike Shanahan's and Joe Gibbs's salaries at $5 million per year. Gerry Dulac, The Money Question: It's Not Everything, but It Is Something, PITTSBURGH POST-GAZETTE, Dec. 31, 2006, at D-1, available at http://www.post-gazette.com/ pg/06365/750301-66.stm.
98. An article in the Gaston Gazette in 2007 reported that salaries of the top ten NBA coaches ranged from over $10 million per year for Phil Jackson (L.A. Lakers) to a paltry $4.4 million for Mike Dunleavy (L.A. Clippers). Even the lowest-paid NBA coach at the time of the survey made $1.6 million per year (Sam Mitchell, Toronto). Richard Walker, Phil Paid Top Dollar Yet Again, GASTON GAZETTE, Feb. 16,2007, at 5C.
99. Whether "reasonableness" for salaries paid by tax-exempt organizations should be measured in relation to for-profit salaries of course is a different question and one hotly debated in the nonprofit community. See generally FISHMAN & SCHWARZ, supra note 21, at 232-37. In 2004, the Senate Finance Committee produced a "discussion draft" of potential reforms for the nonprofit sector that included a proposal to cap board and executive compensation. Id. at 236-37. These proposals were opposed by many in the nonprofit community, and ultimately were not enacted into law.
100. See Colombo, supra note 21, at 1067-73 (comparing the private inurement and private benefit doctrines).
101. 92 T.C. 1053 (1989).
102. Id. at 1078-79.
103. Id. at 1073-79. For a more thorough discussion of this case and its effect on private benefit doctrine,
104. see Colombo, supra note 21, at 1073-74.
105. United Cancer Council v. Comm'r, 165 F.3d 1173, 1176, 1179-80 (7th Cir. 1999). The private benefit issue was not directly addressed in the case, which was actually about private inurement; rather, Judge Posner hypothesized at the very end of his opinion that private benefit might be an available remedy to the IRS even though he ruled that private inurement did not exist. Id. at 1179-80. The "bad deal" in this case was a contract with an outside fund-raiser, under the terms of which the charity received less than 10 percent of the money raised ($2.3 million out of $28.8 million). Id. at 1175. Because the contract between the charity and fund-raiser was negotiated at arm's length with no prior relationship between the two, Judge Posner found that the private inurement doctrine was inapplicable to this situation. Id. at 1178. But he suggested that if the contract was found on remand to be so one-sided that entering into it was effectively a breach of fiduciary duties of the charity's board, the private benefit doctrine could be used to attack the transaction. Id. at 1180. The case was settled on remand, however, and the private benefit issue was never tried. For further discussion, see Colombo, supra note 21, at 1076-77.
106. See, e.g., I.R.S. Gen. Couns. Mem. 39,862 (Nov. 22, 1991), 1991 GCM LEXIS 39, at *39-47 (holding that "revenue stream" joint venture arrangements between doctors and a hospital for outpatient services violated private benefit doctrine);
107. see also Colombo, supra note 21, at 1071-75.
108. See I.R.S. Chief Couns. Mem. 200431023 (July 30, 2004), at 20, http://www.irs.gov/pub/irswd/0431023.pdf.
109. Rev. Rul. 2006-27, 2006-211.R.B. 915.
110. Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) (as amended in 2008).
111. I.R.S. Gen. Couns. Mem. 39,598 (Jan. 23, 1987), 1987 GCM LEXIS 2, at *14-16 (citations omitted).
112. See I.R.S. Gen. Couns. Mem. 39,862 (Nov. 22,1991), 1991 GCM LEXIS 39, at *30-47.
113. Id. at *36.
114. Id. at *67 ("We recognize that there may well be legitimate purposes for joint ventures, whether analyzed under the anti-kickback statute or the tax Code. These may include raising needed capital; bringing new services or a new provider to a hospital's community; sharing the risk inherent in a new activity, or pooling diverse areas of expertise.").
115. Remember, the IRS has applied the private benefit doctrine even where transactions were negotiated at arm's length with "outsiders." See supra notes 63-70 and accompanying text.
116. For example, in I.R.S. General Counsel Memorandum 39,862, discussed in the text at note
117. supra, the IRS assumed that the joint ventures involved fair market value exchanges. I.R.S. Gen. Couns. Mem. 39,862 (Nov. 22, 1991), 1991 GCM LEXIS 39, at *2 ("X-Corp represented that the purchase price for the revenue stream was established at fair market value after arm's length negotiations, and was properly discounted to present value."). Similarly, the IRS has applied the private benefit doctrine to prohibit a nonprofit hospital from entering into a "whole hospital" joint venture with a forprofit health care provider unless the nonprofit organization remains in control of the resulting venture, despite the fact that these transactions are negotiated at arm's length and involve fair market value exchanges. See, e.g., Rev. Rul. 98-15, 1998-1 C.B. 718. This all may sound very strange (perhaps even "crazy") to those not steeped in tax exemption doctrine, but in the immortal words of Dave Barry, "I am not making this up." I have suggested in a recent article that the private benefit doctrine as it currently exists grants far too much discretion to the IRS, and that the doctrine should be limited to certain specific transactions that involve "wasting" charitable assets.
118. Colombo, supra note 21, at 1065-66. This Section, however, deals with what the law is, not what it should be.
119. I should disclose that I have argued strongly against the breadth of the doctrine. See Colombo, supra note 21, at 1080 (noting that "the doctrine currently has no theoretical grounding to set its outer boundaries"). As a result, my assessment of the strength of a private benefit argument is not unbiased.
120. See Thomas Letter, supra note 1.
121. NCAA Bylaw 12.1.2, addressing "Amateur Status," states that "[a]n individual loses amateur status and thus shall not be eligible for intercollegiate competition in a particular sport if the individual:... (f) [a]fter initial full-time collegiate enrollment, enters into a professional draft; or (g) [e]nters into an agreement with an agent." NCAA, 2009-10 NCAA DIVISION I MANUAL, BYLAW 12.1.2 (Aug. 1, 2009), http://www.ncaapublications. com/Uploads/PDF/D1-Manual9d74a0b2-dl0d-4587-8902b0c781e128ae.pdf (citations omitted).
122. Recent activities by the NCAA, however, indicate that the "wall" between the NCAA and the pro sports leagues may be breaking down. A report in the Sports Business Journal in 2008 details a historic $50 million partnership between the NCAA and NBA to improve youth basketball training and programs. John Lombardo & Ross Nethery, NBA, NCAA Team Up for 'Historic Deal,' SPORTSBUSINESS J., Apr. 7, 2008, http://www.sportsbusinessjournal.com/article/58587. One wonders if the NBA sees this partnership as a way to reduce long-term training costs via the participation of the NCAA, a situation that might be more akin to American Campaign Academy. Still, it is unlikely that the IRS would try to make a private benefit argument with regard to a program aimed at training young athletes; if a stand-alone entity engaged in such an activity, it would undoubtedly qualify for tax exemption under § 501(c)(3). See supra text accompanying notes 36-42 (noting that the IRS has always considered "educating" young athletes in a particular sport as a charitable activity).
123. See, e.g., Colombo, supra note 21, at 1084-85.
124. See, e.g., FISHMAN & SCHWARZ, supra note 21, at 355-57;
125. Colombo, supra note 22, at 491.
126. I.R.C. § 503(c)(3) (2006); see also supra note 17.
127. Trinidad v. Sagrada Orden de Predicadores de la Provincia del Santisimo Rosario de Filipinas, 263 U.S. 578, 582 (1924).
128. Treas. Reg. § 1.501(c)(3)-1(c)(1) (as amended in 2008) (original emphasis removed) (emphasis added).
129. Id.
130. I use the word "generally" here because some commercial businesses are, in fact, charitable. Nonprofit hospitals, for example, are generally tax-exempt under § 501(c)(3) despite the fact that they essentially run a commercial enterprise of charging fees to patients for health care services. See Rev. Rul. 69-545, 1969-2 C.B. 117 (recognizing that the promotion of health for the general benefit of the community is a charitable purpose, even if the hospital excludes indigent patients). At least one court has held that a religious publisher was exempt, notwithstanding the fact that its operations were essentially indistinguishable from commercial publishers.
131. Presbyterian & Reformed Publ'g Co. v. Comm'r, 743 F.2d 148,158-59 (3d Cir. 1984). Another common example is a low-income housing development, often done through a limited partnership in which the sole general partner is a § 501(c)(3) entity.
132. See FISHMAN & SCHWARZ, supra note 21, at 137 (discussing IRS standards for exempting low-income housing projects).
133. For further discussion of ways in which exempt charities carry on noncommercial charitable missions, see Colombo, supra note 22, at 525-26.
134. See Treas. Reg. § 1.501(c)(3)-1(c)(1).
135. For example, the regulations state that whether the operation of an unrelated business is a primary purpose of an organization is measured in part by "the size and extent of the trade or business and the size and extent of the activities which are in furtherance of one or more exempt purposes." Id. § 1.501(c)(3)-1(e). See FISHMAN & SCHWARZ, supra note 21, at 357 (suggesting that practitioners use a "50 percent of total revenue" benchmark for "substantiality").
136. In Goldsboro Art League, Inc. v. Commissioner, the Tax Court rejected the IRS's argument that exemption should be denied to Goldsboro because it operated two art galleries at which it sold art to the public (a "commercial" activity) in part because of the minor amount of money involved (gross receipts never exceeded $6,500 per year, and profits were negligible).
137. See 75 T.C. 337, 341-42 (1980).
138. See, e.g., Christian Echoes Nat'l Ministry, Inc. v. United States, 470 F.2d 849, 855-56 (10th Cir. 1972) (opining that the "no substantial part" test for the lobbying limitation is not purely a mathematical assessment but rather a balancing test that measures how important lobbying is to the underlying objectives of the organization).
139. See FISHMAN & SCHWARZ, supra note 21, at 356-57;
140. John D. Colombo, Reforming Internal Revenue Code Provisions on Commercial Activity by Charities, 76 FORDHAM L. REV. 667, 671-72 (2007).
141. C F. Mueller Co. v. Comm'r, 190 F.2d 120,121 (3d Cir. 1951).
142. Treas. Reg. § 1.513-1(d)(4)(iv) ex. 2 (as amended in 1983).
143. Id. § 1.501(c)(3)-1(c)(1).
144. Id. § 1.501(c)(3)-1(e) (emphasis added).
145. See supra note 27 and accompanying text.
146. See John D. Colombo, Regulating Commercial Activity by Exempt Charities: Resurrecting the Commensurate-in-Scope Doctrine, 39 EXEMPT ORG. TAX REV. 341, 346 (2003); Colombo, supra note 91, at 672.
147. See, e.g., Presbyterian & Reformed Publ'g Co. v. Comm'r, 743 F.2d 148 (3d Cir. 1984). In reversing the Tax Court, the Third Circuit nevertheless seemed to approve in general of the Tax Court's "commercial hue" analysis: Where a nonexempt purpose is not an expressed goal, courts have focused on the manner in which activities themselves are carried on, implicitly reasoning that an end can be inferred from the chosen means. If, for example, an organization's management decisions replicate those of commercial enterprises, it is a fair inference that at least one purpose is commercial, and hence nonexempt. And if this nonexempt goal is substantial, tax exempt status must be denied.
148. Id. at 155 (quoting Presbyterian & Reformed Publ'g Co. v. Comm'r, 79 T.C. 1070, 1083-85 (1982)).
149. See also Living Faith, Inc. v. Comm'r, 950 F.2d 365, 373-74 (7th Cir. 1991) (applying commercial hue analysis to health foods store affiliated with the Seventh Day Adventist church).
150. See generally Colombo, supra note 22, at 501-04 (discussing revival of commerciality doctrine and how courts have inconsistently applied commercial hue analysis). The Third Circuit's statement in Presbyterian & Reformed Publishing Co., however, fails to recognize that even substantial commercial activity is consistent with exemption if 'the commercial activity is "in furtherance of" an exempt purpose.
151. In Rev. Rul. 64-182,1964-1 C.B. 186, the IRS considered a case in which an exempt organization derived its revenues largely from renting space in a commercial office building, but used its revenues to make grants to other charitable entities. Concluding that the rental activity was "unrelated" for purposes of the UBIT, the IRS nevertheless ruled that the organization was entitled to retain its exempt status as an organization described under § 501(c)(3) because it was carrying on a charitable program "commensurate in scope" with its financial resources.
152. Id. In 1971, the IRS General Counsel's office reiterated the "commensurate-in-scope" analysis, stating: [A]side from express statutory limitations on business activity, such as section 502 and the newly enacted provisions relating to private foundations, there is no quantitative limitation on the "amount" of unrelated business an organization may engage in under section 501(c)(3), other than that implicit in the fundamental requirement of charity law that charity properties must be administered exclusively in the beneficial interest of the charitable purpose to which the property is dedicated. ... [F]or some time now it has been increasingly apparent that our earlier approach to the problem of permissibility or nonpermissibility of business activities of charities has been based on a misconception that somehow in the enactment of the provisions for exemptions of charities from income tax, Congress intended an implied restriction on the extent of their engagement in business activities. In the years past, the Service sought by ruling and by litigation to deny the right of charities to engage in business, insisting that somewhere, somehow in the enactment of the exemption provisions Congress must have intended to limit the classification of exempt charities to those charities not engaging to any substantial extent in commercial endeavors. Exhaustive research of legislative history from the earliest enactment of the charitable provisions of our income tax laws fails to provide support for such proposition. To the contrary, the evidence is clear that the first provision for exemption of charities from imposition of tax under the Corporation Excise Tax of 1909, from which the present income tax exemption provisions derive, was accompanied not by any intention to limit exemption to charities not engaged in business, but an intention to assure exemption of certain charities that were engaged in business.
153. I.R.S. Gen. Couns. Mem. 34, 682 (Nov. 17,1971), 1971
154. GCM LEXIS 38, at *25-28.
155. More recent applications of the commensurate-in-scope doctrine include rulings approving exemption for an organization that published textbooks for religious schools, even though revenues from the publishing business counted for over half of the organization's total revenues and enjoyed 75 percent profit margins, I.R.S. Tech. Adv. Mem. 96-36-001 (Jan. 4,1996), 1996 PLR LEXIS 1026;
156. for an organization that helped developmentally disabled children, despite receiving 98 percent of its gross income from bingo games, I.R.S. Tech. Adv. Mem. 97-11-003 (Nov. 8, 1995), 1995 PLR LEXIS 2320;
157. and for an organization formed to give financial assistance to needy women that produced 66 percent of its revenues from the operations of a gift shop and tea room, I.R.S. Priv. Ltr. Rul. 2000-21-056 (Feb. 8, 2000), 2000 PRL LEXIS 562.
158. In its 2006 Form 990, the NCAA reported income of over $512 million from "television rights fees." Form 990 Filing, supra note 14, pt. VII, 1. 93.
159. See, e.g., Robert H. Frank, Challenging the Myth: A Review of the Links Among College Athletic Success, Student Quality, and Donations, May 2004, http://www.knightfdn.org/dotAsset/131763.pdf (paper prepared for the Knight Foundation Commission on Intercollegiate Athletics disputing the argument that sports programs strongly impact alumni interest and donations);
160. Welch Suggs, Big Money in College Sports Flows to the Few, CHRON. HIGHER
161. The Supreme Court, for example, has suggested in the antitrust context that NCAA football does not compete with professional football. See NCAA v. Bd. of Regents, 468 U.S. 85, 101-02 (1984).
162. See NCAA Response, supra note 2, at 17-18 (reporting that 53 percent of then Division I-A football programs and 28 percent of Division I basketball programs had revenues in excess of expenses in 2004-05).
163. See Steve Wieberg & Steve Berkowitz, NCAA, Colleges Pushing the Envelope with Sport Marketing, USA TODAY, Apr. 2, 2009, http://www.usatoday.com/ sports/college/2009-04-01-marketingcover-N.htm.
164. E.g., id. Although my conclusion in this Section is that the commerciality doctrine does not provide the IRS with much ammunition for attacking the NCAA's exempt status, if the NCAA continues to unabashedly exploit the commercial side of college athletics and continues to issue statements apparently condoning a more commercialized approach to revenue opportunities, the ability of the IRS to use the commerciality doctrine as a potential exemption attack certainly will increase. After all, it doesn't take a rocket scientist to plaster the commercial activity label on college athletics when the NCAA itself is talking about how to better exploit commercial opportunities. Moreover, as the analysis in this Section shows, courts have been more willing to pull exemption from entities based on the "commercial hue" of their primary activities than perhaps the IRS Regulations or rulings warrant. In short, if the NCAA "keeps it up" on the commercial exploitation front, I might well change my conclusion in a year or two, and more importantly, the IRS might find the NCAA a tempting commerciality target.
165. See infra text accompanying notes 138-40.
166. See infra text accompanying notes 138-46 (discussing the "substantially related" issue under the UBIT).
167. NCAA Response, supra note 2, at 1 ("Divisions I and II intercollegiate sports provide $1.5 billion annually in athletic scholarships . . . .");
168. id. at 17 ("These excess revenues are redistributed to support other sports programs that do not generate revenues sufficient to cover expenses ....").
169. Id. at 22 ("In furtherance of its tax-exempt missions, the NCAA sponsors 88 championships in 24 sports.").
170. For an overview of the constitutional doctrine, see RONALD D. ROTUNDA & JOHN E. NOWAK, TREATISE ON CONSTITUTIONAL LAW: SUBSTANCE AND PROCEDURE § 13.9 (4th ed. 2007). Professors Rotunda and Nowak opine that the immunity of state government from federal taxation may be vastly narrower than IRS interpretations: The principles of federalism, regardless of whether those principles are derived from the structure of the Constitution or the Tenth Amendment, do not restrict the federal power to tax the activities of state and local governments, or persons or entities who deal with those governments, so long as the tax does not discriminate against state and local governments in a way that impairs their sovereignty.
171. Id.
172. I.R.C. § 115 (2006). Despite what it says, § 115 generally applies only if the organization in question is an entity separate from state government but carrying out essential government functions. If the organization involved is not a separate entity but rather simply a part of state government, the IRS takes the position that § 115 does not apply, but that the organization in question is nevertheless exempt under the general doctrine of intergovernmental tax immunity.
173. See supra note 110.
174. Thus whether § 115 applies to a particular public university depends on how the IRS views its organizational structure.
175. See, e.g., Letter from the IRS to the University of Texas System 3 (Mar. 20, 1984), http://research.uthscsa.edu/osp/forms/UT-IRStaxstatusletter.pdf ("Based on the information submitted, we conclude that section 115 of the Code does not apply to the income of the University System and its component institutions because they are not organizations established separately from the State....[W]e conclude that the University System and its component institutions are not subject to federal income taxation [under the doctrine of intergovernmental immunity] because they are agencies within State's government."). For a thorough discussion of § 115 and its quirks,
176. see Ellen P. Aprill, The Integral, the Essential, and the Instrumental: Federal Income Tax Treatment of Governmental Affiliates, 23 J. CORP. L. 803 (1998).
177. I.R.C. § 4958 applies by its terms only to "an applicable tax-exempt organization," which in turn refers to an organization exempt under § 501(c)(3) or (c)(4). I.R.C. § 4958(c)(1)(A), (e);
178. see Lawrence M. Brauer et al, An Introduction to I.R.C. 4958 (Intermediate Sanctions), in IRS EXEMPT ORGANIZATIONS CPE TECHNICAL INSTRUCTION PROGRAM FOR 2002, http://www.irs.gov/pub/irstege/eot opich02.pdf. The one exception may be the private benefit doctrine, discussed in the text at notes 63-81,
179. supra. According to Ellen Aprill, the IRS has applied the private benefit concept in determining if an organization qualifies for exemption under § 115. Aprill, supra note 111, at 816-17. If, however, the public university is simply considered part of state government and therefore exempt under the general doctrines of intergovernmental tax immunity, even the private benefit doctrine appears inapplicable.
180. See id.
181. See I.R.C. §§ 511-513.
182. Richard L. Kaplan, Intercollegiate Athletics and the Unrelated Business Income Tax, 80 COLUM. L. REV. 1430(1980).
183. I.R.C. § 513(c);
184. see also Treas. Reg. § 1.513-1(b) (as amended in 1983).
185. NCAA Response, supra note 2, at 17-18.
186. See Kaplan, supra note 114, at 1442-43 (discussing "program- generated revenues" in collegiate athletics). Obviously, programs that make no profit have little to worry about even if they are subject to the UBIT, because no tax would be due in any event. 118. Treas. Reg. § 1.513-1(c)(1).
187. Id. § 1.513-1(c)(2)(i) ("Where income producing activities are of a kind normally undertaken by nonexempt commercial organizations only on a seasonal basis, the conduct of such activities by an exempt organization during a significant portion of the season ordinarily constitutes the regular conduct of a trade or business.").
188. NCAA, http://www.ncaafootball.com (follow hyperlinks under "Schedules" to view respective Division schedules) (last visited Nov. 10, 2009).
189. NFL, Schedules, http://www.nfl.eom/schedules#week (last visited Nov. 10, 2009).
190. CBS Sports, NCAA College Basketball, Schedules, http://www.cbssports.com/ collegebasketball/schedules (last visited Nov. 10, 2009);
191. NBA, Master Calendar, http://www.nba.com/ mastercalendar/masterCalendar. html (last visited Nov. 10, 2009).
192. See Kaplan, supra note 114, at 1449 (reaching a similar conclusion).
193. NCAA v. Comm'r, 914 F.2d 1417, 1425-26 (10th Cir. 1990).
194. "The competition in this case is between the NCAA's program and all publications that solicit the same advertisers. The competition thus includes weekly magazines such as Sports Illustrated ...."
195. Id. at 1425.
196. The court should have read Professor Kaplan's article (which was written well before this case was decided). As he pointed out, though the regulations state that "intermittent" activities that occur infrequently will not be subject to the UBIT, such activities are taxed if they demonstrate "the competitive and promotional efforts typical of commercial endeavors." Kaplan, supra note 114, at 1450 (quoting Treas. Reg. § 1.513-1(c)(2)(ii) (1975)). I am hard-pressed to find significant differences in the promotional efforts undertaken by the NCAA for its basketball tournament (and the accompanying commemorative program) and the NFL for the Super Bowl (and its accompanying commemorative program). Both are hyped beyond belief by commercial, cable, and satellite television, as well as the usual talking heads on ESPN and other sports programs. The 2007 NCAA Final Four basketball tournament commemorative program was 104 pages, with advertising from such wellknown commercial entities as Cingular, Coca-Cola, Pontiac, DiGiorno, Enterprise Rent-a-Car, The Hartford, Lowe's, State Farm, and Anheuser-Busch; the 2007 Super Bowl commemorative program was 240 pages, with ads by similar well-known commercial entities (Coors, instead of Anheuser-Busch; Pepsi, instead of Coca-Cola; Cadillac, instead of Pontiac; etc.). Both commemorative programs are on file with the author.
197. I.R.S. Action on Decision 1991-15 (July 3,1991), 1991 AOD LEXIS 50.
198. Treas. Reg. § 1.513-1(d)(2) (as amended in 1983). Again, those not steeped in tax policy (and even those who are) may question why profits from a business activity that are used to expand charitable outputs should be taxed at all. For a not-altogether-satisfying answer, see the discussion of the policies behind the UBIT infra text accompanying notes 176-80.
199. Rev. Rul. 69-545, 1969-2 C.B. 117, 118.
200. Carle Found, v. United States, 611 F.2d 1192, 1199-1200 (7th Cir. 1979);
201. Rev. Rul. 68-374, 1968-2 C.B. 242, 243-44.
202. Rev. Rul. 73-105, 1973-1 C.B. 264.
203. Rev. Rul. 73-104, 1973-1 C.B. 263, 264.
204. Treas. Reg. § 1.513-1(d)(4)(iv) ex. 2.
205. Using revenues from an unrelated business to support charitable activities does not exempt the unrelated business itself from taxation. See supra note 27 and accompanying text. The fact that revenues are used to support other charitable programs, however, may be a major factor in a charity avoiding a complete loss of tax exemption due to the conduct of a substantial commercial business.
206. See supra text accompanying notes 83-99 for a discussion of this point.
207. See, e.g., KNIGHT FOUND. COMM'N ON INTERCOLLEGIATE ATHLETICS, A CALL TO ACTION: RECONNECTING COLLEGE SPORTS AND HIGHER EDUCATION 13 (2001), http://www. knightcommission.org/images/pdfs/2001-knight-report.pdf
208. [hereinafter Knight Commission]. This report states: At the heart of these problems is a profound change in the American culture of sports itself. At one time, that culture was defined by colleges, high schools, summer leagues, and countless community recreational programs. Amateurism was a cherished ideal. In such a context, it made sense to regard athletics as an educational undertaking. Young people were taught values ranging from fitness, cooperation, teamwork and perseverance to sportsmanship as moral endeavor. All of that seems somehow archaic and quaint today. Under the influence of television and the mass media, the ethos of athletics is now professional. The apex of sporting endeavor is defined by professional sports. This fundamental shift now permeates many campuses. Big-time college basketball and football have a professional look and feel-in their arenas and stadiums, their luxury boxes and financing, their uniforms and coaching staffs, and their marketing and administrative structures. In fact, big-time programs have become minor leagues in their own right, increasingly taken into account as part of the professional athletics system.
209. see also WALTER BYERS WITH CHARLES HAMMER, UNSPORTSMANLIKE CONDUCT: EXPLOITING COLLEGE ATHLETES 346 (1998) ("[T]he NCAA constitutional restriction prevents direct dealings between the commercial, for-profit world and the athlete. This is not about amateurism. This has to do with who controls the negotiations and who gets the money.").
210. See generally WILLIAM G. BOWEN & SARAH A. LEVIN, RECLAIMING THE GAME: COLLEGE SPORTS AND EDUCATIONAL VALUES 316-17 (2003) (discussing why reform in amateur athletics has been "difficult to achieve," including television revenues and dreams of "winning big" in each new season);
211. JAMES L. SHULMAN & WILLIAM G. BOWEN, THE GAME OF LIFE: COLLEGE SPORTS AND EDUCATIONAL VALUES 5-18 (2001) (discussing the rise of college sports and the transformation "from student clubs to highly professionalized athletic departments," including the public's interest in sports, the institution of regulations and rules of engagement, and "collective institutionalization" under the NCAA and conferences);
212. Erin Guruli, Commerciality of Collegiate Sports: Should the (IRS Intercept?, 12 SPORTS L.J. 43 (2005);
213. Amy Christian McCormick & Robert A. McCormick, The Emperor's New Clothes: Lifting the NCAA's Veil of Amateurism, 45 SAN DIEGO L. REV. 495 (2008).
214. See Knight Commission, supra note 134, at 14-15 ("Big-time athletics departments seem to operate with little interest in scholastic matters beyond the narrow issue of individual eligibility. . . . The historic and vital link between playing field and classroom is all but severed in many institutions.");
215. see also Kaplan, supra note 114, at 1458-59 (discussing the consequences of college athletics that take "a major commitment of the student's time").
216. See Knight Commission, supra note 134, at 27 ("The length of playing, practice and postseasons must be reduced both to afford athletes a realistic opportunity to complete their degrees and to enhance the quality of their collegiate experiences.");
217. Kaplan, supra note 114, at 1458-59 (discussing the "dubious" educational practices that universities engage in to ensure their athletes' eligibility);
218. see also BOWEN & LEVIN, supra note 134, at 280-83 (discussing lengths of the "playing season"-including the "traditional segment," the playing season ending with the NCAA championship; and the "nontraditional segment," the rest of the playing season-and the "off-season," and suggesting such reforms as shortening seasons, controlling what happens in the non-traditional segment, and making working out during the off-season voluntary);
219. SHULMAN & BOWEN, supra note 134, at 69-70 (discussing the time commitments made by college athletes and noting that "athletes are spending more time than many of their peers on activity other than classwork" and that even students involved in other "'extracurriculars' finished much higher in the class, on average, than students in general").
220. Knight Commission, supra note 134, at 15 ("Graduation rates for athletes in football and basketball at the top level remain dismally low .... Graduation rates for both were already abysmal.");
221. see also BOWEN & LEVIN, supra note 134, at 125-27;
222. SHULMAN & BOWEN, supra note 134, at 261-62.
223. See generally BOWEN & LEVIN, supra note 134, at 27-35 (discussing the founding principles and educational values of the Ivy League, New England Small College Athletic Conference (NESCAC), and University Athletic Association (UAA)). For example, NESCAC colleges agreed that one main reason to establish the conference was "to advance their values."
224. Id. at 31.
225. The NESCACs founding principles state, "The program in intercollegiate athletics is to be kept in harmony with the essential educational purposes of the institution. . . . Competing players are to be representative of the student body
226. Id.
227. Among the UAA's founding principles is the notion that "athletics is integral to the overall educational process of the institution and should be conducted in a manner consistent with the institution's central academic mission."
228. Id. at 35.
229. Besides the conferences' own principles and values, proponents of college athletics argue that "[participation in varsity sports is also said to prepare young people for leadership roles in later life," and that "strong intercollegiate programs ... 'build campus spirit and community.'"
230. Id. at 244.
231. See Frank, supra note 101. After discussing previous empirical studies of the link between college athletics and alumni giving,
232. see id. at 20-24, Frank concludes: The most forceful conclusion that can be drawn about the indirect effects of athletic success is that they are small at best when viewed from the perspective of any individual institution. Alumni donations and applications for admission sometimes rise in the wake of conspicuously successful seasons at a small number of institutions, but such increases are likely to be both small and transitory. More to the point, the empirical literature provides not a shred of evidence to suggest that an across-the-board cutback in spending on athletics would reduce either donations by alumni or applications by prospective students.
233. Id. at 33.
234. See supra note 132 and accompanying text.
235. H.R. REP. NO. 81-2319, at 37 (1950).
236. Id. at 109.
237. E.g., Rev. Rul. 67-291, 1967-2 C.B. 184 (finding that an organization that subsidized a "training table" for coaches was tax exempt because the athletic program was an "integral part" of the educational activities of the exempt university in question);
238. Rev. Rul. 80-295, 1980-2 C.B. 194;
239. Rev. Rul. 80-296, 1980-2 C.B. 195 (stating that broadcast revenues from college bowl games were not taxable, as "[a]n athletic program is considered to be an integral part of the educational process of a university, and activities providing necessary services to student athletes and coaches further the educational purposes of the university");
240. see also NCAA v. Comm'r, 914 F.2d 1417, 1421 (10th Cir. 1990) (challenging only the advertising revenues from the NCAA men's basketball tournament as not subject to the UBIT);
241. Kaplan, supra note 114, at 1454-55 (summarizing the differing legal standards between courts' test for whether an activity '"contributes importantly' to a university's educational function" and IRS regulations and rulings that consider "the size and extent of an activity in relation to its claimed educational contributions").
242. Rev. Rul. 80-295, 1980-2 C.B. 194;
243. Rev. Rul. 80-296, 1980-2 C.B. 195;
244. see also supra note 143. Professor Kaplan gives a more extensive history of this episode, noting that the public Revenue Rulings were preceded by numerous private rulings holding that such revenues were not subject to the UBIT. These private rulings apparently were the result of successful lobbying efforts by Southern Methodist University, Texas Christian University, and the University of Kansas that got the IRS to reverse its intent to treat such revenues as taxable under the UBIT.
245. See Kaplan, supra note 114, at 1431.
246. In 1991, the IRS issued two Technical Advice Memoranda that held that "sponsorship fees" paid by a business to a college, university, or independent bowl association were taxable because they represented essentially nothing more than payments for advertising.
247. I.R.S. Tech. Adv. Mem. 92-31-001 (Oct. 22, 1991), 1991 PLR LEXIS 2722;
248. I.R.S. Tech. Adv. Mem. 91-47-007 (Aug. 16, 1991), 1991 PLR LEXIS 1778. Congress responded to this initiative by amending the UBIT rules to eliminate "corporate sponsorship payments" from UBIT.
249. Taxpayer Relief Act of 1997, Pub. L. No. 105-34, §S 965, 111 Stat. 788, 893-94 (codified at I.R.C. § 513(i) (2006)).
250. See generally Ethan G. Stone, Halos, Billboards, and the Taxation of Charitable Sponsorships, 82 IND. L.J. 213 (2007).
251. See infra Part V.B.
252. See I.R.C. § 162. Although a distribution of profit from a taxable corporation to shareholders is not a deductible business expense, the NCAA's distributions to member schools are essentially payments to those schools for the rights to negotiate broadcast contracts, license memorabilia, and so forth on an annual basis, and therefore almost certainly would meet the test of § 162 as an "ordinary and necessary" business expense. Or put another way, the payments to member schools are not a return on members' equity ownership in the NCAA, but payments for the exploitation of property rights owned by those members. Moreover, the NCAA could probably re-arrange its legal relationships with members to make itself essentially an agent collecting a fee for its work, with the underlying payment "owned" by the member institutions. This arrangement would result in only the "fee" being taxable to the NCAA in any event, because only the "fee income" would be "owned" by the NCAA.
253. Form 990 Filing, supra note 14, pt. I.
254. Id. pt. VII, 1.93.
255. Id. pt. I, II.
256. Id. pt. I. It is likely that not all of this expense reasonably could be allocated to Division I football and basketball revenues; the NCAA conducts many other programs in nonrevenue sports, and therefore at least a portion of this expense must be allocable to those other sports. It is also likely, however, that not all the revenue is attributable to Division I football and basketball (for example, the lower-tier football championship is also shown on television). Moreover, at least some of the expenditures of the NCAA are probably directed almost exclusively at big-time athletics: the infractions enforcement, for example, almost always involves major football or basketball programs. Thus the points in the text should be taken as a rough starting point. What is clear is that whatever taxable income would be left to tax under the UBIT is miniscule in comparison to the revenue stream, and even that remainder could fairly easily be "wiped out" with proper tax planning.
257. The NCAA also reported interest income of $12 million; interest income, however, is not subject to the UBIT. I.R.C. § 512(b)(1).
258. BYERS WITH HAMMER, supra note 134, at 221.
259. SHULMAN & BOWEN, supra note 134, at 250.
260. Margaret Riley, Unrelated Business Income Tax Returns, 2004, IRS STATISTICS OF INCOME BULLETIN, Winter 2008, at 76, 96.
261. Peter Panepento & Grant Williams, A Question of Calculation: Many Charity Businesses Manage to Avoid Paying Federal Taxes, CHRON. PHILANTHROPY, Feb. 7, 2008, at 33, 33.
262. See, e.g., BYERS WITH HAMMER, supra note 134, at 221.
263. Pension Protection Act of 2006, Pub. L. No. 109-280, § 1225, 120 Stat. 780, 1093 (amending I.R.C. § 6104(d)(1) (2006));
264. see also I.R.S. Notice 2007-45 (May 29, 2007), http://www.irs.gov/pub/ irsdrop/n-07-45.pdf.
265. A copy of the form is available from the IRS at http://www.irs.gov/pub/ irs-pdf/f990t.pdf
266. See infra Part V.C.3 for a discussion of disclosure issues.
267. See, e.g., Overview of the Tax Exempt Sector: Hearing Before the H. Comm. on Ways & Means, 109th Cong. 57 (2005) (statement of Professor John D. Colombo, University of Illinois College of Law), available at http://waysandmeans.house.gov/hearings.asp?formmode=view&id=2604;
268. JOHN D. COLOMBO & MARK A. HALL, THE CHARITABLE TAX EXEMPTION 4 (1995);
269. FISHMAN & SCHWARZ, supra note 21, at 75-96 (listing various theories);
270. Rob Atkinson, Theories of the Federal Income Tax Exemption for Charities: Thesis, Antithesis, and Syntheses, 27 STETSON L. REV. 395, 397-98 (1997).
271. See COLOMBO & HALL, supra note 161, at 5-6.
272. Id.
273. See id. (discussing how nonprofits "do good" for society);
274. id. at 22-23 (noting the distinction between tax-base and subsidy rationales for charitable tax exemption);
275. FISHMAN & SCHWARZ, supra note 21, at 76;
276. Atkinson, supra note 161, at 403-04.
277. See COLOMBO & HALL, supra note 161, at 63;
278. FISHMAN & SCHWARZ, supra note 21, at 76;
279. Atkinson, supra note 161, at 403-04.
280. See Henry Hansmann, The Rationale for Exempting Nonprofit Organizations from Corporate Income Taxation, 91 YALE L.J. 54, 72-75 (1981) (proposing an efficiency rationale that suggests charitable tax exemption is a capital subsidy that compensates for nonprofit organizations' struggles to build capital, because of the nondistribution constraint, when nonprofits better serve the public than their for-profit analogs).
281. See Nina J. Crimm, An Explanation of the Federal Income Tax Exemption for Charitable Organizations: A Theory of Risk Compensation, 50 FLA. L. REV. 419, 424-25 (1998) (proposing that "tax exemption is a non-volatile expected return to compensate rational charitable organizations for undertaking the provision of 'inherently risky' public goods and services" and that determining if a nonprofit organization should be tax-exempt "requires taking into account an organization's evolution, the need to maximize inter-generational utility, and the application of dynamic gamesmanship theory").
282. COLOMBO & HALL, supra note 161, at 99-113 (explaining that exemption is justified to provide public support to organizations that supply goods or services that are not supplied by the private market or government and that the public desires-as signaled by their significant donations to support these entities).
283. Rob Atkinson, Altruism in Nonprofit Organizations, 31 B.C. L. REV. 501, 617-19 (1990) (proposing that tax exemption is a reward for altruism-the decision to relinquish profits-and that nonprofit organizations can be tax-exempt even if their income funds consumption by people other than those controlling the organization because "[t]he metabenefit of altruistic production" is a desirable policy goal).
284. Evelyn Brody, Of Sovereignty and Subsidy: Conceptualizing the Charity Tax Exemption, 23 J. CORP. L. 585, 585 (1998) ("For all its imprecision, tax exemption keeps government out of the charities' day-to-day businesses, and keeps charities out of the business of petitioning government for subvention.");
285. see also Johnny Rex Buckles, The Community Income Theory of the Charitable Contributions Deduction, 80 IND. L.J. 947, 952-53, 986 (2005) (arguing that the income of charities should not be part of the normative tax base because such income is dedicated to the betterment of the "community" and "the community" itself is not taxable-doing so would be like having the government tax itself, because government exists to improve the welfare of the community).
286. David A. Brennen, A Diversity Theory of Charitable Tax Exemption-Beyond Efficiency, Through Critical Race Theory, Toward Diversity, 4 PITT. TAX REV. 1, 23-24 (2006) (discussing the economic and non-economic benefits of tax exemption for nonprofit organizations and noting that "the charitable tax exemption allows for diversity and experimentation that often lead to production of undiscovered values").
287. Boris I. Bittker & George K. Rahdert, The Exemption of Nonprofit Organizations from Federal Income Taxation, 85 YALE L.J. 299, 307-16 (1976) (discussing how traditional income measurement theory under the IRC cannot be applied to nonprofit organizations and how calculating these organizations' net income would be difficult, complicated, and confusing, and that taxing such income would in effect be a tax on the beneficiaries of the organization who are often too poor to pay tax themselves).
288. One might argue that my own donative theory (which concluded that activities supported in substantial part by donations should be eligible for tax exemption) supports exemption for college athletics because these programs are funded in substantial part by donations from athletic boosters. A wealth of evidence suggests, however, that these so-called donations are largely nothing more than purchases: payments for seating preferences, parking, and special individual perks (such as a seat on the team plane for away games).
289. See Brad Wolverton, Key Senator to Question Tax Treatment of Booster Clubs, CHRON. HIGHER EDUC, Oct. 5, 2007, at 38, available at http://chronicle.com/free/v54/i06/06a03501.htm. Indeed, virtually all university grants-in-aid programs have a "price list" of benefits available to donors at specific donation levels. The "Tide Pride" brochure describing ticket preferences at the University of Alabama based upon various donation levels is typical in this regard. See University of Alabama, Tide Pride 2006, http://www.rolltide.com/fls/8000/ files/tidepride/2006tidepridebrochure. pdf?DB-OEM-ID=8000 (mailing to University of Alabama football boosters). In 1986, in fact, the IRS determined that "donations" to college athletic programs that carried with them the right to ticket preferences and other individual perks were not deductible under the general rule that a payment is not a donation when the payment is in return for a tangible quid pro quo. Rev. RuI. 86-63,1986-1 C.B. 88. In 1988, however, Congress overturned the IRS determination by statute, providing that 80 percent of such donations are deductible in any event. I.R.C. § 170(1) (2006). I have previously opined that so-called "donations" that are in fact quasi-purchases (a category in which I put most athletic donations as well as "donations" that in effect purchase a naming opportunity for the donor, such as a named professorship or building) should not be deductible and should not count as "donations" for purposes of my donative theory of exemption.
290. See John D. Colombo, The Marketing of Philanthropy and the Charitable Contributions Deduction: Integrating Theories for the Deduction and Tax Exemption, 36 WAKE FOREST L. REV. 657, 661-62 (2001).
291. See JOHN S. & JAMES L. KNIGHT FOUND., REPORT OF THE KNIGHT COMMISSION ON INTERCOLLEGIATE ATHLETICS 21 (1999), http://www.knightcommission.org/images/ pdfs/1991-93- KCIA-report.pdf (describing the problems with athletics as "most apparent within major athletics programs and are concentrated most strongly in those sports for which collegiate participation serves the talented few as an apprenticeship for professional careers").
292. See infra notes 190-91 (discussing the NCAA's support of a variety of nonrevenue sports and sponsorship of championships in those sports).
293. Treas. Reg. § 1.513-1(b) (as amended in 1983) ("The primary objective of adoption of the [UBIT] was to eliminate a source of unfair competition by placing the unrelated business activities of certain exempt organizations upon the same tax basis as the non exempt business endeavors with which they compete.").
294. See generally FISHMAN & SCHWARZ, supra note 21, at 376-79 (discussing the history and policy behind the UBIT, including considerations of loss of revenue and unfair competition).
295. Colombo, supra note 22, at 529-46;
296. see also Michael S. Knoll, The UBIT: Leveling an Uneven Playing Field or Tilting a Level One?, 76 FORDHAM L. REV. 857, 891 (2007) (questioning whether there is any economic advantage at all to a nonprofit engaging in a commercial business).
297. See Henry B. Hansmann, Unfair Competition and the Unrelated Business Income Tax, 75 VA. L. REV. 605, 622 (1989) (arguing that repealing the UBIT would shrink the corporate tax base and cause tax-exempt nonprofit organizations to buy corporate businesses through debt-financed acquisitions, and also noting that "[t]he UBIT is far more important in protecting the corporate income tax base than it is in raising revenue directly");
298. see also Colombo, supra note 22, at 529-34.
299. See Burton A. Weisbrod, Modeling the Nonprofit Organization as a Multiproduct Firm: A Framework for Choice, in To PROFIT OR NOT TO PROFIT 47, 54 (Burton A. Weisbrod ed., 1998) (permitting charitable organizations to engage in extensive commercial activities will erode the core differences between charitable management and for-profit management);
300. Colombo, supra note 22, at 534-35.
301. See Colombo, supra note 22, at 538-41;
302. Hansmann, supra note 178, at 614-17 (arguing that repealing the UBIT would cause managerial inefficiency because nonprofit organizations do not have stockholders and therefore have less incentive to maximize their revenues or minimize their costs than for-profit entities, and would also cause poor diversification of nonprofit organizations' investment because "nonprofits would have a strong incentive to abandon the current practice of investing in a broad range of common stocks and to pursue instead a strategy of investing in firms that the nonprofits can completely own").
303. Professor Ethan Stone has suggested that an alternative view of the UBIT is that the legislation was more a political statement (warning?) by Congress intended to keep charities operating in the traditional charitable sphere, rather than expanding to activities not traditionally considered charitable.
304. Ethan G. Stone, Adhering to the Old Line: Uncovering the History and Political Function of the Unrelated Business Income Tax, 54 EMORY L.J. 1475 (2005). Under this conception, one might argue that college athletics, being a traditional activity of exempt educational institutions, should not be subject to the UBIT. And, in fact, the original statement in the House Committee report excluding college athletics from the UBIT would appear to support this view.
305. See supra note 141 and accompany
306. ing text. A counterargument, however, would be that the recent commercialization of Division I athletics has taken it out of what one might identify as the traditional charitable sphere. The very public angst over coaches' salaries, graduation rates, and the athletic "arms race" in general would support the notion that college athletics is now seen as a case of charities expanding into an area not traditionally reserved for charitable activity.
307. Individuals cannot deduct more than 50 percent of their adjusted gross income for charitable contributions (and in some cases, that amount is limited to 30 percent of AGI);
308. corporations cannot deduct charitable contributions in excess of 10 percent of their taxable income. I.R.C. § 170(b) (2006). Therefore, even if a corporation gives all its profits to charity (like Newman's Own), it would owe taxes on 90 percent of that profit. Similarly, individuals would have to pay taxes on at least 50 percent of their net income even if they handed all of it over to charity.
309. See supra note 25 for further discussion of this point.
310. Revenue Revision of 1950: Hearings Before the H. Comm. on Ways & Means, 81st Cong., 2d Sess. 580 (1950) (remarks of Rep. John D. Dingell, Sr.).
311. As noted above in the text at notes 147-60, some question exists as to actually how much tax revenue would be gained by subjecting big-time college athletics to taxation, because it is likely that only a few of these programs would show a taxable profit after applying rigorous tax-accounting policies to their income and expenses. Nevertheless, the point in the text is valid: from a tax-theory standpoint, allowing an activity that would be carried on in taxable form to escape the corporate income tax means that the corporate tax base has contracted to some degree. Or put another way, no one would suggest that U.S. automakers should be exempt from tax simply because they haven't made any taxable profit in the past few years. Whatever the current reality, the theoretical tax base should include operations by auto manufacturers, and the potential for future profit cannot be ignored.
312. See generally Knight Commission, supra note 134, at 16-19 (discussing colleges' "ever growing 'arms race' of spending and building to reach impractical financial goals"). The report also notes that colleges often do not profit from their "big-time" basketball and football programs: There is a tangible downside to this arms race for most schools, that is, for the majority whose big-time programs are less successful and cannot pay for themselves. They must siphon funds from general revenue to try to keep up with the Joneses. Pursuit of success in this context jeopardizes not only the universities' moral heritage but also their financial security.
313. Id. at 19.
314. A recent example is the mess that former basketball coach Kelvin Sampson produced for the University of Indiana. Sampson was finally forced out of his job after recruiting violations, but not before the University engaged in its own extensive investigation of Sampson's activities and paid a $750,000 buyout.
315. See Sampson Forced Out at Indiana, N.Y. TIMES, Feb. 23, 2008, at D3, available at http://www.nytimes.com/2008/02/23/sports/ncaabasketball/23indiana. html?ref=sports;
316. David Woods, Sampson to Keep Coaching as Indiana Investigates, USA TODAY, Feb. 16, 2008, http://www.usatoday. com/sports/college/mensbasketball/bigten/ 2008-02-15-indiana-probe-N.htm.
317. For example, assume that a charity invests $1000 in Starbucks, Inc. by buying its stock and receives a $100 dividend. In order to pay that $100 dividend, Starbucks has to earn a profit of approximately $154, on which it will pay taxes at 35% (35% of $154 equals a tax
318. See Hansmann, supra note 178, at 614-17.
319. For example, my colleague, Steve Ross, who is an expert in sports law at Penn State's law school, notes that universities routinely permit coaches to breach their coaching contracts without penalty; in the professional sports world, however, coaches are typically subject to buyout clauses that impose economic penalties for breach. An arguable result of this behavior in the collegiate world is that colleges overpay for the services of top coaches by not insisting on (or not enforcing) substantial buy-out penalties if a coach wishes to leave for a different (and presumably "better") job. Similarly, because student-athletes cannot be paid market rates, universities must compete for "athletic labor" using back-door incentives such as TV exposure, expensive training facilities and so forth. This situation, of course, has led the NCAA to promulgate extensive rules governing even the minutiae of athletic recruiting and whole "compliance departments" inside athletic programs to ensure the rules are followed.
320. See, e.g., Theresa Tiso, More Paperwork, No Less Cheating, CHRON. HIGHER EDUC, Apr. 22, 2005, at A55.
321. As explained in the text accompanying notes 110-12, supra, public universities technically are not exempt under § 501(c)(3), but rather are exempt either as a part of state government under the broad principle of intergovernmental tax immunity, or else as an "instrumentality" of state government engaged in an essential government function (e.g., education) and exempt under I.R.C. § 115. In the case of public universities, therefore, Congress cannot simply "revoke" their exempt status for failure to comply with conditions relating to athletic programs; as a part of state government, presumably there would be constitutional limits on such an action. Congress could, however, make exemption of athletic revenue from the UBIT subject to such conditions because public universities are subject to the UBIT.
322. See supra note 13. Congress could gain considerable additional leverage by making donations to public universities deductible only if the university complied with whatever athletic program restrictions it chose to enact (in other words, universities operating athletic programs not in compliance with whatever rules Congress might choose would not be eligible to receive deductible donations under § 170 of the Code).
323. NCAA Response, supra note 2, at 7 ("It should be pointed out that colleges and universities apply the 'tax subsidy' to offer a broad range of athletics participation opportunities for hundreds of thousands of young men and women at more than a thousand institutions.").
324. Id. at 22 ("Less than half of the funds from the Division I Men's Basketball Championship is distributed based on appearances in the tournament. Most of the funds are distributed based on the number of sports sponsored and the number of athletics scholarships awarded to all student-athletes on an institutional basis.").
325. Id. at 7-9.
326. My view here is consistent with my position regarding tax exemption for nonprofit hospitals. Some commentators believe that exemption for nonprofit hospitals is appropriate because nonprofit hospitals "do things differently" than for-profit hospitals; for example, some empirical research indicates that nonprofit hospitals are more likely to offer important, but unprofitable, health care services. I have suggested that if this is the case, it is perfectly appropriate to use tax exemption as a means of encouraging the private production of services that are otherwise not available from the for-profit sector, and hospitals should be required to show exactly what services they provide that fit in this category and how much they spend on them.
327. See, e.g., John D. Colombo, Federal and State Tax Exemption Policy, Medical Debt and Healthcare for the Poor, 51 ST. LOUIS U. L.J. 433, 456 (2007).
328. I.R.C. § 145(a)(2)(B) (2006).
329. Id. § 4942
330. see FISHMAN & SCHWARZ, supra note 21, at 608-11.
331. Colombo, supra note 97, at 351-52.
332. On the other hand, one should recognize that expenditure requirements of the type discussed above (e.g., a requirement that a university (1) earn and then (2) spend a certain "rate of return" on the investment in major athletic programs on other charitable outputs) might have little or no effect on profitable programs that already use revenues from football and basketball to subsidize other sports, but rather would (perhaps perversely in the minds of some) have the most impact on programs that either barely break even on major sports or actually lose money on them. In my view, there is nothing wrong with telling a university that consistently invests money in a money-losing commercialized athletic program that it either needs to find a way to be successful enough with that investment to produce revenues to subsidize other charitable outputs or else it needs to liquidate that investment and use the money in some other way (e.g., leave Division I and restructure its programs into "noncommercial," less-expensive versions). But I am sure that the president of Rutgers (see discussion below) would feel differently.
333. See supra note 185.
334. This approach presumably would not work with the NCAA, because the vast majority of its "expenditures" each year are simply distributions to member schools to share revenues generated by the NCAA from commercial exploitation of college athletics; one presumably would not want to limit such revenue sharing.
335. I.R.C. § 501(c)(3). If they so desire, charities other than churches can elect under § 501(h) to use a mathematical expenditure limit test for compliance with the lobbying limitation.
336. Id. § § 4943-4945.
337. See infra note 204.
338. See, e.g., Obama Sets Executive Pay Limits, CNN, Feb. 4, 2009, http://www.cnn.com/2009/ POLITICS/02/04/obama.executive.pay/index.html.
339. For an overview of this debate, see FISHMAN & SCHWARZ, supra note 21, at 232-37. As Fishman and Schwarz note, the Senate Finance Committee in 2004 circulated a discussion draft of proposed reforms in the nonprofit sector that included limits on executive compensation. The Panel on the Nonprofit Sector issued a response to these proposals in 2005 which opposed compensation caps. Final legislation passed by Congress in 2006 as part of the Pension Protection Act did not include any compensation limitations.
340. Id. at 236.
341. The Rutgers mess was chronicled in a series of investigative reports by the New Jersey StarLedger, available at http://blog.nj.com/ledgerarchives/ rutgers-stadium/ (last visited Nov. 10, 2009). The Rutgers situation spawned internal investigations by Rutgers as well as the state government, all of which painted a picture of an athletic department completely "out of control," spending or committing to spend vast amounts of money ostensibly to keep its football program competitive with other Division I programs.
342. See Henry Gola, Terrelle Pryor Timeline, ESPN.COM, Mar. 19, 2008, http://sports.espn.go. com/ncaa/recruiting/football/news/story?id=3300355 (chronicling the recruitment of Pryor). On February 1, 2008, "Pryor expects Ohio State coach Jim Tressel and Michigan coach Rich Rodriguez at his basketball game against East Allegheny. He has already hosted Penn State coach Joe Paterno, LSU coach Les Miles and Oregon coach Mike Bellotti."
343. Id.
344. See INTERNAL REVENUE SERV., INSTRUCTION FOR FORM 990 RETURN OF ORGANIZATION EXEMPT FROM INCOME TAX 5 (2008), http://www.irs.gov/pub/irs-pdf/ i990.pdf [hereinafter Instructions for Form 990]. Charities other than churches with gross revenues in excess of $25,000 per year are required to file Form 990 annually. This filing requirement would encompass the NCAA and all private universities engaged in college athletics. Public universities, however, generally are not required to file Form 990 because they are governmental units and thus are exempt from tax under § 115 of the Code, rather than § 501(c)(3) (although even public universities are subject to the UBIT and must file a UBIT return when appropriate). Accordingly, some congressional action would be necessary to extend reporting requirements to public universities that otherwise are not required to file a Form 990.
345. See supra note 206.
346. Posting of Lindsey Luebchow to the Higher Ed Watch Blog, College Sports Reform: Opening Up the Budget Books, http://www.newamerica.net/blog/higher-ed- watch/2008/college-sportsreform-spending-5441 (July 29, 2008, 22:44 EST) [hereinafter Opening Up the Budget Books].
347. Id.
348. Id.
349. THE COAL, ON INTERCOLLEGIATE ATHLETICS, FRAMING THE FUTURE: REFORMING INTERCOLLEGIATE ATHLETICS, Proposed Reform 4.1 (2007), available at http://www.neuro.uoregon. edu/~tublitz/COIA/FTF/FTFtext&appendix.htm ("The Athletic Department's budgets, revenues and expenditures should be transparent and aligned with the mission, goals and values of the institution. The University President should take the lead to ensure that fiscal reports, including dash board indicators as listed in the 2006 NCAA Presidential Task Force report, are issued annually and made available to the campus faculty governance body.").
350. The Drake Group, The Drake Group Proposals, http://thedrakegroup.org/ proposals.html (last visited Nov. 10, 2009)
351. see also Opening Up the Budget Books, supra note 210.
352. The revised form requires substantial disclosure of compensation levels and details for directors, officers, trustees, "key employees," and the five highest compensated employees not part of the first four categories in Part VII of the core form, with additional details provided on Schedule J. For more specifics on the reporting requirements, see Instructions for Form 990, supra note 208. Because of their high compensation levels and responsibility for large programs within the university, Division I football and basketball head coaches likely will fall under either the "key employee" definition or fall within the group of five most highly compensated employees outside the other groups. Note, however, that public universities generally are exempt from the Form 990 filing requirements. See supra note 208.
353. Instructions for Form 990, supra note 208, at 2.
354. See, e.g., INTERNAL REVENUE SERV., FORM 990 REDESIGN FOR TAX YEAR 2008: SCHEDULE H, HOSPITALS-HIGHLIGHTS (Dec. 20, 2007), http://www.irs.gov/pub/irs- tege/highlights-schedule-h. pdf.
355. Id.
356. Schedule H, for example, requires an exempt hospital to provide detailed information on the costs of charity care, Medicaid shortfalls, and other "community benefit" expenditures, as well as information on charity care policies, joint ventures, and other business activities.