Tonight is the NCAA Division I Men’s Basketball Championship game between Gonzaga and North Carolina. While March Madness 2017 has brought surprises—who expected South Carolina to go so far?—and disappointment—personally, that would be Kentucky’s loss to North Carolina in the Elite Eight—a buzzer beater over the so-called “bathroom bill” played out off the court between the state of North Carolina and the NCAA and ACC.
A new wrinkle to this controversy is legislation pending in North Carolina that encourages the IRS to strip the NCAA and ACC of tax exempt status for “excessive lobbying.” Could this be a sign of things to come as states and tax-exempt organizations such as the NCAA and its member conferences battle over social justice issues?
The Opening Tipoff
The NCAA and the ACC decided last fall to move championship games from North Carolina in response to H.B. 2, “the bathroom bill.” The NBA took similar action, moving the 2017 All-Star Game from Charlotte, N.C., and PayPal abandoned its plans for a new operations center in Charlotte. In December, former N.C. Gov. Pat McCrory (R) called for a special legislative session to look into a possible repeal of the legislation. Flash forward to March 12, Selection Sunday, and the N.C. General Assembly had not yet taken any action, despite an economic fallout to the state that is estimated to reach $3.7 billion by 2028.
On March 15, days before the big dance was set to begin, Bloomberg BNA’s Andrew M. Ballard reported for the Daily Tax Report that state lawmakers filed a bill that accuses the NCAA and ACC of engaging in excessive lobbying activities. Under H.B. 328, the President Pro Tempore of the Senate and the Speaker of the House of Representatives would be required to file a complaint with the IRS against the NCAA and ACC for “exceed[ing] the scope of their respective charters by using economic retaliation against the State of North Carolina for the purpose of forcing the General Assembly to adopt social legislation that is not connected to the core mission of either the NCAA or the ACC.”
The NCAA did not respond to H.B. 328 directly, but on March 23 it issued a statement reminding North Carolina that the process for picking championship sites for 2018-2022 would begin in one week, effectively giving the state a deadline for repealing the bathroom bill. North Carolina met the NCAA’s deadline, with hours to spare, and repealed portions of the law on March 30. On March 31, the ACC Council of Presidents voted to reinstate North Carolina as an eligible site to host conference championship games.
“H.B. 328 probably isn’t going anywhere,” Canaan Huie, an attorney at Moore & Van Allen in North Carolina, a member of the firm’s Public Affairs team and co-author of the North Carolina Corporate Income Tax Navigator, told Bloomberg BNA on March 31. “It would be a heavy lift to get the IRS to say either the NCAA or ACC engaged in excessive lobbying.” Hypothetically, however, Huie agrees that H.B. 328 is an interesting inquiry.
Lob Pass Over the Top: Tax-Exempt Status and Lobbying
“There is some concern about the extent to which nonprofits are engaged in lobbying,” Huie says, and “social conservatives felt held hostage by the NCAA and ACC.” On the flip side, there is a “fair amount of confusion among 501(c)(3)s between lobbying and intervening in political campaigns,” he told Bloomberg BNA. He highlights that the use of the phrase “excessive lobbying” in H.B. 328 recognizes the fact that 501(c)(3) organizations may generally lobby, but there are some boundaries.
Generally, I.R.C. § 501(c)(3) prohibits tax-exempt organizations from spending a substantial part of their time on lobbying activities, but there are two avenues for tax-exempt organizations to engage in some lobbying: they can elect to be subject to the lobbying expenditure limitations of I.R.C. § 501(h), or they can operate without such an election.
If a tax-exempt organization elects to be subject to lobbying expenditure limitations and exceeds those limits, it will owe a 25 percent tax under I.R.C. § 4911 on the excessive lobbying expenditures. According to the instructions for Schedule C to IRS Form 990, tax-exempt status will only be lost if, over a four year average period, the organization’s average annual total lobbying expenditures exceed 150 percent of its dollar limits.
If a tax-exempt organization does not make the election but its lobbying expenditures for a tax year are “substantial,” it will owe a 5 percent tax under I.R.C. § 4912 and cease to be a 501(c)(3) organization.
According to the NCAA’s 2014 Form 990, the information return tax-exempt entities file with the IRS, the NCAA had total revenue of over $952 million. The Form 990 also showed the NCAA spent over $588 million on grants and $560,000 on lobbying activities, specifically on direct contact with legislators, their staffs, government officials or a legislative body, for that tax year. Neither I.R.C. § 501, § 4912 nor the instructions to Schedule C define the term “substantial” as it is used for measuring lobbying expenditures.
“Even if federal tax-exempt status is revoked, there is a question, in my opinion, about whether the NCAA and ACC would still fit the exemptions for North Carolina corporate income and franchise taxes,” says Huie.
In addition to exemptions from both state taxes for organizations that are exempt from federal income taxes, North Carolina law exempts charitable and educational corporations not operated for profit and clubs organized and operated exclusively for recreation. The NCAA and ACC appear to be unincorporated associations, which may not be subject to North Carolina corporate income or franchise taxes. “There would be second level of analysis,” says Huie.
Why Even Play the Game: What is the Point of H.B. 328?
There are a lot of questions about what the sponsors of H.B. 328 are trying to achieve. Economics is certainly at play. Long term, PayPal was going to bring good paying, permanent jobs to North Carolina, says Huie. So, why target the NCAA and ACC with H.B. 328 but not PayPal? They are the high profile event, says Huie.
Another question is why H.B. 328 does not change state law relevant to tax-exempt organizations so that a state tax exemption is prohibited in certain situations, including lobbying?
This is where transparency comes into play. The second half of H.B. 328 would create a reporting requirement for chancellors of constituent institutions participating in the NCAA and any of its member conferences. “The reporting requirement is interesting,” says Huie.
Of the four universities in North Carolina that are members of the ACC, only Duke University President Richard Brodhead revealed how he voted when the ACC Council of Presidents decided to move all championship games to locations outside of North Carolina. According to a Sept. 16, 2016, story by The News & Observer’s Jane Stancill, Brodhead voted to move the championship games out of North Carolina, while, UNC-Chapel Hill Chancellor Carol Folt, N.C. State University Chancellor Randy Woodson and Wake Forest University President Nathan Hatch declined to comment on how they voted.
“Both chancellors of UNC and N.C. State said their votes [on whether to take games to another state] were confidential. UNC and N.C. State might say no public record was created by their votes, which is important because there is not duty to create a public record but there is a duty to provide a public record that exists,” says Huie.
UNC and N.C. State, both public universities, are bound by state public records laws. H.B. 328 would change the characterization of votes cast by the chancellors of UNC and NC State as members of the ACC Council of Presidents into public records.
In the end, North Carolina may increase the paper trail of its public universities but the state’s economic losses from the fallout of H.B. 2 may remain without a rebound of the business that left or an amendment to tax laws imposing taxes similar to federal excise taxes on excessive lobbying expenditures. Otherwise, there is no slam dunk or cutting down the nets for anyone involved.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How can states harness the federal concept of taxes on excessive lobbying expenditures to regulate tax-exempt organizations operating within their borders?
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