Tax-Deductible College Football, Hoops Seats Puzzle Lawmaker

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By Aaron E. Lorenzo

June 9 — Plum seats for college sports often offer more than a good view of the action. Sitting at midcourt or on the 50-yard line can also confer tax deductions, as could luxury boxes.

But that connection is starting to draw scrutiny on Capitol Hill.

Tax benefits don’t seem like a good match for pricey college sports seating to Rep. Tom Reed (R-N.Y.), a House Ways and Means Committee member who is crafting legislation to compel colleges and universities to use a portion of their endowment earnings to defray tuition costs or lose their tax-exempt status.

Reed says he believes that improving college affordability would boost economic mobility by expanding education opportunities. And he is less and less convinced that tax deductions for good seats at college games do anything for that.

“One of the things that obviously we’re greatly concerned about is this is a tax preference in the tax code with tax deductions and tax-free income, not-for-profit status that’s being deployed here, and the charitable purpose is education,” Reed told Bloomberg BNA.

A tax deduction of 80 percent is allowed under tax code Section 170(l), which Congress inserted in 1988, effectively reversing a prior rule from the Internal Revenue Service. Reed said this could change in connection with his still-developing endowment bill.

Quid Pro Quo

Existing IRS standards generally preclude tax benefits for donating gifts that involve quid pro quo values given back to the donor.

But donations to college and university revenue sports—football and basketball—represent an exception to that principle. And that doesn't sit well in some academic circles.

“As a policy matter, this is nuts,” said John Colombo, law professor emeritus at the University of Illinois at Urbana-Champaign.

Gifts that number in the many thousands of dollars entitle the donor to seat licenses and other perks such as choice parking spaces outside stadiums, as well as tax deductions, all of which go against standard tax doctrine, Colombo told Bloomberg BNA.

Congress could fix the flaw by removing Section 170(l) and adding committee report language explaining that the 80 percent deduction was an abuse, said Richard Schmalbeck, a law professor at Duke University. He called the 80 percent-20 percent split a legislative compromise that favors deductibility for well-heeled athletic boosters.

“You would not find it in nature,” Schmalbeck told Bloomberg BNA.

As a compromise to outright repeal of Section 170(l), the code section could be changed to reflect the price of tickets underlying a donation, akin to paying above-market value for an item at a charity auction and deducting the difference rather than the full amount paid, he said.

Adding Up

While it is difficult to calculate the funding that seat licenses generate for college sports, estimates exist.

According to President Barack Obama’s latest budget proposal, eliminating Section 170(l) would raise about $2.9 billion over a decade. A year before, when the idea first appeared in a White House budget, the estimate was about $2.5 billion over 10 years.

Less conservatively, Schmalbeck once figured that 100 universities could garner about $7 billion in annual contributions, which would generate about $20 billion in forgone revenue over a decade.

He assumed that each school could command the roughly $3,500 per seat for a seat license that Duke does for its basketball arena through the fundraising arm for Duke athletics, the Iron Dukes. The group's website indicates required levels of support, such as a $7,000 donation that gives a donor rights to buy two season tickets.

Seat licenses cost up to $2,200 per seat for football games at the University of Alabama, which won the most recent college football championship, according to the school’s Tide Pride Club website. Costs vary per game for field suites, it said.

A Duke official declined to comment, and spokesmen at the University of Alabama didn't respond.

Reed simply isn’t convinced that donations for the rights to buy tickets amount to giving to a charitable organization—in this case a college or university, which qualifies because of its educational mission.

“I think it’s only right that we have a role in asking the right questions to make sure that the money is going to that charitable purpose,” he said.

Question Marks

Reed’s history includes probing the growth in college and university endowments. Such endowments have expanded in recent years along with rising stock markets.

Reed has developed, but not introduced, legislation that would apply some portion of income from endowments that exceed $1 billion to tuition reduction or scholarships, in particular for working families. He has toyed with a 25 percent threshold, meaning a quarter of $1 billion or more of an endowment’s income would have to be used for those purposes, or the colleges and universities would lose their nonprofit status.

A study from the National Association of College and University Business Officers showed a 15.5 percent average return on investment and 4.4 percent average payout rate in 2014; 56 private universities and colleges have endowments of more than $1 billion.

“Despite these large and growing endowments, many colleges and universities have raised tuition far in excess of inflation,” said a letter to all 56 of them from Senate Finance Committee Chairman Orrin Hatch (R-Utah) and House Ways and Means Committee Chairman Kevin Brady (R-Texas).

Their letter, sent in February, requested answers to more than a dozen questions, including the percentage of endowments applied to financial aid for student tuition. All 56 schools responded.

Reed said the committees’ supervision dovetails with his legislative ideas.

“I think they can be paired together because in that situation you’re talking about clear waste, fraud and abuse types of things,” he said. “As we deal with oversight of not-for-profit status, I think that is definitely an appropriate role we should have because that’s, in my opinion, an abuse of the system for the charitable purpose of education.”

To contact the reporter on this story: Aaron E. Lorenzo in Washington at aaron@bna.com

To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com