THE NEW TAX PLAN'S EFFECT ON COLLEGE ATHLETICS
(Tuesday, June 9, 11:30 a.m. -12:30 p.m.)
Last year when the tax bill was passed, we thought there were going to be some real changes in the country, most of them good. Well, it turned out for intercollegiate athletics that there was something that came out about that same time: an IRS revenue ruling. It's going to have a long-term impact on all of us. The Federal Government has been fooling around with a number of things. I come from Oregon, and we've just had the Immigration and Naturalization Act passed. In Oregon, right
now we can't have our strawberries picked. In fact, in Eugene they have an annual strawberry festival at one church and a sign on the church read, "Because of the Immigration and Naturalization Act, we're still going to have our strawberry festival, but we're serving prunes this year." That's the way
we feel about the tax bill and the IRS ruling. We will really not know, and Doug Dickey made this plain yesterday at the I-A meeting, the long-term effect that this is going to have on our donors for several more years, until the IRS starts its audits. Most of our donors last year made this year's contribution last year in December. That's why you saw that large increase in contributions in your December income, because they were making that contribution then to get it on last year's income
taxes. Now, at the IRS, the onus is on us to tell our donors what we can and can't expect from the contributions that they're making. And the man who knows all there is to know about that is Phil Hochberg, our representative in Washington, D.C. Phil.
Always, always be careful when somebody introduces you by saying,"the man who knows everything about it," because sure as the dickens there's going to be somebody who asks you a question out there that you don't know the answer to. I'm glad that Bill cut short his introduction, because I did see the part of Lt that he didn't use. It was something to the effect that Phil Hochberg is to the practi of law what Lloyd Bloom and Norby WaIters are to questions of integrity, and I would just as soon not have that comment made. As I was getting ready for the session today, I happened to be talking to a couple of athletic directors and I introduced myself to them. I said, "My name's Phil Hochberg. I've been representing your interests in Washington." And one of them said, "Yeah, we were just laughing about that at breakfast this morning." I trust that this won't become a laughing matter. And
indeed, if the response to that remark is any indication, it certainly won't become a laughing matter.
I have passed out copies of a memorandum. The first page, for those of you who have it, is a thumbnail update of where we are, in fact, as of Friday, as to where we stood on our efforts on the legislation to overturn Revenue Ruling 86-63. In fact, there have been some developments even since then. The second page is a summary of arguments that, to the extent that you get involved with member: of Congress, I would suggest that you look at. It is a summary of the arguments that we have made on the Revenue Ruling. The third page of the five-page handout is a breakdown of the members of the
State Finance and House Ways and Means Committees, and we have underlined the sponsors and co-sponsor: as of last Friday, of the legislation. I was delighted to get the report yesterday from Paul Roach of Wyoming that indeed we have picked up Senator Wallop as a co-sponsor of S-74 on the Senate side. For those of you looking at that list, you'll note that we've identified the members of the Senate Finance Committee and the House Ways and Means Committee, their colleges and their graduate schools to the extent that it lights up anything in your mind about contacts that you might be able to make,
I would urge you to make them. On pages four and five of the five-page handout are sample letters. T. the extent that you feelcomfortabl~ plug in the names of your Senators or your Representatives and send the letters. Let's get the message across from the college athletic directors. You'll note that the letter to the House of Representatives is a little different than the one to the Senate, pointing out that we have now, in the House Ways and Means Committee, more than half of the membership as co-sponsors of our legislation. A significant point, I might add. The second handout, which Tim Gleason is handing out now, is a survey which we are attempting to do. We have gotten some specific questions about the extent of priority seating programs. I would ask you to fill that out and let me have it at the end of the session.
I said early on that what we're doing is really not, if you will, a laughing matter. The
college athletic directors have a realistic chance, I don't want to say a good chance, I'm going to qualify that by saying it's a realistic chance to get tax legislation passed which will relieve us of the burden of Revenue 86-63. This is not being done by the colleges. This is not being done by the college presidents. This is not being done by the NCAA. This is being done by the college athletic directors perceiving a problem that they have and trying to do something about it. It is the athletic
directors working together, cooperating and using, quite honestly, a certain amount of clout that
exists in your organization. A week ago, Glen Tuckett from Brigham Young, at a meeting of the College Football Association, used a phrase which a number of athletic directors picked up on. He said it's time for the college athletic directors to prepare, not repair. Shortly thereafter, Jack Lengyel from Missouri, seconded that concern. And Jack put it in words something akin to this. He said
it's time for the college athletic directors to realize that they're involved in a business. And being involved in a business means being aware of everything that is happening around you. It
involved the recognition that you, as athletic directors, can control what happens to your business.
And indeed, it is a recognition that you, as a.thleticdirector~ must control, or certainly make attempt to control, your own business.
Well, what is this legislation, what is this tax issue that we have spent so much time dealing with in the last year? On April 28, 1986 the Internal Revenue Service issued Revenue Ruling 86-63. If any of you want to see copies of that, I'll be happy to send it to you. Basically, it raised questions about the tax treatment of priority seating plans. Priority seating plans cut across the whole of certainly Division I-A, Division I-AA, Division I-AAA and to some extent Division II athletics as well. You have payments made into your athletic department in return for preferred seating at your events. Those events, obviously, can be football, basketball, hockey and, in some cases now, baseball. They
can be any athletic event. They also involve, I might add, priority seating for postseason tournaments as part of this.
The IRS laid out four specific circumstances. In the case of a sold-out facility, where somebody has made a contribution in order to get access to seats, that contribution is totally, totally non-deductible. That was illustration one. Illustration two said that in the circumstance of a sold-out facility where the donor is required to give $500, for example, and gives $800, only the
excess amount is deductible. Situation number three dealt with a non-sold-out facility. The cut-stone there was, in a non-sold-out facility where someone has made a contribution but could walk up on the
day of the game and purchase a comparable seat, then the contribution really has gained that donor no benefit. So that donor can deduct all of his donation. That in non-sold-out facility where
comparable seats are available on the day of game purchase basis. The fourth situtation is a non-sold- out facility where comparable seats are not available, where some guy shows up on the day of the game and he's sitting in the rafters or he's sitting on the ten-yard line, but he can buy a ticket to the game. This has caused the most consternation in the collegiate athletic community, because there the IRS has imposed a burden on you to make an analysis of the benefit that that donor has received. As
I say in my cover memo, under those circumstances, a non-sold-out facility where comparable seats are not available, you are required to analyze your facility and notify prospective donors in advance of the specific dollar amounts being solicited which could be treated as a gift and the specific dollar amounts which could not be treated as a gift.
Well, how do you do this? The IRS, in its infinite wisdom, said that you have to analyze the level of demand of tickets, the general availability of seats, the relative desirability of seats based on their types, locations, and views and other relevant factors. We then raised to them a situation which, we have estimated, controls in maybe 85 to 90 percent of the priority seating
programs, and that is what we call the grandfathering aspect. This is where you might have a donor paying $100 sitting next to a donor paying $300 sitting next to ~ donor paying $200 sitting next to
a donor who is not paying you anything because he's been sitting in that seat for 20 years. We call this the grandfathering problem. Among the Division I-A schools, for example, we have found one school that says it does not have the grandfathering problem. We raised this to the IRS. What about our grandfathering problem? The $300 contributor sitting next to the guy who pays $100, for example? The response of the IRS, when this question was raised by a Senate staffer, was, "What's the concern? He made his $300 contribution five years ago and he's already deducted it." The IRS simply did not
realize that these contributions to the priority seating program are being made on an annual basis, not on a one-time basis.
It has been suggested to me that some of the lawyers for the IRS ought to be arrested for indecent exposure the way they write the law. I'm not sure that I would quite go that far, but let me tell
you, they ain't showing much knowledge when it comes to their drafting. They thought that the stadiums and the arenas were wiped clear every year. They thought that it was similar to a charity dinner, for example, where you might pay $100 and the church or charity soliciting the donation notifies you in small type at the bottom of the soliciation that $75 of this is deductible because $25 is the value
of the benefit that you're getting. You are put in the position, as athletic directors, of analyzing, again, as the IRS said, the level of demand for tickets, the general availability of seats, the relative desirability of seats based on their types, locations, and views and other relevant factors. Good luck.
Doug Dickey from the University of Tennessee, admittedly a very, very successful athletic program, has 17,000 contributors to his football priority seating plan. I asked Doug if he intended to analyze each and everyone of the donors and their seats to come up with this evaluation that the IRS has
required him to do, and he looked at me as if I was one of those people smoking something silly. There' no way in the world that he's going to do it. And in fact, as we analyze the collegiate programs, we are not aware of a single school that has totally complied with what the IRS required you to do as of April 28, 1986. The bottom line that we come to under those circumstances is if a law is being totally ignored, then maybe, just maybe, there is something wrong with the law rather than the willingness to comply. Those of you who attended our tax session last year at Marco heard Representative Norman Dicks of Washington, one of our most fervent supporters on this thing. Norm referred to the IRS as the group that comes on the battlefield and shoots the wounded. In this case, the IRS is the wounded and believe me, we are doing what we can to attack the Internal Revenue Service.
Well. exactly how did the problem play out? In the 99th Congress. as Bill alluded earlier. we attempted to get the Revenue Ruling reversed in the context of the tax revision bill. We were unsuccess Congress was dealing with a change in the tax law that had the effect of dealing with $120 billion dollal over a five-year period. and we were talking about something that the Joint Committee on Taxation had estimated was worth $10 million dollars a year in lost tax revenues. There was no way in the world that we were going to get Congress to address this problem in the context of the tax revision bill. We simply couldn't do it. The issue was much. much too small for Congress to address in that context. However. as the tax revision bill wended its way through Congress Senator Russell Long. who was
retiring after 30 years in the Senate. perhaps as a parting gift to him and from him to his alma mater. LSU. got a special exemption for LSU. If you read the tax revision bill. Section 1608 of the tax revisi( bill. it specifically exempts LSU from the dictates of Revenue Ruling 86-63. Senator Long having been successful on the Senate side. the conferees approached members of the House and Representative Jake Pickle from Texas attempted to broaden that exemption to apply to all of collegiate athletics. He was unsuccessful. He was told. however. that because the tax bill had given an exemption to one school in the Senate Representative Pickle would have the opportunity to do it for one school in the House. And indeed. the University of Texas. likewise. is exempted from the provisions of Revenue Ruling 86-63. Senator Long retired and went into the practice of law in Washington. Representative Pickle got bludgeoned on this issue. Apparently. he forgot that there were a few A&M grads that also lived in Austin. and he heard about it and heard about it and heard about it. In fairness to Representative Pickle. he has been a patron on this issue and he has made vigorous attempts to expand the scope of the examption. We failed in the 99th Congress. On the first day of the 100th Congress. the bill was introduced by Senator Phil Graham of Texas. and A&M grad. I might add. and shortly thereafter by Representative Pickle in the House. The legislation. and you'll note that I have referred to it on the thumbnail up is S-74. the Senate bill introduced on the first day of the 100th Congress. and HRII06 introduced in February by Representative Pickle.
NACDA has been very active and very agressive in lobbying on this issue. the administration of NACDA through Mike Cleary; the leadership of NACDA through Homer Rice and Homer's Urgent Committee through NACDA. headed by Monte Johnson of Kansas initially and by Doug Dickey of Tennessee now. including other members of the committee. Frank Broyles. DeLoss Dodds. Bill Byrne. BillOlson
and Lew Perkins. Our efforts to date have been successful. I think. although we are still. as it has been expressed to me. perhaps in the top of the sixth inning with a one-run lead. We have been making. and I have been after any number of you to make. the hometown contacts. We have had 19 athletic directors come into Washington already for meetings with members of the Senate and the House. It has not been a totally easy task as I have addressed it. because frequently. I have found myself calling athletic directors that I don't know and who don't know me and explaining to them a problem that they
may not have and asking them to contact a member of the Senate or House that they may not know and who may not know them. and getting that member of the Senate or House to support legislation that that
member may not be toally in support of. But. this I will tell you. the contact. especially when we get in a face-to-face meeting. have produced what I think are quite significant results. As I've said. we have had 19 athletic directors come in. They have been from schools allover the country.
But I think the greating involvement is by a number of athletic directors who, for one reason or another, have not been able to come into Washington and do lobbying. For example, one AD that I
didn't even know and I don't even know if he's here today is Walt Johnson from Bakersfield. If he is here, I want to thank him afterwards. Contacts from him to Representative Bob Thomas, a member of
the Ways and Means Committee, were specifically responsible for Mr. Thomas signing on as a co-sponsor. And Gino Gasparini from North Dakota's efforts were specifically responsible for Byron Dorgan from North Dakota signing on as a co-sponsor. And they run the gamut from the Walt Johnsons with Bakersfie College to the Bob Devaneys with Nebraska. The contacts from me to you have been uniformly well recei' The activities from you to the members of Congress, likewise, have been almost uniformly successful.
As of today, we have 39 co-sponsors in the House of Representatives. That's not a significant number. It's less than one-tenth of the House. But of those 39, 20 of them are members of the
House Ways and Means Committee. That's an absolute majority on Ways and Means. Assuming that we
don't run afoul of Chairman Rostenkowsky on this issue, I think we've got a pretty good shot in the House. On the Senate side, we have now lined up 16 co-sponsors as of last Friday. Of those, seven of them are members of the 20-member Senate Finance Committee, and we have a very good shot at landing an eighth before the end of the week. And I would hope, soon enough, we will have a majority of the
Senate Finance Committee
I guess one could call this the Smith-Barney approach. We've gotten our support the old
fashioned way. We have gone out there and we've earned it. There should be substantial movement in
the next two weeks or so, as what are known as "dear colleague" letters go out from the Senate supporters and the House supporters to the rest of the members of the Senate and House, asking them for support. This, for example, is a letter from Senator Pryor going to all 100 members of the Senate, telling them, "If, you have not signed on as a co-sponsor of S-74, a bill to help collegiate athletics, I'm asking
you, one Senator to another one, to sign on the legislation." The dear colleague letter on the House
side is being held up right now as one member of the House says to one of the other signers of the dear colleague letter, "I am not signing this dear colleague until you sign my dear colleague, which I
sent over to you on another bill a few weeks ago." You play the hand that's dealt you and you learn to get along with these kinds of problems in the Senate and the House, and you just try to get around them as best you can.
The legislative language would direct the IRS to simply treat any contribution tied into an athletic ticket purchase as a charitable contribution. No ifs, ands or buts about it. The IRS would not do any interpretation, would not issue any guidelines. The IRS would simply be told to treat
these as charitable contributions. Where are we going at this point? Well, we're still targeting a number of members of the House Ways and Means Committee who have not yet become sponsors. We're making a run at a number of them, such as Representative Pete Stark from California. Dave Maggard for example, has indicated that he's willing to come into Washington and lobby directly face-to-face with Representative Stark. We have very good representation in NACDA of Florida athletic directors and
Sam Gibbons of Florida is the number two man on the Ways and Means Committee. We do want to get him as a co-sponsor. In the House, I would ask all of you this. To the extent that you look at that
list on page three of the handout, to the extent that you look on that list and see any members of the House that you know that are not underlined, either as members of Ways and Means or co-sponsors, write to them. You can send them that form letter. You can change the letter to meet your specific needs. But write to them. We're looking in the House of Representatives to build up the absolute numbers
of co-sponsors. We have just about finished our work with the Ways and Means Committee, which is the critical committee obviously, and we're looking to build up our absolute members. On the Senate
side, we are going to be attempting to focus on a number of Finance non-co-sponsors. I expect to
be meeting today with a number of athletic directors or assistant ADs who are here such as Stu Haskell from Maine, and Barb Hollmann from Montana, because we want to try and drum up some support among the Finance members who are not co-sponsors already.
The next leg of the strategy, if we have to do it, and I don't want to get to this, will be to try and get some of your donors involved. I don't want to use up those silver bullets, where you would go to your donors, who also happen to be big contributors or active participants in the campaign
of a senator or a member of the House, and ask them on your behalf to contact that member. I don't want to waste those silver bullets because we may have to use them at some point in the future. Nonetheless, that is one avenue which we well may have to travel. The vehicle that we may end up
using as the one that accomplishes our end goal is a bill that may have been introduced today. We don't even know. Referring to this thumbnail update, if you look at the very last paragraph, I referenced the Technical Corrections Bill. That may be introduced today to clean up a lot of the minor errors in the Tax Reform Bill. Now, in cleaning up a lot of the minor errors, there also may be the opportunity to achieve some substantive changes. We don't know yet. If it does not become part of
the Technical Corrections Bill, it well may become a part of what was known as the Budget Reconciliation Act, a much larger piece of tax legislation, which will be introduced later this year in both the House and the Senate. We fully expect that there will be hearings on both bills, although quite
honestly, we don't want to take an active part in the hearings. We may end up filing a statement. We don't want to be especially visible on this simply because there is a potential for people
attacking us. We want to accomplish this thing as quietly and as effectively as we can. At some point, we think during the course of the summer, there will be what is known as a mark-up on both the House side and the Senate side, where our legislation would be introduced as an amendment to whichever bill becomes the chief vehicle for it.
There is one potential glitch sitting out there, and that is what they have called the revenue impact. How much money will this cost Congress, how much will it cost Treasury to give in the break to the colleges? We had an estimate last year of $10 million dollars, which is an insignificant amount as far as Congress is concerned in tax legislation. They're running the numbers again.
Mr. Rostenkowsky asked the staff to run the numbers. It could be a stumbling block. Congress has recognized that they can defer a lot of tax matters by simply saying, "If it's going to cost us any money, show us where that money is going to come from." It may be a stumbling block. And indeed, it may end up causing us to compromise at some point on the total amount of deduction.
Why are we doing all of this? What's the bottom line? It seems to me our purpose is two-fold. First of all, it's to reverse the IRS, to get rid of a foolish and uneducated decision in this Revenue Ruling by the Internal Revenue Service. It is going to cost you dollars. It is going to cost you aggravation at some point in the future. It will put you in dilemmas with your contributors at some point when those audits begin taking place. So we want to reverse the IRS. We want to save ourselves some money. But also, I suggest to you that part of the purpose is to exert the clout that this industry has, or should have. This issue is only the first in issues that you, as businessmen, will have to address in Washington. The next could be, who knows, the troubling issue of agents, for example. This group has the potential of being a very, very effective lobbying group on matters that do affect you. I'm asking for you to help me and I'm asking for you to help yourselves. I won't give you any sports metaphors about it's second and goal in the fourth quarter. The plain, unvarnished truth: it's
important for you and I think it's important for your profession. Let's get behind the effort to show that you as athletic directors are equal to this task.
Thank you, and I'd be happy to answer any questions. I would ask those of you who have the preferred seating plan survey, please fill it out and return it to me at the end of the session today. We're trying to compile this information. Again, thanks, and I'd be happy to respond to any questions.
Let me say before we ask some questions that tomorrow we have some roundtables and not only will we have Phil there, but we're going to have Bill Allen, who is the chief tax partner for Price Waterhouse. He is going to be here as well to answer specific questions about this and about your individual programs. So, you'll have the access to Phil today and then the CPAs from Price Waterhouse tomorrow will be there at the roundtables for two hours.
FROM THE FLOOR:
I'd like to talk to a different aspect of the tax law. It's somewhat due to the two-martini luncheon. There is coming word from Washington that the grant-in-aid and scholarships issued by institutions such as ourselves, that the room and board aspect is income to the individual athletes, who have worked as scholars earning such a scholarship. Tuition and books would be free, but their room and board would be taxable to them. Could you speak to that today or tomorrow?
No, I can't speak to it today, quite honestly. I have not been working on that particular
issue. What I will attempt to do this afternoon, however, is to call my law partners back in Washingtc and see if we can't get some update. However, on a related matter, let me just address one point
which has come out. Late in April, the IRS, in Internal Revenue Bulletin 1987-17, interpreted changes and offered guidance on compliance with the scholarship and fellowship grants dealing with gross income. I have a copy of it here and I'd be happy to let you see it. I'd be happy to send you a copy, if you want, although I'm sure your counsel has it back home. I've made some notes here and substantively, the IRS apparently didn't take a hard line on this issue. For example, the changes
made by the Tax Reform Act are effective for taxable use beginning after December 31, 1986, but only for scholarships granted after August 16. So, our memo says as long as students knew that they
would receive a certain amount of scholarship aid by August 16, those scholarships are excluded from the new tax. The notice further provided the regulations which will be issued will generally relieve 1 institution of an obligation to file information returns or to withhold income taxes or employment taxes. Again, I'd be happy to share this with you and provide Y,ou a copy by mail.
No other questions? Phil. you did a tremendous job as usual. Please be sure and return your questionnaires. Remember that there are people who think this isn't going to affect them. It's going to affect all of us. It may not affect us all immediately, but in a few years we could be put in very uncomfortable situations with the people who support us by giving us their hard-earned dollars. We don't want to get ourselves in that kind of position. The best way to do that is to change the law, tc change the IRS ruling. That's why we need to have you help us. Thank you very much.