Bored By The Bowl Games? The Irs Wasn'tby
Internal Revenue Service officials probably like a New Year's Day football game as well as the next red-blooded, taxpaying American, but they took more than a fan's interest in the Mobil Cotton Bowl this year. The game itself was a snore--the Miami Hurricanes stomped the Texas Longhorns 46-3. What really interested the IRS were the big bucks Mobil Corp. ponied up for the afternoon in Dallas.
The Cotton Bowl Athletic Assn. (CBAA), the nonprofit group that organized the game and festivities, operates on an $8 million budget--including a substantial though undisclosed amount from Mobil. The IRS contends that the oil company's contributions had little to do with the CBAA's tax-exempt function, which is to promote university athletics. The agency wants the bowl association to pay taxes on the funds Mobil put up.
BIG MONEY. The outcome of the dispute will have implications far beyond a single bowl game. The John Hancock Bowl in El Paso is under IRS scrutiny, and other games that give a corporate sponsor top billing, such as the Federal Express Orange Bowl, could also be getting unwelcome attention from the tax men. Equally vulnerable are many events sponsored by corporations and organized by nonprofit groups, from professional golf and tennis tournaments and the New York Marathon to fund-raising activities of the National Multiple Sclerosis Society.
Huge sums--and huge liabilities--could be involved. Corporate sponsorship of such events has skyrocketed from $400 million in 1984 to $2.5 billion this year. Since the hugely successful and largely privately underwritten 1984 Los Angeles Olympics, corporate dollars for sports events alone have vaulted from about $320 million to $1.7 billion (chart). "Because this is becoming such a big revenue source, it's natural for the IRS to take a look at it," says Jim Andrews, editorial director of International Events Group, a Chicago-based corporate sponsorship consultant.
The investigation may be new, but the problem is old: whether the money nonprofits receive is related to their tax-exempt purpose. The IRS claims that Mobil is essentially paying for advertising. It added its name to the title of the event, and on New Year's Day, the Cotton Bowl field resembled an enormous billboard. Mobil's logo was emblazoned across the 50-yard line and in each end zone. Mobil contends "the grant is to support the universities in the Southwest Conference."
Regardless of the outcome of the IRS review, Mobil can write off its payment, but bowl officials say they'll be limping from the field if the IRS wins. They claim that an adverse ruling would severely damage university athletic programs. If the corporate contributions to the 19 bowl games were taxed, the money that funnels down to the schools could drop by as much as $5 million, says John Stuart, president of the CBAA.
Under National Collegiate Athletic Assn. rules, organizers must pay out at least 75% of bowl revenues to schools in the athletic conferences from which contestants are selected. That money is critical to the athletic departments of the large schools that field big-time teams. Football is often the only money-maker in their athletic programs, and if the proceeds were taxed, schools wouldn't be able to subsidize other collegiate sports as easily. "When the colleges cut back on the rowing or golf team, some kid somewhere will be deprived of the opportunity to participate," says Stuart.
GETTING SACKED. Nonprofit groups and the universities seem to have precedent on their side. When the issue came before the U. S. Court of Appeals in Denver last year, the IRS got sacked. That case involved a challenge to the advertising in the program for the NCAA's Final Four basketball games. The court ruled that the ad revenues weren't taxable as unrelated business income. "The service isn't very happy with that decision," says Marcus S. Owens, director of the exempt organizations office of the IRS. Now, the agency is looking for a conflicting court ruling so that it can force the issue to the Supreme Court.
That has sports groups quaking in their sneakers. An IRS victory "would be devastating to the running world," says Fred Lebow, president of the New York Road Runners Club, which organizes the New York City Marathon. The club's 10 annual sponsored competitions support about 100 other money-losing events, including its popular New Year's Eve race. "It seems to me the IRS would have bigger fish to fry," gripes Burch R. Riber, executive director of the International Golf Assn. But as corporate sponsorships grow, the nonprofit fish look mighty tempting.