Washington, D.C. -- The Internal Revenue Service has ruled that the Cotton Bowl and the John Hancock Bowl must pay taxes on the money they receive from corporate sponsors.
Although the rulings apply only to the Cotton and John Hancock football bowl games and establish no official precedent, they are part of a pattern of tougher tax scrutiny that could have great implications for college sports.
The revenue service ruled that Mobil Corporation’s contribution to the Cotton Bowl -- about $1.5-million -- and John Hancock Mutual Life Insurance Company’s $1-million payment to its bowl should be taxed as unrelated-business income.
Tax law says that non-profit groups must pay unrelated-business tax on income that is not “substantially related” to their primary mission -- which, for the bowl games, is education. The IRS ruled that the donations given to the bowl games by the corporations were, in effect, payments made in exchange for advertising. The revenue service dismissed claims by lawyers for the bowl games that the contributions were not made in exchange for any benefit.
In line with its policy, the IRS did not identify the Cotton and Hancock Bowls.
But Bruce Bernstien, a tax partner at Arthur Andersen who represents the Cotton Bowl, said last week: “We have received indication from the service that it plans to maintain its position that the funds we receive from our sponsor are taxable.”
The non-profit groups that sponsor the bowl games may appeal the rulings to the IRs or challenge them in either the Tax Court or U.S. District Court. If the rulings stand, the bowls must pay a tax of about 34 per cent on the corporate contributions.
College and bowl-game officials also are hoping for legislative relief. Bills in the House and Senate would amend the Internal Revenue Service Code of 1986 to protect the tax-free status of groups that sponsor amateur athletic events. However, a competing bill, introduced by Rep. Paul B. Henry, a Michigan Republican, would declare all revenues from television and gifts taxable as unrelated-business income.
Officials of the bowl games note that most of the money they get from corporate sponsors goes directly to the colleges that participate in their games. National Collegiate Athletic Association rules, in fact, require that bowl games return 75 per cent of their gross receipts to the teams.
“The real losers are the institutions that participate in the games,” said Mr. Bernstien.