In 1986, two years into Ronald Reagan’s second term, the Democrats regained a Senate majority. David Pryor, a Democratic senator from Arkansas, used his new position as chairman of the Senate Subcommittee on Oversight of the Internal Revenue Service, to launch an attack on what he called the IRS’ “questionable, overreaching activities”.
Among the IRS’ “overzealous, heavy-handed, and often illegal methods” that Pryor perceived was the decision by the IRS that football “seat donations” do not meet the definition of a nontaxable gift.
For much of its modern history, college sports have added fees to the cost of their premium seats
These additional fees, called seat donations, carried with them the right to purchase upgraded seats. Seat donations had always been deemed by the IRS to be gifts to an academic institution, a tax deductible donation. As of 1986, the athletic departments of almost all major universities had come to rely on these seat donations to provide a large portion of their athletic program budgets.
Frank Broyles was the highly successful football coach at the University of Arkansas. He joined forces with Joe Paterno, the even more successful coach of Penn State, to lobby Pryor and other senators on behalf of college athletics. They vociferously predicted that stripping away this tax deductible donation would cause many a deserving young American athlete to be denied a scholarship.
Their dire warnings won the day. The deductibility of seat donations was largely preserved for college sports. (The deduction was reduced a piddling 20 percent, from 100 percent to 80 percent. The taxable 20 percent was considered a quid pro quo for the value of the seating rights.)
Seat donations are huge generators of income for college athletics
We’re talking about major money here. In 2017, the 10 schools which raked in the most athletic donations received somewhere between $32 million to $55 million per school, according to the Counsel for Aid to Education. Those numbers include all college donations, not just donations linked to advantageous seating positions. But selling the best seats has long been used as a central strategy for luring donors.
Some schools have required a minimum per seat donation, ranging from several hundred to several thousand dollars, in order to purchase premium seats. This college donation is, of course, above and beyond the base cost of the seats themselves.
Other institutions have adopted a point system. The donors who give the most overall contributions are awarded the most points. The more points a donor has, the better seats he, she, or it can buy. Either way, seat donations have been huge generators of income for college athletics.
New tax cut bill ends deductibility of seat donations
Now the new tax cut bill that went into effect this year has eliminated the deductibility (WSJ login required) of seat donations. The law takes away all deductibility from any donation that is related “directly or indirectly” to an ability to purchase seats. This move is expected to increase federal tax revenue by $2 billion over the next 10 years.
Some of the universities appear to have been caught a little flat-footed. This time around, there was no team of high-powered coach/lobbyists deployed to Washington. And many schools appear to be wondering how exactly to respond now that the law is in effect.
Many universities urged their donors to prepay for seat purchasing rights for the next several years. But the door to that solution is now closed, of course.
The 80/20 rule made it easy for the schools. 20 percent of each seat donation was conclusively assumed to be the fair market value of the seating rights, and the other 80 percent was assumed to be a legitimate charitable donation, i.e., a tax deduction.
What does this mean for college football that depends on seats donations?
One consequence of the new law is that the schools will now be forced to assume the burden of making a fair and reasonable determination of the actual value of a right to purchase seats. The schools will have the concomitant burden of issuing a receipt to the donor showing the market value of the seating rights. That receipt should enable the donor to deduct the balance of the seat donation, above and beyond the fair market value.
Even under the new rules, only the actual value of the right to purchase seats is no longer deductible. Any portion of the seat donation that is clearly above the fair value of the seating rights can still be deemed to have been given with a donative intent and with no quid pro quo. These amounts should therefore retain their deductibility.
But the right to buy seats in a stadium that is regularly sold out can be undeniably (and undeductibly) valuable. For example, the University of Michigan football stadium is sold out for years in advance. The right to buy seats there is highly prized. This means that the athletic departments of successful teams like the Wolverines will likely take a substantial hit under the new rules.
Other schools, whose stadiums are sparsely populated even for the most heated of rivalry games, will find it easier to downplay the value of a right to purchase even the most elite seat. Those institutions will find it relatively easy to attribute a larger share of seat donations to the donors’ philanthropic intent to make a gift to their dear old alma mater.
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