CRS REPORTS ON TAXING CORPORATE SPONSORSHIP PAYMENTS TO COLLEGE BOWL GAMES.

                          Dennis Zimmerman

The Internal Revenue Service has declared the corporate title sponsorship payments received by two nonprofit college football bowl organizations to be taxable income from the sale of advertising that is unrelated to their exempt purpose. Three bills pending in the 102d Congress -- S. 866, H.R. 538, and H.R. 2464 -- would exempt this unrelated business income from taxation. Deciding the tax status of these payments may be approached by comparing the value of (1) the social benefits generated by untaxed receipts of nonprofit college football bowl organizations against (2) alternative use of foregone Federal tax revenue and the detrimental effects of allowing nonprofits to compete on a tax-free basis with for-profit sellers of advertising.

Corporate title sponsorship of the college bowls arguably represents nonprofit sale of advertising, which is not the exempt purpose of the nonprofit organizations. Corporations may well receive these advertising services at a lower price than could be obtained from for-profit sellers of advertising (such as a National Football League game). If this corporate advertising were placed with a for- profit entity, the for-profit entity's net income would be taxed at a 34 percent rate. These revenues would be available for deficit or tax reduction or to finance alternative Federal programs.

Although one cannot place a value on the social benefits provided by college football bowl games, decisionmakers can identify the subsidized activities and groups of people which constitute the social goods. The estimated $5 million Federal subsidy of college bowl games is likely to have been divided in unknown shares among three activities and groups: lower ticket prices and/or an increased quantity of college football bowl games (which would benefit primarily consumers of college football bowl games); lower advertising rates or, phrased differently, smaller sponsorship payments (which would benefit primarily corporate sponsors); or increased funding for universities. Increased university funding is likely to have been divided among football programs, other sports programs, and nonsports university activities. Furthermore, some argue that high visibility sports programs generate social benefits by stimulating financial contributions to universities and helping to maintain a large pool of student applicants. If true, the Nation might gain if total contributions to nonprofit organizations increased, but not if contributions were reallocated from other worthy nonprofit organizations. One would, however, be hard pressed to justify Federal taxpayers having an interest in influencing the college choice of students attracted to schools with successful sports programs.

The three bills would exempt title sponsorships only for amateur sports. If the decision is made to exempt these payments from taxation, consideration might be given to extending exempt status to nonsports nonprofits. Also, no meaningful difference exists between title sponsorships and royalty income paid by corporations for use of a college bowl's name or logo -- both allow the nonprofit to sell advertising. If the decision is made to tax title sponsorships, consideration might be given to extending taxation to royalty payments.

                              CONTENTS

A recent Internal Revenue Service (IRS) ruling held that two nonprofit organizations formed to conduct college football bowl games must declare as unrelated business income those corporate payments made in exchange for renaming the Cotton Bowl the Mobil Cotton Bowl and the Sun Bowl the John Hancock Bowl. The characterization of these payments is important to the nonprofit organizations. If characterized as charitable contributions under section 501(c)(3) of the Internal Revenue Code (the Code), the payments are not taxable. If characterized as unrelated business income from the sale of advertising under section 513 of the Code, the payments are subject to an unrelated business income tax (UBIT) of 34 percent. The characterization of these payments generally has little or no tax consequence for the corporations. The payments are likely to be deductible from corporate gross income either as a charitable contribution or as a cost of purchasing advertising.

The IRS ruling at this time applies only to the Mobil Cotton Bowl and the John Hancock Bowl. Corporate title sponsorship payments received by other college football bowl games, as well as nonprofit organizations engaged in other sports and nonsports activities, presumably eventually would be affected. The reaction of many to the IRS action is one of surprise and disapproval. The college football bowl games have become institutions of popular culture, enjoy mass appeal, and appear to promote desirable and enjoyable activities. Senator John Breaux and Representatives Silvio Conte and Ed Jenkins have introduced legislation (S. 866, H.R. 538, and H.R. 2464) that would reverse the IRS ruling by exempting from UBIT title sponsorship payments made in exchange for a nonprofit entity's "use of the name or logo of a sponsor in association with the amateur athletic event and related activities." The bills would also provide explicit statutory exemption for several other sources of income that frequently are received by amateur athletic organizations, most importantly broadcasting income and royalty income received in exchange for licensing corporate use of the nonprofit's name or logo

Opportunities to make small, seemingly insignificant, cuts in the budget deficit such as would be made by this IRS ruling are presented to policymakers on a regular basis by the administrative and policymaking apparatus of the bureaucracy as it goes about its job of monitoring and evaluating Federal law for conformance with policy objectives that usually have little to do with deficit reduction. These deficit reduction options are often summarily declined as those individuals who benefit directly from the questioned programs are energetic in contrasting (1) the substantial adverse impact cuts would have on the affected group with (2) the proportionately small contribution cuts would make to overall deficit reduction. In contrast, the case for cuts often lacks an organized constituency to articulate what frequently are complex economic policy justifications for alternative (and therefore hypothetical) uses of the funds.

A decision not to collect taxes on nonprofit organization income is comparable to a Federal spending program that subsidizes these organizations' activities. Analytic evaluation of the IRS ruling and the proposed legislation considers several important issues other than the effect on Federal revenue. The first is characterized as impact on fair competition, whether nonprofit organizations (in this case the college bowl organizations) use their tax exempt status to sell goods and services (in this case advertising) that are unrelated to their exempt purpose at prices below what for-profit sellers of comparable goods and services can charge. The second concern is whether the foregone Federal tax revenue (Federal subsidy) might be better used on some other activity (private spending and saving or alternative Federal spending program). For many policymakers, in this instance a necessary condition to maintain the subsidy would be that these 501(c)(3) bowl organizations provide social benefits commensurate with the value of the tax benefits they receive. A related concern is the potential effect of removal of the subsidy on the colleges, such as budgetary retrenchment in athletic programs and reduction of sports-induced student applicant pools and financial contributions to universities. Another question is whether, if the IRS ruling is overturned, the legislation should provide some nonprofit organizations (those promoting amateur sports) with more preferential tax treatment than other nonprofit organizations. A final concern is whether, if the IRS ruling stands, legislation should be enacted to extend taxation to nonprofit royalty income received in exchange for licensing corporate use of a nonprofit's name or logo.

The discussion that follows suggests that the relative importance of charitable and commercial motivation may vary widely among corporate sponsorships of nonprofit organizations, which suggests widely varying social/private benefit shares. It is difficult to differentiate between charitable and commercially motivated sponsorships with a tax code that traditionally relies on voluntary compliance. Congress has devoted increasing attention to the tax treatment of nonprofit organization funding sources, and IRS has responded with increased monitoring effort, as evidenced by the college football bowl ruling. Although this report necessarily questions Federal subsidy of big-time college football, this in no way implies it is not a desirable activity or is not an attractive candidate for State or local subsidy.

FOREGONE FEDERAL REVENUE

Total corporate sponsorship of sports, arts, music, community, and cause-related events was about $2.9 billion in 1991 (estimated by Special Events Report, a newsletter published by International Events Group). The nonprofit share of those sponsorship payments was $1.1 billion, of which about $64 million was paid to the college football bowl organizations. Of this $64 million, an estimated $19.6 million was received for corporate title sponsorships rather than as corporate royalty payments. ¹ The Federal revenue loss depends upon three factors: the cost to the nonprofit of providing the advertising services; how broadly the IRS ruling is applied across all nonprofits; and whether the ruling is eventually applied to royalty income as well as title sponsorships.

Assume corporate sponsorships would remain the same even if subjected to UBIT (the aftertax price to the corporation does not change). The college bowl organization contracts call for them to pay the colleges 75 percent of the sponsorship payments; therefore assume advertising expenses consume 25 percent of the payments. If the UBIT were applied only to college football bowl games, taxable net title sponsorship income would be $14.7 million (75 percent of $19.6 million), and tax revenue would be $5 million (34 percent of $14.7 million). If UBIT were applied to all nonprofits and included all sponsorship income, taxable net sponsorship income would be $825 million (75 percent of $1.1 billion), and tax revenue would be $281 million (34 percent of $825 million).

Alternatively, suppose the application of UBIT induced some nonprofit organizations to end their sporting events, and some corporations responded by turning to sponsorship of professional sports events. The payments would be gross receipts to the professional league (or a television network), and the portion of the payment in excess of expenses required to produce advertising services would be taxable income. Revenue collections would be the same as in the previous case if the cost of providing the advertising services is the same for for-profit organizations as it is for nonprofit organizations.

Of course, the actual revenue gain from application of UBIT to these payments depends upon the reaction of the nonprofit organizations and corporate sponsors. But the amount of money at stake here is not trivial if applied to nonprofit sponsorship payments in general.

FAIRNESS OF COMPETITION

A primary benefit argued for the IRS ruling is the reduction in the potential for unfair competition. The ability of nonprofit organizations to engage in unfair competitive practices is controlled by the unrelated business income tax provision.

BACKGROUND ON UNRELATED BUSINESS INCOME TAX

Nonprofit organizations are exempt from the corporate income tax under Code section 501(c). A large subset of these organizations is also eligible under section 501(c)(3) to receive contributions that are generally deductible by the donor in the calculation of taxable income (whether individual or corporate) under section 170(c). This preferential tax status is intended to promote desirable social goals, but also creates the potential for nonprofit organizations to compete unfairly with the private sector by using the absence of tax payments as a vehicle for charging a lower price than for-profit providers of identical or similar services (taxes being a cost of production that must be paid by taxable entities in the private sector).

The unrelated business income tax (Sections 511 and 512) is supposed to inhibit such unfair competitive behavior. ² The UBIT is levied on nonprofit organization revenue received from activities that are not substantially related to the exempt purpose for which the nonprofit organization was formed (unrelated trade or business, Section 513). Note that the determination of whether income is unrelated does not depend upon the USE of the revenue, whether the nonprofit uses the revenue obtained for the furtherance of its exempt purpose, but rather upon the SOURCE of the revenue, whether the revenue is received from an economic activity it undertakes which is not related to its exempt purpose.

The UBIT is designed to prevent unfair competition both large and small, subtle and obvious. Thus, it prohibits arrangements such as one once enjoyed by the New York University Law School, whereby untaxed profits from its ownership of companies such as Mueller Macaroni accounted for a substantial portion of its funding, and the Treasury Department would like it to prohibit others such as college bookstore and museum gift shop sales of general-purpose books, appliances, clothing, and gifts unrelated to the subject matter of the institution. ³

ANALYSIS OF FAIRNESS OF COMPETITION

This discussion proceeds with specific reference to either the Mobil Cotton Bowl or the John Hancock Bowl, but the issues would be similar for other nonprofit organizations. Classification of the Mobil payment as unrelated business income and an important policy issue seems to require two conditions: (1) that the payment be in exchange for an activity unrelated to the exempt purpose of the Cotton Bowl Athletic Association (CBAA); and (2) that engaging in this activity provides the nonprofit entity with a potential unfair competitive advantage relative to competing private firms.

IRS maintains that the CBAA agreement to change the name of the Cotton Bowl Classic to the Mobil Cotton Bowl Classic and to display the Mobil name in Cotton Bowl promotional materials and on the football field constitutes the sale of advertising to Mobil. Since the sale of advertising is not the exempt purpose of the CBAA, it contends the Mobil payment is taxable unrelated business income.

The CBAA maintains the Mobil payment provided only incidental benefits to Mobil and is, therefore, a charitable contribution rather than unrelated business income. CBAA cites several reasons to justify its position that the agreement provides only incidental benefits to Mobil: (1) no new events or activities were created to benefit Mobil; (2) the manner in which the bowl game's logo was displayed did not change; and (3) Mobil's commercial activities, products, or services were not promoted.

Is the Mobil Payment Unrelated Business Income?

CBAA's "educational" exempt purpose is the promotion of amateur athletics, not the sale of advertising. If advertising was sold, the income received arguably was unrelated to the exempt purpose of CBAA. Thus, the issue is whether the Mobil payment was made in exchange for advertising services. Note that the fact the proceeds may have been used to promote CBAA's exempt purpose is not legally relevant to this judgment.

First, CBAA claims the payment should be seen as a charitable contribution because CBAA created no new events or activities specifically for Mobil. One obvious counter is that this misconstrues the nature of the transaction. It appears that Mobil's intention was to associate its name with an established, highly visible event, and not to pay for the creation of a new event. One can assume that Mobil would have paid considerably less for association with a new event than it was willing to pay for association with the well established Cotton Bowl Classic. From this perspective, it was not necessary for CBAA to create new events for Mobil -- the value to Mobil was in the purchase of an association with an existing event.

Second, CBAA contends it did not display the CBAA logo in any way not displayed in the past. CBAA changed its logo. Mobil purchased a DESIGN change for the logo. It appears true that the LOCATION of the logo display was not changed -- but on the other hand, the logo was already in the ideal position (on the football field) to maximize the benefit to Mobil.

Finally, CBAA maintains that it did not promote Mobil's commercial activities. Presumably CBAA means that words were neither written nor spoken that specifically promoted Mobil's gasoline, oil, and other products. The IRS decision appears to suggest that, since arguably the word "Mobil" is in the public mind associated with these products, it would not be necessary for CBAA to write or speak the names of the products to promote Mobil's commercial activities.

A case can be argued that the Mobil payment was made in exchange for something more than its magnanimity and incidental tangible benefits. ⁴ Mobil did make its contribution to the CBAA in exchange for an assurance that its name would appear in the title of the game and on the field, precisely the services that provide substantial tangible benefit. These changes made the Mobil name (and arguably the products linked to that name) visible to the millions of newspaper and magazine readers exposed to pregame publicity and postgame accounts and additional millions of people viewing the football game on television.

If this line of reasoning is incorrect, then one should expect that removal of Mobil's name from the title and the field would not affect Mobil's willingness to make the payment to CBAA. The reasoning would be correct if the CBAA/Mobil contract allows Mobil to back out of its payment obligation should the Mobil Cotton Bowl Classic fail to be televised.

It is possible that Mobil's accounts for the payment to CBAA are in its charitable contributions account rather than its advertising account. That, however, would not be dispositive of the issue. Money is fungible and can be moved from account to account. The better test of whether Mobil views this payment as advertising or as a charitable contribution is what would happen to Mobil's advertising payments to for-profit organizations if the opportunity to engage in title sponsorship of nonprofit activities was eliminated (football bowl games, Public Broadcasting System programs, etc). If advertising payments to for-profit organizations remained the same or increased by less than its nonprofit sponsorship payments, that would be evidence suggesting the payment might have been a charitable contribution.

In summary, one would have to take a quite narrow view of what provides benefits to a corporation to accept the argument that CBAA title sponsorship does not benefit Mobil other than through feelings of good citizenship from promoting amateur athletics. Reasonable arguments suggest that the Mobil payment is "unrelated business income" for the CBAA.

Does the Potential for Unfair Competition Exist?

The question arises whether the sale of such title sponsorship represents unfair competition against for-profit sellers of advertising. The major competitors are television, radio, magazines, and newspapers. All these media outlets provide packages of information and/or entertainment to the general public and sell advertising to commercial entities that desire to communicate with the general public. The advertising rates these media companies charge are a direct function of the number of readers or viewers they attract, and the socioeconomic characteristics of those readers or viewers.

When Mobil wants to place its name before the general public, it can choose among all these potential advertising outlets. Suppose it has decided to focus on television. The CBAA is analogous to a film production company that produces a television series, or the National Football League that produces a television series of professional football games. All of them have in common the production of entertainment that many people desire to see. Mobil could choose to allocate its advertising dollar among these events solely based upon the number of consumers each event can deliver per dollar of advertising cost.

The film production company and the National Football League are for-profit companies, and as such are subject to the corporate income tax. One of their costs of doing business is income tax payments. Absent the necessity of paying taxes, all other things being equal, the CBAA has the potential to provide X number of viewers to Mobil at a lower cost per viewer than can be provided by taxable producers of entertainment. CBAA can keep some of the foregone taxes for itself (to be used in furtherance of its educational purpose) and use some of the foregone taxes to lower the payment it charges to Mobil. The division of the foregone taxes between the charitable purpose and Mobil may depend upon the degree of competition among all those organizations trying to attract advertising dollars and among corporations desiring to sponsor bowl games.

Some anecdotal evidence suggests the college bowl games are competing unfairly. John Hancock Financial Services has an arrangement with the former Sun Bowl that is similar but not identical to Mobil's agreement with the CBAA. John Hancock estimated that it received $5.1 million of advertising services in exchange for its 1990 payment of $1.6 million to associate its name with the game. A John Hancock senior executive vice president was quoted as saying "The bowl is an extraordinarily efficient media buy. It would cost us a great deal more money to help influence sales by normal advertising." ⁵

This suggests two things. First, the Sun Bowl may have charged considerably lower per customer advertising rates than John Hancock would have had to pay to a for-profit enterprise. Second, a substantial portion of the tax benefits may well have been transferred to John Hancock.

SOCIAL BENEFITS

Policymakers face a tradeoff when contemplating the imposition of UBIT on corporate sponsorship of amateur sports events. They must compare the detrimental effects of arguably unfair competition (subsidized advertising rates for sponsoring corporations) and the sacrifice of Federal revenue against the potential loss of social benefits.

Evaluating these social benefits is a more subjective task than the preceding evaluations of unfair competition and Federal revenue loss. This section of the report does not attempt to determine whether college football bowl games do or do not provide adequate social benefits, for by their very nature social benefits cannot be measured with any numerical precision. Rather, the section attempts to assist an informed judgment by discussing the college bowl games in the context of the economic rationales for having nonprofit organizations in a private enterprise economy and the ways in which these nonprofit organizations may fulfill or fail to conform to these rationales.

SUCCESS AND FAILURE OF NONPROFIT ORGANIZATIONS ⁶

There is good reason in a market economy to have a nonprofit sector. Two economic rationales have been advanced to explain and justify the existence of nonprofit organizations in the economy. The first hinges on the usual public goods argument that justifies public provision of collectively consumed goods. Coalitions of minority voters, desirous of a higher level of collective consumption than provided by the majority, may fulfill these desires through preferentially taxed nonprofit organizations. Many educational, scientific, religious, and cultural organizations provide services that fit this profile.

The second justification for the nonprofit sector is labeled "contract failure" by some, "asymmetric information" by others. Here the problem is one of an essentially private good about which the seller possesses much more information than the buyer, leading to a possibility that the buyer will be taken advantage of by the profit- motivated seller. In such instances, the nondistribution constraint on nonprofit organizations (the prohibition against surplus or profit being distributed to board members or managers) supposedly reduces the incentive for the service provider to take advantage of the consumer's informational disadvantage. Nursing homes and mental treatment facilities are thought to be good examples of services that fit this profile.

These rationales explain why society relies on nonprofit organizations to provide social benefits. The literature on nonprofit organizations suggests, however, that several types of nonprofit behavior may violate widely shared standards of efficient and equitable use of public resources and interfere in nonprofit organizations' ability to provide social benefits. These types of nonprofit organization "failure" have contributed to policymakers' willingness to consider and impose limits on the provision of Federal subsidy to every nonprofit entity or to every dollar of income for any given nonprofit entity. ⁷

ECONOMIC EFFECTS ON COLLEGE SPORTS

Although one cannot place a value on the social benefits provided by college football bowl games, it is possible to identify the subsidized activities and groups of people which constitute the social goods. It is these activities and groups that would experience cutbacks if the $5 million subsidy is eliminated.

In theory, the $5 million Federal subsidy implicit in the $19.6 million of title sponsorship payments made to college football bowl games is likely to have been divided in some fashion among three activities and groups: lower ticket prices and/or an increased quantity of college football bowl games (which would benefit primarily consumers of college football bowl games); ⁸ lower advertising rates or, phrased differently, smaller sponsorship payments (which would benefit primarily corporate sponsors); or increased funding for universities (whose primary beneficiaries might include several different activities and groups).

It is possible that the universities use their share of sponsorship income to fund nonsports university activities such as libraries or need-based academic scholarships. Another possibility was suggested in a January 21, 1991, Business Week article that indicates the increased university funding was spent on those sports that are not self supporting (e.g. rowing and golf). ⁹ At least as likely as these two options is that the increased university funding (or some of it) is kept by the athletic department for the football program. In that case, loss of the subsidy might mean the college football program would proceed on a less costly basis, with budget adjustments chosen from such options as: scholarships reduced and maybe allocated on a financial needs basis; salaries of coaches and administrators reduced (to the extent any existing differential with the remainder of the university faculty is financed with sponsorship funds); reduced travel to accommodate more local and regional rivalries; and less "first class" capital facilities. ¹⁰ Most of the impact of the entire alleged $5 million revenue reduction might be focused on big-time college sport. In assessing the consequences it may be noted that the majority of colleges and universities receive no revenue from the college bowls and manage to conduct diverse athletic programs with limited funds.

It is also possible that title sponsorship income generates substantial social benefits by increasing the visibility of college sports programs. Many college administrators maintain that high visibility sports programs help sustain a large pool of student applicants and high levels of financial contributions. A large pool of applicants is an undeniable asset to any college or university, and a subset of students is probably going to be attracted to schools with successful athletic teams. But one would be hard pressed to justify Federal taxpayers having an interest in which schools these students attend. It may be an important issue to a particular school or a particular State, but it is of little consequence to the Nation.

The financial contributions argument has inherent appeal, but raises a few issues for which it would be useful to have additional information. One issue is the magnitude of the impact on contributions. A second the relative shares of the increase directed to the athletic program and the university as a whole. A third is which groups of people are benefitting from the increase. Finally, it is not clear that the Nation as a whole benefits even if a relationship between sports success and financial contributions to universities does exist. National benefit might result if the overall level of contributions to all nonprofit organizations increased. It is possible, however, that the increased visibility of college sports induces potential contributors to reallocate their contribution dollars from other worthy charitable endeavors to universities. Reallocation would benefit the Nation only if the marginal social benefit of a dollar contributed to large universities is greater than a dollar contributed to activities such as cancer research or public television.

NONNEUTRAL TREATMENT OF NONPROFITS AND TYPES OF PAYMENTS FOR ADVERTISING SERVICES

The three bills mentioned in the introduction -- S. 866, H.R. 538, and H.R. 2464 -- would all specifically exempt from UBIT the following types of revenue generated from any qualified amateur athletic event conducted by an organization described in section 501(c) of the Code:

o the use of the name or logo of a sponsor in association with the amateur athletic event and related activities,

o the sale of broadcasting rights for the amateur athletic event and related activities, ¹¹

o the licensing to an unrelated third party of the right to produce and sell the program for the amateur athletic event and related activities, and

o the licensing to an unrelated third party of the right to use the name or logo of the organization or the amateur athletic event and related activities.

The first item listed is the subject of the IRS ruling, the use of the corporate sponsor's name or logo in the title of the event. Suppose it is judged that the social benefit generated by the Federal subsidy of title sponsorship payments exceeds the combined value of the foregone Federal revenue and the detrimental effects of any unfair commercial competition. Note that the bills would provide an exemption from UBIT for amateur sports events only. Such preferential treatment relative to arts, music, community and cause-related nonprofit organizations would tend to direct an even greater share of title sponsorship monies to amateur athletics (because they can offer more attractive advertising rates).

The desirability of this nonneutral treatment of arts, music, community, and cause-related nonprofit organizations depends on one's own priorities. Some citizens would undoubtedly prefer sponsorship benefits to be channelled to other causes such as Public Broadcasting System, Ronald McDonald homes for families of hospitalized children, housing for the homeless, and Special Olympics (classified as aid to handicapped rather than sports). Others including many college football fans would likely support subsidizing the bowl games. Congress will ultimately make the decision. If it is believed that the social benefits from creating a special title sponsorship exception to UBIT are desirable, consideration might be given to placing all nonprofit entities on an equal footing in seeking such funding.

The outline of the nonprofit counter to the IRS ruling is already apparent. Nonprofits are being advised to structure sponsorship payments as royalty income, which currently is exempt from UBIT. The nonprofit organization licenses its name or logo for use by an unrelated corporation in exchange for the corporation's payment of royalty income. This places the responsibility for doing the advertising on the corporate sponsor rather than on the nonprofit entity. This technique already is a primary financing mechanism exploited by many nonprofit organizations such as the U.S. Olympic Committee. Corporations buy the right to use the Olympic logo in their advertising and call their product the "Official Widget" of the Olympic Games.

Although royalty payments have a different name than title sponsorship payments, it is difficult to differentiate between the services being purchased with these payments. Both use the name of the nonprofit organization or nonprofit event as a vehicle to advertise the name and sometimes the products of the sponsoring corporation. Perhaps the most meaningful distinction is the exclusivity of the two techniques -- title sponsorship is restricted to but one corporation, royalty purchase is available to many corporations -- and the premium price the nonprofit is able to charge for the title sponsorship advertising service. Regardless of price, the two techniques arguably enable the nonprofit organization to compete with for-profit sellers of advertising, and create the potential for unfair competition absent UBIT.

The essential similarity between title sponsorships and royalty payments seems to have been perceived by sponsors of the legislation. Although royalty payments are currently exempt from UBIT, the bills would disallow future IRS efforts to apply UBIT to royalty payments. Royalty payments are included in the revenue sources that would be statutorily exempt from UBIT (see the fourth item in the list of revenue sources described above in this section).

Another strategy being suggested to nonprofits is to "draw up bare bones contracts. The IRS may deem even the mere existence of a sponsorship contract as inconsistent with the notion of a charitable gift." ¹² Whatever the value of this tactical advice, changing from a written to an oral contract does not change the essential nature of the transaction. A strong case can be made that both title sponsorships and royalty payments are provided in exchange for advertising services. If so determined, this makes them commercial transactions that compete with the private sector.

Taxing sponsorship income of nonprofit organizations -- for nonprofit use of the corporate name and corporate use of the nonprofit name -- might leave many dissatisfied. All sponsorship arrangements may not have similar shares of "charitable" and "commercial" motivation. There may be widely varying social/private benefit shares. Does McDonald's sponsorship of housing facilities (bearing its name) for families of hospitalized children entail a degree of unfair competition comparable to the Mobil sponsorship of the Cotton Bowl? Phrased differently, are these two arrangements equally subsidized by the untaxed income of the nonprofit organizations? And do taxpayers value equally the social benefit from the marginal dollar of foregone tax revenue spent on the different groups of people being subsidized by McDonald's and Mobil's payments to the two nonprofit entities? ¹³ Differentiating between such cases is very difficult, particularly when the subsidy program is administered with a tax code that traditionally relies on voluntary compliance. Congressional concern about the social benefits being provided by some nonprofit organizations has undoubtedly contributed to recent IRS efforts to increase its monitoring of the nonprofit sector.

² See Statement of Honorable Dan Rostenkowski. U.S. Congress. House. Committee on Ways and Means. Subcommittee on Oversight. The Unrelated Business Income Tax. Hearings, 100th Cong, 1st sess. June 22, 1987. Washington, U.S. Govt. Print. Off., 1988. pp. 2-4.

³ See the discussion in W. Harrison Wellford and Janne G. Gallagher. Unfair Competition. The Challenge to Charitable Tax Exemption. Washington, D.C.: The National Assembly of National Voluntary Health and Social Welfare Organizations. p. 89.

⁴ Evidence exists that the college bowl organizations know their sponsorship income (whether title sponsorship payments or royalty income from licensing of the nonprofit's name or logo for corporate use) represents an exchange for advertising services rather than purely a solicitation of charitable contributions. International Events Group, Inc. runs an annual marketing convention that brings together the two sides of the "events" market -- events seeking sponsors, and sponsors seeking events. A Sponsor's Impact workbook of "Company Profiles" is provided to attendees. Quoting from the 1991 profile written by the Fiesta Bowl (a nonprofit organization that stages an annual festival whose centerpiece is the New Year's Day Fiesta Bowl college football game:

All sponsorship packages are tailored for sponsors so that they RECEIVE TANGIBLE RETURNS ON THEIR SPONSORSHIP DOLLARS . . . [S]uccess of the Fiesta Bowl . . . attributed to the . . . sponsors who so generously CONTRIBUTE to the bowl. The Fiesta Bowl invites you to inquire about sponsorships today. [emphasis added].

⁵ Wall Street Journal. April 24, 1991.

⁶ This section is based upon a discussion of the economics literature on nonprofit organizations in Dennis Zimmerman. Nonprofit Organizations, Social Benefits, and Tax Policy. National Tax Journal. September 1991. pp. 341-349.

⁷ Two examples are of particular interest. The Tax Reform Act of 1986 imposed a $150 million cap on each nonprofit organization's outstanding stock of tax-exempt bonds, thereby limiting access to Federal subsidy of borrowing costs. Hospitals were exempt from this requirement, but all other nonprofit institutions, including universities, were affected. Imposition of the limit seems to suggest that society values the social benefits produced by these institutions but has questions as to whether the marginal dollar of public subsidy is bringing the Federal taxpayer a reasonable return in social benefits. These congressional concerns continue, and have focused recently on nonprofit hospitals. See Statement of James J. McGovern, Assistant Chief Counsel (Employee Benefits and Exempt Organizations), Office of Chief Counsel, Internal Revenue Service. U.S. Congress. House. Select Committee on Aging. Hospital Charity Care and Tax-Exempt Status: Restoring the Commitment and Fairness. Hearings, 101st Cong., 2d sess. June 28, 1990. Washington, U.S. Govt. Print. Off., 1991. Report 101-780. pp. 57-72.

⁸ Nonprofit organizations do maintain that sponsorship revenue sometimes is used to subsidize ticket prices. The director of Seattle's Bumbershoot Arts Festival was quoted in reaction to the IRS ruling: "We very much count on our sponsorship revenues to make the festival break even and to keep ticket prices low." Wall Street Journal. April 24, 1991.

⁹ This line of reasoning was a theme of the recently completed bowl game season. Announcers on the 1992 Rose Bowl telecast informed viewers that the University of Washington's $10 million athletic department surplus in the preceding year had been spent to fund the women's softball and soccer teams. Presumably, they meant to say that a portion of the surplus had been used for those sports, since it is unlikely that two such minor sports could use that much money.

¹⁰ If the football budget alternative were correct, one of the less visible beneficiaries of the subsidy might be the owners of professional football teams, who need to invest less in developing the skills of their players because of the sponsorship-funded skill development imparted by the colleges.

¹¹ Representative Paul Henry has introduced a bill (H.R. 969) that would move in the opposite direction of these three bills by requiring that broadcasting revenue, a more pervasive athletic department revenue source than title sponsorship payments, be INCLUDED in the definition of unrelated business income.

¹² Nonprofit Events' Organizers Gird to Confront IRS. Wall Street Journal, December 27, 1991.

¹³ One's perception of social benefits might differ even when considering activities and groups that at first appear quite similar. For example, consider corporate sponsorship of two organizations that administer different U.S. Olympic teams, basketball and Greco-Roman wrestling. The activities are similar, sports teams representing the Nation in Olympic competition. The participant characteristics, however, are quite different -- basketball team members are very well compensated players from the professional National Basketball Association; the wrestling team members are people who probably receive minimal compensation for their wrestling skills.