Nat'l Collegiate Athletic Ass'n v. Comm'r of Internal Revenue

• Decision Date: 28 February 1989
• Docket Number: Docket No. 24889-87
• Citation: 92 T.C. No. 27,92 T.C. 456
• Parties: NATIONAL COLLEGIATE ATHLETIC ASSOCIATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

92 T.C. 456

92 T.C. No. 27

NATIONAL COLLEGIATE ATHLETIC ASSOCIATION, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 24889-87

United States Tax Court

Filed February 28, 1989

P employed H as its agent to sell advertising to be published in programs for its annual men's basketball championship tournament. HELD, P did not prove that the advertising sales activities were not ‘regularly carried on‘ or that the income constituted royalties. Thus, the income from the sales were subject to tax as unrelated business income. Secs. 511 through 513, I.R.C., as amended. George H. Gangwere, C. W. Crumpecker, Jr., and Randal O. Carlson, for the petitioner.

Robert M. Fowler, for the respondent.

COHEN, JUDGE:

Respondent determined a deficiency of $10,395.14 in petitioner's Federal income tax for 1982. The issues for decision are (1) whether income received by petitioner in connection with the publication of commercial advertisements in game programs for the 1982 Men's Division 1 Basketball Championship Tournament was unrelated business taxable income under section 512 ¹, and if so, (2) whether such income is excludable from the unrelated business income tax as a royalty under section 512(b)(2).

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Petitioner's principal place of business was located in Mission, Kansas, when the petition was filed.

Petitioner is an unincorporated association of more than 880 members consisting of colleges, universities, athletic conferences and associations, and other educational organizations. Among petitioner's stated purposes, as established by Article 2, section 1(f) of petitioner's constitution, is ‘to supervise the conduct of * * * regional and national athletic events under the auspices of this Association.‘ Petitioner is governed by its member institutions. To assist it in its day-to-day operations in 1982, petitioner employed a staff of 45 to 50.

Petitioner annually sponsors 76 championship games, meets, or tournaments for men or women in 21 sports, including basketball. Game programs which set forth the participants and other tournament- related information are usually published and sold in conjunction with these events. Petitioner's Executive Regulation 2, section 15, as published in the 1981-1982 NCAA Manual, authorized the actual printing of such programs and selling of advertising therein by ‘an outside agency under contract, the host institution, or the NCAA national office.‘ The regulation further stated, ‘If the program is printed by an outside agency, the Association shall receive a guaranteed amount or a predetermined percentage of program receipts.‘

One of the largest and most celebrated championship events that petitioner sponsors is the Men's Division 1 Basketball Championship Tournament (the tournament). The tournament has been conducted annually since 1939, although sponsored by petitioner since 1940, following the conclusion of each regular season of college basketball. Petitioner's 9-member Division 1 Men's Basketball Committee supervises the event. It is an elimination tournament which begins with regional rounds played at various locations across the country and culminates with what is commonly referred to as the ‘Final Four Tournament‘ — the semifinal and final games involving the top four teams (the Final Four). The 1982 tournament was held on 8 separate days in March spanning approximately 3 weeks. Forty-eight college teams were invited and participated. The total revenue generated by the tournament, amounting to over $18 million in 1982, traditionally has been responsible for about 75 percent of petitioner's annual operating budget.

In a written contract dated May 18, 1981, petitioner contracted with Lexington Productions, a division of Jim Host & Associates, Inc. (Host or Publisher) for the publication and sale of programs, including advertising therein, for the 1982 Final Four games. The written contract included the following terms:

WHEREAS, NCAA desires to arrange for the publication and sale of, and for the sale of advertising space in, its 1982 National Collegiate Basketball Championship souvenir program; and

WHEREAS, Publisher has agreed to provide said services on the terms hereinafter set forth;

NOW THEREFORE, it is AGREED as follows:

1. APPOINTMENT AND AUTHORIZATION. NCAA hereby grants to the Publisher the exclusive right to print and to publish as co- publisher with the NCAA the 1982 National Collegiate Basketball Championship Program for the semifinals and finals to be held in New Orleans, LA, on March 27 and 29, 1982, and NCAA hereby appoints Publisher as its exclusive agent for the sale of advertising to be included in said program publication. * * *

2. SERVICES. The Publisher agrees to produce the program in accordance with copy submitted to Publisher by the NCAA and to deliver the agreed upon number of copies of the NCAA as hereinafter provided. Publisher agrees further to use its best efforts to secure national and local advertising for said program. Publisher agrees to accomplish the foregoing in an efficient and workmanlike manner under the following terms:

(a) Publisher shall plan, organize and conduct an advertising sales program for the aforementioned publication.

(b) Publisher shall create and develop advertising ideas.

(c) Publisher shall bill all advertising clients, make collection on due accounts, and furnish the NCAA with a complete record of sales billed, amount collected, and amount of, and manner of computing, commissions.

(d) Publisher shall agree to pay all layout, printing, production and freight costs, and all costs and expenses incurred in the selling of the advertising.

3. ADVERTISING LIMITATIONS. a) Advertising in the program shall not exceed 35% of the total pages in the program, including the cover pages. b) In making sales of advertising space, it is understood that the following advertising shall be excluded: Alcoholic beverages (except malt beverages, beer and wine as limited hereafter), cigarettes or tobacco used for purposes of smoking, political organizations (except for the offices of president and vice-president of the United Status), professional sports organizations and their personnel (except as specified hereafter) and organizations or individuals promoting gambling. c) Malt beverages, beer and wine advertising may be used in game programs if consistent with the policy of the host institution, but such advertisements shall not comprise more than 14 percent of the space in the program devoted to advertising. d) Advertisements featuring active professional athletes in other sports may comprise not more than seven percent of the space in the program devoted to advertising. Parties representing the NCAA in advertising sales for game programs shall take every reasonable step to discourage the use by advertisers of active professional athletes from sports regulated by the NCAA, informing the advertisers of the NCAA's desire that such professional athletes not be used. Every potential sponsor shall be advised of the terms of this provision prior to contracting with such sponsor. Advertisements are not acceptable which contain references to or photographs of the game, personnel, broadcasts, telecasts or other activities of professional sport organizations. e) Nontherapeutic drugs and, generally, other drugs and patent medicine advertisements are excluded; however, analgesics, cold remedies, antacids, and athletic training aids which are in general use are acceptable. Institutional advertising by pharmaceutical firms also is acceptable. No advertisement may relate, directly or indirectly, the advertising company or the advertised product to the participating institutions of their athletes, or the NCAA itself unless prior written approval has been granted by the NCAA executive director. f) The NCAA reserves the right of final approval for all advertising in the aforementioned program.

* * * 6. COMPENSATION AND EXPENSE. Publisher agrees to pay to NCAA for co-publishing and advertising rights the sum of $50,000 or 51% of net revenues, whichever is greater. Net revenues shall mean gross revenues for all NCAA program sales and advertising sales less printing costs, vendor commissions, advertising commissions, sales taxes, and advertising production expense. The cost of handling and mailing of mail order sales shall be at the publisher's sole expense. Publisher shall prepare and deliver to the NCAA on or before June 1, 1982 a report, certified by a Certified Public Accountant, showing gross sales of all advertising and program sales and all deductions therefrom and net revenues as specified herein. * * * NCAA shall have the right to examine Publisher's financial records pertaining to the NCAA accounts at any time.

In addition, Host agreed to indemnify petitioner from any claims arising from contracts between Host and third parties made to effectuate the contract and any claims, liabilities, or damages arising from the preparation, presentation, or sale of the programs or the advertising contained therein.

Petitioner and Host also entered into an oral agreement whereby Host would produce a uniform program for the 1982 regional tournament rounds. The terms of the oral agreement were essentially the same as those of the written contract, including petitioner's share of income.

Only two of petitioner's staff members worked with the Division 1 Men's Basketball Committee in sponsoring and managing the 1982 tournament. Petitioner's involvement with Host was limited to recommending some story ideas about the tournament or authors to write those stories and reviewing whether a couple of proposed advertisements met the conditions of the contracts on acceptable advertisements in programs. Petitioner did not otherwise monitor the content, sale or publication of advertisements in the tournament programs. Petitioner...