National Collegiate Athletic Ass'n v. C.I.R.

• Decision Date: 20 September 1990
• Docket Number: No. 89-9005,89-9005
• Citation: 914 F.2d 1417
• Parties: -5602, 90-2 USTC P 50,513, 62 Ed. Law Rep. 937 NATIONAL COLLEGIATE ATHLETIC ASSOCIATION, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1417

914 F.2d 1417

66 A.F.T.R.2d 90-5602, 90-2 USTC P 50,513,

62 Ed. Law Rep. 937

NATIONAL COLLEGIATE ATHLETIC ASSOCIATION, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 89-9005.

United States Court of Appeals Tenth Circuit.

Sept. 20, 1990.

C.W. Crumpecker, Jr. (George H. Gangwere and W. Ann Hansbrough with him on the briefs), of Swanson, Midgley, Gangwere, Clarke & Kitchin, Kansas City, Mo., for petitioner-appellant.

Bruce R. Ellisen, Atty. (Shirley D. Peterson, Asst. Atty. Gen., and Gary R. Allen and Robert S. Pomerance, Attys., with him on the brief), Tax Div., Dept. of Justice, Washington, D.C., for respondent-appellee.

Before SEYMOUR and TACHA, Circuit Judges, and BRATTON, ^* District Judge.

SEYMOUR, Circuit Judge.

The National Collegiate Athletic Association (NCAA), the petitioner in this case, appeals from the decision of the tax court, which determined a deficiency of $10,395.14 in unrelated business income tax due for the 1981-1982 fiscal year. ¹ On appeal, the NCAA challenges the court's conclusion that revenue received from program advertising constituted unrelated business taxable income under I.R.C. Sec. 512, not excludable from tax as a royalty under section 512(b)(2), I.R.C. Sec. 512(b)(2). We reverse. ²

I.

The NCAA is an unincorporated association of more than 880 colleges, universities, athletic conferences and associations, and other educational organizations and groups related to intercollegiate athletics, for which it has been the major governing organization since 1906. The NCAA is also an "exempt organization" under section 501(c)(3) of the Code, I.R.C. Sec. 501(c)(3), and hence is exempt from federal income taxes. One of the purposes of the NCAA, as described in the organization's constitution, is "[t]o supervise the conduct of ... regional and national athletic events under the auspices of this Association." Rec., exh. 3-C, at 7. Pursuant to this purpose, the NCAA sponsors some seventy-six collegiate championship events in twenty-one different sports for women and men on an annual basis. The most prominent of these tournaments, and the NCAA's biggest revenue generator, is the Men's Division I Basketball Championship. The tournament is held at different sites each year. In 1982, regional rounds took place at a variety of sites, and the Louisiana Superdome in New Orleans was the host for the "Final Four," the tournament's semifinal and final rounds. In that year, the Championship consisted of forty-eight teams playing forty-seven games on eight days over a period of almost three weeks. The teams played in a single-game elimination format, with each of the four regional winners moving into the Final Four.

The NCAA contracted with Lexington Productions, a division of Jim Host and Associates, Inc. ("Host" or "Publisher"), in 1981 to print and publish the program for the 1982 Final Four games. ³ The purpose of such programs, according to the NCAA's then-director of public relations, is

"to enhance the experience primarily for the fans attending the game.... [It also] gives the NCAA an opportunity to develop information about some of its other purposes that revolve around promoting sports [as a] part of higher education and demonstrating that athletes can be good students as well as good participants."

Rec., vol. II, at 21-22.

Prior to the middle of the 1970s, the host institution produced the Final Four program. The NCAA took over production until the late 1970s, when it began contracting with Host for the Final Four program. In 1982, Host began producing the programs for all rounds of the Championship. The motive for contracting the program production to Host was, according to the NCAA, to achieve consistency and quality at each round's game sites; making a profit was not the primary incentive. See id. at 25-26.

The "Official Souvenir Program" for the 1982 Final Four round of the tournament was some 129 pages long, and it featured pictures of NCAA athletes such as Michael Jordan and articles on the NCAA itself, on New Orleans, on individual athletes, on championships from prior years, and on the Final Four teams: Georgetown, Houston, Louisville, and North Carolina. Advertisements made up a substantial portion of the program, some of which were placed by national companies. Among the products and services so displayed were Buick automobiles, Miller beer, Texaco motor oil, Fuji film, Maxwell House coffee, Nike sneakers, McDonald's fast food, Coca-Cola soda, Xerox photocopiers, ESPN cable network, and Popeyes Famous Fried Chicken. Other advertisers were local New Orleans merchants. A number of the New Orleans advertisements, including those for restaurants, hotels, and rental cars, apparently were directed at out-of-town tournament attendees. But these advertisements were exceeded in number by those placed by New Orleans/Louisiana companies not specifically related to the tourist industry. Among the local advertisers were the Canal Barge Company, the National Bank of Commerce in Jefferson Parish, Breit Marine Surveying, Inc., Pontchartrain Materials Corp., McDermott Marine Construction, and Tri-Parish Construction & Materials, Inc. See rec., exh. 5-E. ⁴

The NCAA's total revenue from the 1982 Men's Division I Basketball Championship was $18,671,874. See rec., exh. 1-A, at 10 (schedule 2 at 1). The NCAA reported none of this amount as unrelated business taxable income on its federal income tax return for the fiscal year ending August 31, 1982. The Commissioner mailed the NCAA a notice of deficiency in which he determined that the NCAA was liable for $10,395.14 in taxes on $55,926.71 of unrelated business taxable income from the program advertising revenue. The NCAA petitioned the tax court for a redetermination of the deficiency set forth by the Commissioner. The tax court determined that this revenue was unrelated business taxable income, and that it was not excludable from the tax as a royalty.

II.

Under section 7482(a) of the Code, I.R.C. Sec. 7482(a), we review tax court decisions "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." This case presents us with neither a purely factual question, to which we apply a clearly erroneous standard, nor a purely legal question, which we consider de novo. See Love Box Co. v. Commissioner, 842 F.2d 1213, 1215 (10th Cir.), cert. denied, 488 U.S. 820, 109 S.Ct. 62, 102 L.Ed.2d 40 (1988). Instead, we must decide a mixed question of law and fact in which "the facts are admitted or established and the law is undisputed; the sole issue is whether the law applied to the facts satisfies the statutory standard." Supre v. Ricketts, 792 F.2d 958, 961 (10th Cir.1986) (citing Pullman-Standard v. Swint, 456 U.S. 273, 289 n. 19, 102 S.Ct. 1781, 1790-91 n. 19, 72 L.Ed.2d 66 (1982)). We apply the clearly erroneous standard where the mixed question is primarily factual, but if it "primarily involves the consideration of legal principles, then a de novo review by the appellate court is appropriate." Id. at 961. The NCAA's principal objections in this case are to the "conclusions drawn by the tax court in arriving at its determination." Pollei v. Commissioner, 877 F.2d 838, 839 (10th Cir.1989). Because "[w]e are equally as able as the tax court to draw conclusions from the undisputed facts presented ..., we review de novo the tax court's application of the law to the facts before us." Id. (citation omitted).

III.

Section 511 of the Code imposes a tax on the unrelated business taxable income of exempt organizations. Section 512(a)(1) of the Code defines the term "unrelated business taxable income" as "the gross income derived by any organization from any unrelated trade or business ... regularly carried on by it...." The term "unrelated trade or business" means "any trade or business the conduct of which is not substantially related ... to the exercise or performance by such organization" of its exempt function. I.R.C. Sec. 513(a). Under the heading "Advertising, etc., activities," section 513(c) provides that "the term 'trade or business' includes any activity which is carried on for the production of income from the sale of goods or the performance of services.... [A]n activity does not lose identity as a trade or business merely because it is carried on ... within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the organization." I.R.C. Sec. 513(c).

The NCAA's advertising revenue therefore must be considered unrelated business taxable income if: "(1) It is income from trade or business; (2) such trade or business is regularly carried on by the organization; and (3) the conduct of such trade or business is not substantially related (other than through the production of funds) to the organization's performance of its exempt functions." Treas.Reg. Sec. 1.513-1(a); see also United States v. American College of Physicians, 475 U.S. 834, 838-39, 106 S.Ct. 1591, 1594-95, 89 L.Ed.2d 841 (1986). If a taxpayer shows that it does not meet any one of these three requirements, the taxpayer is not liable for the unrelated business income tax. See Veterans of Foreign Wars v. Commissioner, 89 T.C. 7, 19-20 (1987).

The NCAA concedes that its program advertising was a "trade or business" not "substantially related" to its exempt purpose. The only question remaining, therefore, is whether the trade or business was "regularly carried on" by the organization. The meaning of the term "regularly carried on" is not defined by the language of the statute. Accordingly, we turn to the Treasury Regulations for assistance. ⁵

Section 1.513-1(c) of the Treasury Regulations provides a discussion of the phrase "regularly carried on." The general principles set out there direct us to consider "the frequency and continuity with which the activities productive of the income are conducted and the manner in which they are...