The Bill implements the Trump Administration’s campaign pledge to extend the TCJA Tax Cuts. This component of the Bill represents the overwhelming portion of the agreed $5.3 trillion budget spend. As noted in our previous legal alert, the Bill also includes a number of pro-business provisions that will be favorable to industries as a whole, including the sports industry.
The Bill also includes a number of business-unfavorable provisions that are included in part to raise revenue to offset the tax cuts in other parts of the Bill. A number of these provisions will impact the sports industry directly or indirectly. Whether these provisions survive the legislative process will not be known until the final whistle.
Franchise Amortization
Professional sports teams have a long and somewhat contentious history when it comes to the amortization of sports franchise intangibles. The most valuable assets of sports teams include player contracts, league franchise rights, and broadcast and media rights. As far back as the 1920s, the issues regarding the tax treatment of sports player contracts were being litigated. Prior to the seminal case of Newark Morning Ledger and the enactment of section 197, sports teams typically looked to the depreciation rules under section 167 for recovering the costs of intangible assets. The Internal Revenue Service (Service) frequently opposed the sports teams’ efforts, and issued several revenue rulings regarding the capitalization of, and recovery of, the cost of player contracts. Aggressive tax positions, particularly with regard to the allocation of significant value to player contracts, for which the cost recovery deductions were realized over an abbreviated period, led to the enactment in 1976 of section 1056 (since repealed), which provided a presumption that in a sale or exchange of a sports franchise, no more than 50% of the purchase price was allocable to player contracts. This, however, left open the tax treatment of other sports franchise intangibles.
Section 197, enacted in 1993, was intended to adopt a uniform approach to the amortization of intangibles by providing a single method and period for recovering the cost of acquired intangible assets. As initially enacted, section 197 excluded sports franchises from its scope. The statute explicitly provided that intangibles acquired in connection with the acquisition of a sports franchise were not subject to section 197 which meant, for the sports industry, continuing uncertainty as to the tax treatment, and ongoing disputes with the Service, of sports franchise intangibles. Then, in 2004, section 197 treatment was extended to professional sports franchises, as Congress explained that section 197 should apply to all types of businesses regardless of the nature of their assets.
In the Bill, the House proposes to step back from the plate, upending that intended uniformity by singling out sports franchises for less beneficial treatment under section 197. Section 197 provides that the amount of deduction with respect to amortizable section 197 intangibles is determined by amortizing the adjusted basis of the intangible over a period of 15 years. For “specified sports franchise intangibles,” the Bill scales the deduction back to 50% of adjusted basis. “Specified sports franchise intangibles” include any amortizable section 197 intangible which is (i) a franchise to engage in professional football, basketball, baseball, hockey, soccer, or other professional sport, or (ii) acquired in connection with such a franchise. If enacted, the amendment to section 197 would apply to property acquired after the date of enactment.
Tax Increase on Private Colleges and Universities
The bill proposes to expand the excise tax based on investment income of private colleges and universities. Current Section 4968 imposes an excise tax of 1.4% of the net investment income of applicable educational institutions. Net investment income is determined in a manner similar to Section 4940 (applicable to private foundations) by calculating gross investment income and capital gain net income and subtracting certain deductions, except that there is an add-back for certain student loan income and certain federally subsidized royalty income.
The applicability of the current Section 4968 excise tax is predicated in part on the institution having an aggregate fair market value of assets at the end of the preceding taxable year (other than those assets which are used directly in carrying out the institution's exempt purpose) equal to at least $500,000 per student of the institution.
The proposed bill would generally retain the value-to-student concept but would apply the ratio taking into account only certain “eligible students” (student adjusted endowment). The term “eligible students” would generally exclude international students. “Eligible students” is defined in the Higher Education Act of 1965 as including a student that is a citizen or national of the United States, a permanent resident of the United States, or able to provide evidence from the Immigration and Naturalization Service that he or she is in the United States for other than a temporary purpose with the intention of becoming a citizen or permanent resident. Educational institutions with significant number of international students could become applicable educational institutions that are newly subject to the excise tax as a result of the redefinition of the value-to-student ratio. The proposed bill would also alter the definition of an applicable education institution by excluding qualified religious institutions.
The proposed bill would also increase the excise tax rate for educational institutions with higher value-to-student ratios.
The bill would also amend Section 6033 to include requirements for applicable educational institutions to report certain information related to the excise tax. If passed in its current form, these amendments would apply to taxable years beginning after December 31, 2025.
College and University Name and Logo Royalties Subject to UBIT
While many colleges and universities are tax-exempt organizations, i.e., exempt from federal (and in most cases state) income tax, they are taxable on income that is unrelated to their exempt purpose (unrelated business income tax or UBIT). Many tax-exempt organizations, and colleges and universities in particular, earn significant revenue from corporate sponsorships and licenses of their logos and intellectual property. The plethora of corporate-sponsored college football bowl games is a prime example.
One key issue with respect to name-and-logo payments are whether they are in the nature of royalties which are excluded from UBIT or whether they are in the nature of advertising or other service payments which are UBIT. In 1991, the IRS issued two important rulings involving the Cotton Bowl and the John Hancock Bowl holding that the corporate sponsorships were in the nature of advertising and thus included in UBIT. In 1997, Congress enacted section 513(i) to exempt qualified corporate sponsorship payments from UBIT provided that the corporate sponsor had no expectation of a substantial return benefit other than the use or acknowledgment of the corporate sponsor’s name and logo. Treasury promulgated Treas. Reg. Sec. 1.513-4 to implement these rules.
A long line of authorities stretching back decades, addresses the issue of whether affinity programs, such as travel, insurance, credit cards or other financial products, in which the tax-exempt organization licenses its name and logo and potentially provides services to a for-profit entity, involve royalties or UBIT. Cases have held that certain affinity credit card programs, in which an organization licenses its name and logo for use by a bank on a credit card, or the sale of mailing lists, generate royalties that are exempt from UBIT. See, e.g., Sierra Club Inc. v. Commissioner, 86 F.3d 1526 (9th Cir. 1996); Oregon State University Alumni Ass’n v. Commissioner, 71 T.C.M. 1935 (1996), aff’d, 193 F.3d 1098 (9th Cir. 1999).
As reported out by the Ways & Means Committee, the House Bill included a provision to expand the definition of unrelated business income and would subject income from the sale or licensing of any name or logo of the organization (including trademarks or copyrights pertaining thereto) to the unrelated business income tax. Although the House Budget Committee struck the provision from its version of the Bill, given that the provision was estimated to raise over $3.7 billion over the ten-year measurement period, it is quite possible that the provision could be included in a future version of the Bill as Congress tries to make the numbers work.
Under the Ways and Means version of the Bill, the calculation of an organization’s unrelated business income would include “any” income derived from the sale or licensing of an institution’s name or logo. The JCT explanation to the proposed bill makes clear that the change is intended to override the general rule that excludes royalties from UBIT.
The Ways and Means Bill would implement the change by enacting new section 513(k) rather than amending existing section 513(i). As a result, it would appear that the bill intends to retain current law on qualified corporate sponsorships.
