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Grassley: Do college-athletic donations merit tax deductions?

Tom Witosky

Des Moines Register

January 18, 2007

Tom Witsky, How Deduction is Figured on Kinnick Lease Payment

[Note: This material is copyright by the Des Moines Register, and is reproduced here as a matter of "fair use" for non-commercial, educational purposes only. Any other use may require the prior approval of the Des Moines Register.]

U.S. Sen. Charles Grassley of Iowa is researching the federal tax exemption that colleges and universities use to help finance athletics.

"There are a lot of questions that need to be answered," said Grassley, the ranking Republican on the Senate Finance Committee. "We need to make sure that taxpayers are not being played for a sucker by a tax exemption that they are paying for."

At stake, potentially: Will boosters and corporations that contribute hundreds of millions of dollars annually to athletic departments nationally continue to receive tax deductions for charitable donations?

According to the National Collegiate Athletic Association, boosters contributed $845 million to major college athletic departments in 2004-05. During the 2005-06 academic year, officials at Iowa's three state universities said, boosters gave a combined total of almost $25 million to the athletic departments - $20 million to Iowa, $3.9 million to Iowa State and $1 million to Northern Iowa.

There previously has been little indication of any political will among federal lawmakers to take up the issue. But Grassley, who has made a national reputation of taking on the Pentagon and wasteful military spending, could help change that.

Grassley and other lawmakers question whether donations to athletic departments should be considered contributions to an educational institution when some of those donations help pay the skyrocketing compensation packages for college coaches such as Alabama's Nick Saban, who will be paid a reported $4 million over the next year, or Iowa's Kirk Ferentz, who is paid $2.7 million annually.

"I wonder whether university trustees are doing their jobs, when there are big salaries for sports coaches and money for stadium skyboxes while tuition skyrockets," Grassley said. "Schools must be able to justify those expenses as part of the public obligation that comes with tax-exempt status."

Federal law permits 80 percent of the contribution made for premium seating or luxury suites to be deducted on an annual basis. All other contributions, including those for scholarships and capital projects, are 100 percent deductible.

In Iowa, contributors fueled projects such as the $86 million Kinnick Stadium renovation in Iowa City, the $20 million McLeod Center in Cedar Falls and the $15 million Drake Stadium upgrades in Des Moines. Iowa State is about to unveil details of a proposed $135 million athletic facility improvement plan that will be largely financed with private contributions.

Iowa State athletic director Jamie Pollard is putting finishing touches on a major renovation project for his university's football stadium and basketball facility. He insisted this week that athletic department donations must be increased if Cyclone sports is to wean itself off direct general fund assistance from the school.

Asked how big of an impact repeal of the deduction would have on college athletics, Pollard said: "It would take time to figure out the real impact, but I really don't want to find out."

Gary Barta, Iowa athletic director, echoed Pollard's view: "You don't know what the impact would be, but I would think raising money for projects for everyone would be more difficult."

A spokesman for Senate Finance Committee Chairman Max Baucus, D-Mont., said last week that the senator also was interested in making certain that "federal tax incentives do what they're meant to do - give Americans access to higher education."

Katie Baird, an economics professor at the University of Washington-Tacoma and an authority on higher education economic policy, said the federal tax exemption that university athletic departments rely on to generate donations is simply a taxpayer subsidy.

"It is a back-door way for the federal government to be subsidizing college athletics," Baird said. "If you got rid of the charitable donations, it would make the existing price of attending a game more expensive for the purchaser because he would not be getting a discount."

Baird said the exemption is no different from an exemption used by a nonprofit civic opera or symphony, or a charity like the Salvation Army.

"That makes contributors more generous, because contributors are likely to provide more money in exchange for paying less taxes," she said. "To the extent that college athletics are treated the same way, it has the same effect."

Pollard said escalating concern about the issue surprises him because elected officials across the country are urging leaders in higher education to spend more time finding private financing for school operations, research and facility construction - instead of relying on tax money.

"This isn't just a college athletics issue," Pollard said. "It's about the fact that higher education in general is receiving less and less tax support from our government leaders. Now, they may want to make it more difficult for us to raise money privately? I don't understand why they would want to open that can of worms."

Grassley and others, however, have begun to question whether allowing wealthy boosters to benefit from athletic tax deductions has anything to with a school's educational mission.

In a 58-page written response to questions last year posed by the U.S. House Ways and Means Committee, NCAA President Myles Brand argued that the exemption should be maintained because the educational value of athletics isn't diminished by the scale of its popularity.

"The fundamental purpose of intercollegiate athletics is the education of student-athletes in both the classroom and on the field or court," Brand wrote.

For now, Grassley said, he is in a fact-finding mode - asking questions to try to understand whether the skyrocketing costs of major college athletics raise legitimate concerns about the use of the tax exemption.

Grassley said any congressional inquiry should be directed at two questions: Do tax-exempt donations made to athletic departments enhance higher education? And do the boards and presidents who monitor those departments impose proper oversight of the use of that money?

"We expect the boards to make the decisions that are responsible and in accordance with the intention of the exemptions they receive," Grassley said. "It is no different for universities than any other charity or nonprofit corporation."

How deduction is figured on Kinnick lease payment
Premium seating at Iowa and Iowa State football games not only has become popular with wealthier Cyclone and Hawkeye boosters, but donors get a good tax deduction from their annual lease payments.

Federal tax law permits each leaseholder to deduct up to 80 percent of the annual rental cost after the cost of tickets and the value of "amenity" are subtracted from the annual payment for the lease, University of Iowa athletic director Gary Barta said this week.

Here is how the deduction is determined using a $55,000 lease payment at Kinnick Stadium:

The cost of the tickets and an amount representing the "amenity" portion of the payment are subtracted from the total. For a $55,000 suite at Iowa, the total amount subtracted would be $8,640. The amenity portion is a determination by the athletic department of the value of the suite to the leaseholder.

The donor would then be informed that the contribution portion of the $55,000 payment is $46,360.

According to Internal Revenue Service regulations, the $46,360 would then become the basis for an 80 percent tax deduction, or $37,088.

The $86 million Kinnick Stadium renovation, which is being financed largely by suite and club seat rentals, included the installation of 47 suites and nearly 1,300 club seats on the stadium's west side. Annual leases on the suites range from $45,000 to $85,000.

Meanwhile, Iowa State officials announced Tuesday that they now have received commitments to lease 18 of 24 suites to be constructed for football fans at Jack Trice Stadium. In addition, the leases on all 25 existing suites have been renewed.

The annual rent on existing ISU suites is now $15,000 to $25,000. Lease costs for new suites will range from $25,000 to $40,000 annually.

Jamie Pollard, Cyclone athletic director, said that the hiring of new head football coach Gene Chizik "has spurred sales far greater than anticipated."

- Tom Witosky