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LSU Nabs $4 Million Tax Free from National Championship

Jan. 14, 2020, 9:45 AM

LSU ends its perfect season with a national championship trophy and a $4 million payout after beating Clemson 42-25.

That money helps cover the cost of the extra postseason games LSU played—and it’s 100% tax free thanks to some macaroni.

Despite the amateur status of college sports, the NCAA held over $600 million in assets in 2018 according to its most recent financial statement. Revenue from merchandise, and licensing of television rights to games all goes untaxed in large part due to a 70-year-old lawsuit involving a pasta company controlled by New York University, which sparked federal action related to nonprofits.

“From the get-go, it was clear that college athletics was going to be protected,” Joe Tierney, a partner at Meissner Tierney Fisher & Nichols in Milwaukee, said.

The company, C.F. Mueller, was donating its profits to NYU’s law school. The IRS, seeking to prevent an unfair tax advantage for businesses, argued that a nonprofit organization such as a university should be subject to income tax on earnings unrelated to its charitable or educational purpose.

Spurred by the universities, Congress intervened. It updated its statute for Unrelated Business Income Tax , which targets that revenue, so that money earned by college athletics programs—including “income derived from a basketball tournament,” for example—is defined as expressly related to educational function, and thus absolved from taxes.

“It precipitated people thinking about the issue,” said Tierney, who also teaches law at Marquette University. “As they worked their way through it became clear that this had to be controlled—but they just didn’t want to fudge with college football.”

$2 Million Per Game

There’s no financial bonus for winning the national championship, but collegiate athletic conferences receive $6 million from the NCAA for each team they enter in the College Football Playoff. They have carte blanche to distribute the money how they see fit.

LSU is entitled to $2,050,000 for the semifinal Peach Bowl game, and an additional $2,150,000 for advancing to the championship game, under the Southeastern Conference’s bylaws. Clemson is entitled to similar figures under the Atlantic Coast Conference’s.

“This helps to defray the costs of participating in these events,” Robert Munson, an LSU athletic director said.

Each conference splits the rest of the $6 million between its other member universities.

LSU will receive an additional $250 per mile to cover round-trip travel expenses, SEC Associate Commissioner Herb Vincent told Bloomberg Tax.

For 1,200 plus miles of travel between university and the site of each of its playoff games (Mercedes -Benz Stadium in Atlanta, and Mercedes-Benz Superdome in New Orleans) LSU is in line for roughly $302,200.

The ACC also grants travel stipends for any of its universities participating in bowl or playoff game, although it doesn’t use a dollars per mile formula, a Clemson spokesperson said.

The ACC declined to answer questions from Bloomberg Tax for this story.

‘Macaroni Monopoly’

The IRS’ suit to tax NYU’s profits from C.F. Mueller came in 1950 after the law school had acquired a deceased majority holder’s assets.

The IRS contended those funds didn’t contribute to the university’s educational purposes, and they were subject to an Unrelated Business Income Tax, which nonprofits can owe on regular income from trade or business unrelated to their missions.

The primary purpose of the unrelated business income tax is to eliminates a source of unfair competition for tax-paying businesses. Former Rep. John
Dingell Sr. (D-Mich.) even went so far as to call the company a “macaroni monopoly,” criticizing it for dominating the pasta market without paying a cent in taxes.

The NCAA, anticipating a ruling that could upend the profitable world of college sports, lobbied congress to update its statute, which it did mid-lawsuit.

Congress passed the Revenue Act of 1950, which held:

“Athletic activities of schools are substantially related to their educational functions.”

“This applies not only to the direct revenues from athletic events like gate receipts, but also to the TV revenues that arise from them,” Tierney said.

NYU and the macaroni company ended up winning on appeal a year later.

To contact the reporter on this story: Sam McQuillan in Washington at smcquillan@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; David Jolly at djolly@bloombergtax.com

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