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IRS Rethinking Ruling That Threatened College Athletic Contributions

January 8, 1985

WASHINGTON (AP) _ The Internal Revenue Service, under pressure from Congress, educators and sports fans, is rethinking a hotly disputed ruling that threatened the tax deductions claimed for some contributions to athletic scholarship funds.

The IRS will make a decision as quickly as possible, Charles M. Morgan III, associate chief counsel, said Monday after a public hearing on the rule. However, he added, ″the law is still what the law was″ - and the agency is sticking to its long-held principle that a contribution is not deductible if something was gained in return.

At issue is a 1984 ruling in which the IRS said a tax deduction would not be allowed a person who made a $300-a-year contribution to a college athletic scholarship fund and, in return, received the right to buy preferred-seat season tickets to the school’s home football games. More than 2,000 people were waiting to buy those tickets; once a seat opened up, the donor had to pay an additional $120 to buy it for a season.

The IRS said there was no charitable contribution in that case because the right to buy preferred seating was worth at least $300. If the donor could prove the value was less, a deduction would be allowed for the difference.

After loud complaints from college presidents and fund-raisers, key members of Congress intervened and the Treasury Department suspended the ruling pending Monday’s hearing.

Following the hearing, Morgan said it is not clear what the IRS will do. He conceded, however, ″there may be a need for the IRS to come to grips with″ the problems of placing a value on the preferred-seating benefit and with the fact there are a half-dozen different types of college programs providing incentives for donors to contribute.

Morgan noted such ″revenue rulings″ are based on a very restricted set of facts, and if the facts are changed, a quite different ruling might be expected. For example, he explained, if there had been no waiting list for the preferred seats, the ruling almost certainly would have been different.

If the IRS takes that position formally, it could free the majority of donors from the rule. A survey by the National Collegiate Athletic Association found that only 17 percent of the major schools responding to a survey have a waiting list for preferred seating.

The difficulty in calculating the value of such benefits was emphasized by John L. Toner, University of Connecticut athletic director and president of the NCAA, and by Farris W. Womack, vice chancellor of the University of North Carolina, who spoke for the American Council on Education.

On the other hand, Richard L. Kaplan, professor of tax law at the University of Illinois at Urbana-Champaign, said the original ruling should be reimposed and enforced vigorously. He called a deduction for such gifts an entertainment subsidy.

″These people (who give to colleges and receive preferred seating) have no interest in benefitting the university,″ Kaplan said. ″Try to get them to donate a microscope to the science lab. ...″

Womack asked the IRS, ″How can we value the benefit in the absence of a market″ for preferred seating? What if there is no waiting list? ... Is the ruling limited to athletic programs?″

Those questions must be answered quickly because ″the ruling already has had a chilling effect on giving″ by causing ″fear on the part of donors that their gifts may be disallowed,″ Womack said. He added that a reduction in giving will force colleges to turn to governments for more money.

Toner said 77 percent of major colleges that responded to an NCAA survey have fund-raising programs tied to preferred seating. They generate more than $100 million a year, he said.

Only a small minority offered a tangible benefit - such as free parking or cut-price season tickets - to donors, he said. Most offered only the right to purchase preferred seats.

Toner said the IRS ruling would force taxpayers to place a value on the right to purchase - an enormously difficult undertaking. The proper thing for the IRS would be to conclude that such an intangible benefit has no significant, measurable market value, he added.

Rep. Norman Dicks, D-Wash., said he will offer legislation to kill the ruling outright.

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