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Tax-Exempt Pedicures

January 5, 2011

With the ongoing college football postseason as a backdrop, a group of lawyers is yet again challenging the tax-exempt status of a major bowl game.

Last week, the Playoff PAC, a group with relatively little interest in federal tax law but that advocates replacing college football’s Bowl Championship Series with a tournament, filed a supplemental IRS complaint against the Orange Bowl Committee, alleging that it had used charitable funds to treat Orange Bowl executives and college athletics directors to a four-day “complimentary getaway” to the Bahamas.

Since bowls are operated as 501(c)3 charities, they cannot operate for the benefit of private interests. The Playoff PAC, which uncovered the Orange Bowl trip through a series of public-records requests, argued that it was little more than a “junket” and could jeopardize the tax-exempt status of the bowl, which is one of the five games that constitute the BCS.

A detailed agenda for the trip shows a dearth of business meetings for attendees, who included athletics directors from 40 institutions and commissioners from the Atlantic Coast Conference, the Big East, Conference USA, the Mountain West Conference and the Western Athletic Conference.

"The Majesty of the Seas will be docked off shore from their private island,” reads an excerpt from the agenda. “Today is a day to enjoy on your own, there are no planned OBC events. Relax on the ship, have a massage, work out or take the boat shuttle to CocoCay.… CocoCay offers activities for everyone, from parasailing to sipping delicious 'Coco Locos' on a hammock."

Other documents show that the Orange Bowl gave each guest a $100 credit to spend as he or she wished aboard the cruise ship and offered to pay for either a manicure or pedicure at a spa during the trip for each attendee or his or her “spouse/guest.”

Larry Wahl, Orange Bowl spokesman, offered little comment about the recent challenge.

“The Orange Bowl Committee believes it is important to meet with its key stakeholders to communicate and advocate our business focus,” Wahl wrote in an e-mail. “This is consistent with our mission because it greatly assists the Orange Bowl in remaining current with matters related to college athletics and in maintaining its prestigious national position as a BCS bowl. Such meetings also help the [Orange Bowl Committee] to fulfill its mission to enhance tourism and economic development in South Florida.”

Prior Challenges

This is not the first challenge the Playoff PAC has made to the tax-exempt status of a bowl game. In September, the group filed an IRS complaint against the operators of the Fiesta, Orange and Sugar Bowls, three of the five BCS games, alleging that they “use charitable funds to provide excessive compensation to their executives, make undisclosed lobby expenditures, intervene in political campaigns and provide substantial private benefit to organization insiders.”

For example, Paul Hoolahan, CEO of the Sugar Bowl, received a salary of $645,000 in 2009. That same year, John Junker, CEO of the Fiesta Bowl, received a salary of nearly $600,000. The Playoff PAC argued that these are “above market” salaries, given that a recent survey revealed that the average salary for a chief executive of a nonprofit organization with a similar operating budget that year was $185,000. They further argued that this compensation is “an abuse of [the] organizations’ favorable tax status.”

Also in its September IRS complaint, the Playoff PAC highlighted what it called “frivolous” uses of Orange Bowl funds, such as more than $1 million in entertaining and catering in 2009. In one of the more damning allegations, the Playoff PAC claimed that the Fiesta Bowl reimbursed its employees who contributed to “friendly politicians.”

The Fiesta, Orange and Sugar Bowls all released statements disputing the challenges brought against their tax-exempt status. In September, a Fiesta Bowl official called the Playoff PAC’s allegations “dated, tired and discredited” in a statement to the Associated Press.

Still, in the complaint it issued last week, the Playoff PAC noted to the IRS that, according to a December story in The Arizona Republic, the Arizona attorney general has impaneled a grand jury to investigate the Fiesta Bowl for state-law campaign violations. It added, “We believe this development supports our earlier contention that the Fiesta Bowl used its charitable funds for prohibited political participation or intervention.”

A Pro-Playoff Tactic

Bill Hancock, chief BCS administrator, defended the bowls against these recent challenges.

“The bowls are conducting reviews, and I think it’s only fair to allow for those reviews to be completed,” Hancock said from New Orleans, the site of Tuesday’s Sugar Bowl. “I don’t know about these allegations specifically, but from what I read of them, they don’t have anything to do with how the teams are selected for the BCS.”

Hancock also noted the popularity of the BCS as a counterargument to those who advocate for a playoff.

“The BCS event has just finished the first year of a four-year agreement and has been very successful,” Hancock said. “The event is extremely popular. Thousands of people attend the games and millions watch on television. The BCS Championship Game draws higher television ratings than the NBA finals, the NCAA Final Four and the World Series. The entire bowl system, which frankly the Playoff PAC would like to get rid of, is quite popular.”

Marcus S. Owens, a Caplin & Drysdale lawyer who is representing the Playoff PAC pro bono and formerly headed the IRS's Exempt Organizations Division, said the group will continue to forward information challenging the bowls’ tax-exempt status as it uncovers it. He said the IRS has acknowledged receipt of its complaints but that the agency does not have to disclose whether it plans an audit.

Owens added that the recent complaints are not necessarily about favoring the BCS or a playoff.

“We represent a lot of tax-exempt organizations, charities and nonprofits that do good work,” Owens said of his firm. “They use money wisely for charitable and educational purposes. They’re really debased when things like this occur. We represent charities that don’t take people on junkets to the Bahamas with their money. It’s a real concern by the rest of the sector that if a few bad apples are allowed to continue to erode the confidence of the public, there will be a negative impact on those legitimate actors and people will think twice about giving.”

Owens’s colleague, Matthew T. Sanderson, Playoff PAC co-founder and another Caplin & Drysdale lawyer, offered a different take, more rooted in the BCS-versus-playoff debate.

“It’s true,” admitted Sanderson, that "we favor wholesale reform in college football."

"Still, we would view it as a significant progress if the system was cleaned up, even if it continued to exist as it is. … It furthers our ultimate goal of having a playoff and moving that ball forward.”

Sports law critics and observers note that Playoff PAC’s allegations against the BCS bowls are simply the latest in a history of challenges to the tax-exempt status of college sports.

Gary R. Roberts, dean of the Indiana University School of Law at Indianapolis and a professor of sports law, said the allegations against the bowls could be serious if they are proven true. Still, he said that he doesn't buy Owens’s rationale for looking into the BCS — that it potentially gives all nonprofits a bad name.

“I don’t think the tax-exempt status of 99.9 percent of nonprofits is in danger because the Orange Bowl people may be doing something they shouldn’t,” Roberts said. “It’s pretty transparent that these are folks who are trying to put more pressure on the BCS system to bring about a playoff system. That’s really what’s going on here.”

 

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