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Tax Deductible Two Part Tariff (at least the first part)

2017 September 22
by Phil Miller

From the Chicago Tribune:

What I don’t understand, however, is the law that allows ticket buyers to write off 80 percent of their “preferred seating donation” as a charitable contribution for federal tax purposes.

That’s right. High rollers in the swankiest suites can subtract $4,500 from their taxable income, a benefit worth up to $1,782 off their tax bill, as though they had given that money to a soup kitchen or hurricane relief.

Put another way, for each such privileged fan, the federal government effectively provides a $1,782 ticket subsidy.

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Now, normally, under tax law, if you get something in return for a donation to charity, you can only deduct from your income the amount of your donation above the value of what you’ve received. If you pay $500 a plate for a charity dinner, for example, and the meal is worth $50, you can only claim a charitable contribution of $450.

Pretty simple. Pretty obvious.

And, in the mid-1980s, when these preferred-seating donation scams first arose, the Internal Revenue Service issued a common-sense ruling that a mandatory donation linked to the purchase of seasons tickets was a quid pro quo and so not deductible for tax purposes.

Legislators representing schools in the powerful Southeastern Conference “went crazy,” said University of Illinois emeritus law professor John D. Colombo, a specialist in tax laws governing charitable organizations. And in 1988, Congress added subsection 170(l) to the IRS code that specifically allowed for an 80 percent deduction on donations to “institutions of higher education” that granted “the right to purchase tickets for seating at an athletic event.”

The pro sports analogy to this collegiate two-part tariff, at least here in the States, is the personal seat license (PSL).  Fans buy a PSL from a team which essentially gives them the right to buy season tickets to that team’s home games.  Would it be OK to allow PSL buyers to deduct 80% of the PSL price from federal income taxes?  Of course not, because there is no facade that pro sports teams are charitable organizations.

If an organization is classified as a “non-profit” for tax purposes, this only means that it is a non-profit in an accounting sense.  It does not necessarily follow that the “non-profit” cannot seek maximum economic profits.  It just means that they have to show a zero accounting profit on their books.

I think it is pretty clear that major college football (and basketball) programs, if not athletic departments in general, are profit-maximizers in the economic sense.  You can call them non-profits, charitable organizations, or whatever.  But just because they are non-profits for tax purposes does not mean they aren’t profit-maximizers.

Via Skip Sauer on Twitter

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