Tuesday, December 13, 2022

Coach Prime, Excess Benefit and Revenue Sharing


I can't believe how old and fatter I am getting.  I was reminded of my age while reading a sports story about Deion Sanders' contract with Jackson State University.  The contract is, of course, terminated because Coach Prime has moved up to big time college football, having recently accepted the Head Coaching gig at Colorado.  What caught my attention was clause 4(g) of the Jackson State University Contract.  I should note, first, that JSU is a 501(c)(3) charity according to Publication 78, Guidestar and Charity Navigator.  This is an important preliminary fact because the excess benefit prohibition of IRC 4958 applies only to charities recognized under IRC 501(c)(3).  There are many state universities that have not applied for 501(c)(3) recognition and thus are not subject to the excise tax for excess benefit transactions.  State colleges and universities are generally exempt under the "intergovernmental tax immunity doctrine" and IRC 115 (gross income does not include income derived from the exercise of any essential governmental function and accruing to a state or political subdivision) and do not need to apply for exemption under 501(c)(3).  Some public institutions nevertheless apply, typically to give potential big donors greater assurance that their donations will be deductible (though I hardly see that as necessary but some universities do so anyway just to avoid having to explain to big donors who want to see their beneficiary's name in Publication 78 before writing the check).  Anyway, a public university that has applied and received IRC 501(c)(3) recognition, like JSU, becomes an "applicable" organization for purposes of IRC 4958.  And while revocation of exempt status for an excess benefit transaction would change little (because the public institution would still be entitled to exemption under IRC 115 and intergovernmental immunity), being an applicable exempt organization subjects disqualified persons and managers to two tiered excise taxes.  Thus, Coach Prime and the JSU officials could potentially be hit with excise taxes even if JSU's tax exempt status is safe.  Why?  Take a look at clause 4(g) of Prime's contract with JSU:

Ticket Sales. If at the conclusion of any football game during the term of this Agreement, the number of tickets sold for such game is greater than 30,000 tickets (the gross revenue generated from any tickets sold in excess of 30,000 tickets, the Game Ticket Sales Revenue ), the University shall pay to Head Coach an amount equal to ten percent (10%) of the Game Ticket Sales Revenue. The Game Ticket Sales Revenue shall be deemed earned upon the conclusion of the applicable game, and shall be reconciled and payable in one lumpsum within thirty (30) days of the conclusion of the applicable football season of said games. If at the conclusion of any football season during the term of this Agreement, the number of season tickets sold for such season is greater than 10,000 season tickets (the gross revenue generated from any season tickets sold in excess of 10,000 season tickets, the Season Ticket Sales Revenue ), the University shall pay to Head Coach an amount equal to ten percent (10%) of the Season Ticket Sales Revenue. The Season Ticket Sales Revenue shall be deemed earned as of the conclusion of the applicable football season or the date upon which this Agreement is earlier terminated (provided on the date of such termination, the benchmark above has been exceeded pursuant to this Section), whichever is earlier, and shall be payable in one lump sum within thirty (30) days of the conclusion of the applicable season.
So, Coach Prime was entitled to 10% of revenue from tickets sold in excess of 30,000.  And if JSU sold more than 10,000 season tickets, Coach Prime was entitled to 10% of that revenue.  Sounds like revenue sharing to me.  What does this have to do with my age and waist size?  Well, I am too fat to ever play football again and I was just a young pup in the academy when "intermediate sanctions" were enacted under IRC 4958.  Back then, revenue sharing was all the rage.  You couldn't go to an exempt org conference without hearing about revenue sharing and whether it constituted a "per se" violation of the private inurement prohibition.   Here I am with plenty of gray hair (in my moustache since the hair on my head is about gone) and revenue sharing regulations have still not been enacted.  Everyone thought Treasury would resolve the mystery under the authority IRC 4958(c)(4) which gave Treasury authority to determine by regulation when or if revenue sharing constituted private inurement and an excess benefit transaction.  Treasury punted in the eventual regulations.  Instead, Treasury Regulation 53.4958-5 "reserves" the issue for another day and that day doesn't seem any closer than when the law and final regulations were adopted.  
I would bet that Coach Prime and the JSU managers are safe from excise taxes even if the notion never occurred to them and they didn't seek tax advice on that particular provision.  The relatively low amount of compensation possible under the contract (basically $300K base plus 10% of ticket sales at a small HBCU) would probably not have even broken the $1 million mark and makes the issue not worth pursuing for one.   And secondly, the IRS would have PR problems going after Coach Prime while the big time coaches are pulling down exponentially larger buckets of money.  The revenue sharing bonus doesn't kick in without some indication of superior performance, and certainly didn't put Coach Prime in a position to benefit at the University's expense or at the expense of the charitable mission (assuming we can still call college football part of a charitable mission).  Coach Prime is now one of those big time well paid coaches and I hope his new contract was properly vetted if it contains a clause 4(g). But the contract makes for good classroom discussion when discussing private inurement and excess benefit transactions.


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How about a big time coach's contract with 10 years of $1 mi or more, guaranteed. Coach gets fired after year 4, but continues to be paid that last 6 years of the contracted compensation. Parachute payment?

Posted by: C David Anderson | Dec 13, 2022 11:05:59 PM

Let's face it, when it comes to college football we all go crazy and rules of law relating to tax exemption are out the window. That's why sponsorship revenue for college bowl games are not taxed as unrelated business income. So yeah, paying a fired coach to sit on his or her losing butt for six years seems like a huge waste of charitable assets. Posner in United Cancer Council might have suggested a private benefit violation. But the contract seems consistent with industry practice -- coaches get fired all the time with years left on their contract and thus "money for nothing." As long as a university can say "this is the only way we can attract" coaches (by agreeing to such parachute payments, I mean), they are probably safe from private benefit As for private inurement or excess benefit, the coach and the institution would likely be protected by the "initial contract exception," (aka, the first bite rule). If the coach was not an insider (or disqualified person), when the contract was entered into, no private inurement or excess benefit. We can thank Judge Posner for that rule too.

Posted by: Darryll Jones | Dec 14, 2022 7:30:36 AM

I was asked recently about which nonprofit organizations pay the highest salaries. My off-the-cuff response entertained the questioner. I told them I'd look first at health system CEOs and Power 5 conference head football (and occasionally men's basketball) coaches. The coaches' examples are further complicated by universities, including public universities, using foundation and other sources to pay all or part of a coach's salary.

I'm also reminded of how the University of Louisville used its foundation to do an end around the state statutory limitation on its president's compensation; i.e., about $250,000 annually from the university and about $2 million annually in his companion role as foundation leader.

Posted by: Michael L. Wyland | Jan 11, 2023 8:42:51 AM

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