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:
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
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