Big Brother meet big headache. Or if you prefer, it may be time for a more formal introduction: IRS meet BCS.
The potential implications for college football's power elite aren't positive unless you're a fan of tax investigations or audits. Rather suddenly, three of the four BCS bowls (all but the Rose) are alleged to have engaged in "tax irregularities." A political action committee filed a complaint to the IRS in September using those words to describe the operations at the Fiesta, Orange and Sugar bowls. The committee, Playoff PAC, also alleges the Orange Bowl hosted a lavish, all-expenses paid Caribbean cruise for college administrators where no business meetings were scheduled. It also said the Sugar Bowl executive director was paid more than the top three Rose Bowl executives combined.
The complaint attacks the bowls' tax-exempt, nonprofit status. saying, "The BCS Bowl spending calls into question the Bowls' need for the financial government assistance they receive."
|Fiesta Bowl CEO John Junker is on paid administrative leave amid a probe into alleged improper campaign contributions. (US Presswire)|
Nonprofit, tax-exempt status designation allows businesses to avoid paying taxes because they are a community trust. The government is obviously interested in such organizations justifying those tax breaks.
Summary: After 13 years of dodging and deflecting every other kind of criticism, the BCS doesn't need a tax law headache. The BCS defending its controversial postseason is one thing. Defending the numbers in its books to an IRS agent is another. Would the IRS hesitate at all in taking on college football's big bowls?
"I don't think they'd blink an eye," said veteran tax attorney Wayne Henry.
Henry, of the national firm Stinson, Morrison, Hecker, should know. He chairs the firm's Nonprofit Tax-Exempt Organizations Practice Group out of Omaha, having formerly worked for the IRS chief counsel's office. That's not to say anything is in the works or that the BCS is even worried. It's just another front opened up on the sport's postseason battlefront.
"The IRS has said [in general], 'We're going to be in the compliance arena now. What was acceptable in the past is no longer acceptable in the future ...' " said Henry, who later added, "There's greater scrutiny by the federal government and state government of nonprofit, tax-exempt organizations, in part, I think ... because there is a large federal and state deficit."
The nation's financial crisis could then touch places that have never had much of one -- the major bowls. The Sugar Bowl, for example, claimed net assets of $32 million in fiscal 2009, according to tax records. The Outback Bowl in Tampa, Fla., is not a BCS bowl, but CEO Jim McVay made $808,000 in the same tax year, more than any of the BCS bowl executives. That figure was inflated that year because McVay earned a retention bonus worth approximately $128,000, according to an Outback spokesman.
There's not anything necessarily wrong with those numbers, unless they can't be justified.
"Now you get to a more subtle question," Henry said. "What is reasonable?"
With a nonprofit, there is no share price to prop up. There can't be private benefits, no donations to political candidates. Essentially, nonprofits must stay true to their "mission." In the case of the Fiesta Bowl, that includes assisting "the cause of higher education with the highest university payouts possible." Junker allegedly encouraged employees to make "contributions to politicians friendly to the bowl," according to the Arizona Republic. Those employees were then reimbursed in the form of bonus checks, the paper said.
Junker makes in excess of $600,000. Sugar Bowl CEO Paul Hoolahan made $645,000, according to the latest tax records. All of the major bowls are believed to use "compensation analysts" who vet those CEO salaries, comparing them to similar businesses, before the money is approved by a bowl's governing body.
"We don't know if or when the IRS will respond to allegations," Hoolahan said. "I know what the level of accountability is going to be if they do inquire. Anybody who is prudent would do their due diligence."
The Orange Bowl is working with a Virginia law firm to analyze the complaint. It has also formed an ad hoc committee of past presidents and treasurers to do the same for those years not involved in the complaint, according to CEO Eric Poms.
"We feel very confident we are operating well within regulations of nonprofit rules and regulations," he said.
Also in the complaint, BCS bowls are accused of a "disturbing pattern" that raises questions about their charitable tax status. Playoff PAC adds that tax-exempt funds have been used for "excessive compensation," to pay registered lobbyists without disclosure "and [to] heap frivolous benefits on bowl insiders."
Speaking of Hochman's hiring by the Fiesta, Playoff PAC founder Matthew Sanderson said, "That is not just someone you hire if the complaint is frivolous. I think they do have reason to be concerned."
The Fiesta Bowl describes itself as operated through four nonprofit organizations. It annually stages two games -- the Insight and the Fiesta. Once every four years, it also hosts the BCS title game. In 2006-07, the last time records are available from a championship year, it had a reported economic impact of $402 million. Established 40 years ago, the Fiesta evolved from a modest mid-level bowl, positioning itself to gain entry into the BCS 13 years ago ahead of the older, more tradition-laden Cotton Bowl. Its profile continued to grow, and it hosted its fourth BCS title game last month. It is considered one of the most highly regarded charitable and sports organizations in the Phoenix area.
All four BCS bowls are seen as local economic engines that help define and enrich the profile of their base cities. The first Rose Bowl was played more than a century ago, while the Sugar Bowl is more than 75 years old. Traditionalists argue that tearing this fabric would wreck college football's long-standing tradition. Opponents argue the big bowls have gotten too fat and powerful.
"The abuses are inherent in a system run by a few power brokers," said Sanderson, a Washington, D.C. campaign finance lawyer.
It's fair to say Playoff PAC is seen as a nuisance by the BCS. But it looked rather amateurish when it released a video calling BCS executive director Bill Hancock "Baghdad Bill." Playoff PAC asks for contributions on its website but Sanderson admits financial support has been negligible. The organization's stated goal is to bring about a college football playoff. Their current effort, though, doesn't necessarily mean that beer (IRS investigation) leads to heroin (playoff).
Worst-case scenario, the bowls could lose their tax-exempt status. But Henry speculates that bowls could still operate without the designation.
"You might owe taxes for a number of years," Henry said. "If they made a lot of money, there could be a big corporate tax liability. In these types of cases, traditionally and typically, there would be some kind of settlement with the government and nothing would come to light. If there is a settlement, they could keep it out of court."
Attacking the BCS on the anti-trust front has been mostly fruitless. BCS commissioners were forced in 2003 to grant better access to BCS bowls to non-BCS schools because of a threat of Congressional involvement by Tulane president Scott Cowen. The Utah attorney general last year asked the Justice Department to look into the BCS over anti-trust issues. But BCS officials remain confident in their legal standing when it comes to talk of a monopoly.
We all know the IRS isn't politicized. It has a mandate from Congress to catch tax cheats of all species. If there is a patron saint of such issues, BCS haters have one. Sen. Chuck Grassley of Iowa is known as a powerful watchdog over nonprofit organizations. In the past, he has taken on the American Red Cross and the Smithsonian. To put it in football terms, those aren't exactly Sun Belt schools.
"He was taking them on for very much the same reasons they're taking on the bowls," Henry said of Grassley, "for apparently having big parties and taking cruises everywhere around the world. He said they [allegedly] were paying too [large] salaries and having too [many] perks. They're [IRS] not afraid of any of these organizations."
Noted BCS opponent Sen. Orrin Hatch of Utah is now the ranking member of the Senate Finance Committee, which has jurisdiction over tax issues. Hatch recently replaced Grassley in that position. If Republicans were to take control of the Senate in 2012, Hatch would be in line to become chairman.
"I'm not surprised there is greater scrutiny," Henry said. "I tell nonprofit, tax-exempt organizations, 'In this environment, you really need a well-run business producing mission-driven, charitable results.' If you believe some of the reports you wonder if their [bowls'] policies for governance were adequate."
That's not to say nonprofits can't make money. Universities, hospitals and churches are among the most common such organizations. But they can't abuse the tax-exempt privilege. Among the Playoff PAC allegations is that BCS bowls used some their funds to fly first-class, pay private club dues and pay for employees' personal income taxes.
Back to that subtle question for the IRS, the BCS and its tax lawyers: What is reasonable?