This post continues our focus on the Tax Cuts and Jobs Act provisions that affect the tax-exempt sector. One change could have an impact on collegiate fundraising, as it repeals the deduction for a portion of donations made in connection with selecting and purchasing season tickets in university stadiums. This deduction was originally enacted in 1988 after massive lobbying efforts by football powerhouse Southeastern Conference schools.
Old Law. As a starting point, there is no deduction allowed for a purely quid pro transaction—i.e., a transaction where money is paid to a charity in exchange for goods and services. However, if there is a donative component to a transaction, a deduction can be allowed for that portion. In the mid-1980s, the IRS had ruled that a mandatory donation for the right to purchase tickets was a non-deductible, quid pro quo transaction. However, when Section 170(l) was added to the Tax Code in response to lobbying, taxpayers who were required to make a charitable donation to a college or university in order to gain preferential rights to purchase athletic stadium seats were allowed a charitable deduction equal to 80 percent of the donation. This provision did not apply to the actual purchase of the season tickets themselves—in fact, if there was a single transaction for donation and purchase, then no deduction was allowed. As such, most colleges and universities with major athletic programs adopted a two-step program for selling season tickets so that athletic fans could take advantage of the deduction.
In the first step, typically the purchaser would make a sizeable donation to the school in order to qualify for priority in purchasing their season tickets. The right to purchase tickets and the level of priority relative to other purchasers could be dependent upon the amount donated. Once the purchaser secured their right to their place in line, they engage in the second transaction to select and purchase their actual seats. This second transaction—purchasing the actual tickets—often represented a much smaller amount than the donation transaction because the face value of athletic tickets are typically substantially undervalued relative to their actual worth on the secondary market. This is done in part to keep prices low in order for students to be able to attend.
For example, in step one, a college football fan and alum makes a $10,000 donation to his alma mater in order to earn the right to purchase four season football tickets at the priority of number 20 in line. After the other 19 purchasers ahead in line have selected their seats and paid for their tickets, the football fan chooses four seats on the 50 yard line in the third row. In step two, the football fan pays $1,000 to purchase the tickets. He would be entitled to a charitable deduction of $8,000 (80 percent of the $10,000 pre-ticket purchase donation), which at the top tax bracket of 37 percent is worth $2,960. Thus, under Section 170(l), the football fan receives a $2,960 subsidy for the season tickets.
New Law. For tax years after December 31, 2017, the 80 percent deduction is no longer allowed. The football fan in the above example, then, is no longer allowed the $8,000 charitable deduction because even a separate “donation” to secure rights to purchase tickets will be viewed as a non-deductible quid pro quo transaction. As such, the net cost of purchasing season tickets has increased $2,960.
There are differing opinions on just how much this change will affect university fundraising. One economist at Williams College has calculated that the change would result in a 20 to 30 percent drop in fundraising. However, an economist at the Urban-Brookings Tax Policy Center has suggested the change will be negligible because demand for the tickets is so high. In other words, people will be willing to pay whatever the university charges for tickets even without any deductible amount. However, schools themselves appear to be very nervous. Louisiana State University receives more than $60 million in donations tried to seat rights, and senior Associate Athletic Director Robert Munson says a 20 percent drop as a result of the law change would be “a number we cannot possibly absorb.”
For more information, check out this interesting op-ed on the repeal in the context of larger tax reform.