SKYBOXES, LONGHORN ALUMS AND OTHER TAXING MATTERS

February 09, 1987

Sports is big business, and two years ago when the normally pro-business Reagan Administration proposed an end to tax deductions for all business entertainment expenses, including such things as sports tickets and skyboxes, the reaction from pro and college sports administrators was swift and furious. Mounting a major lobbying effort in Washington, the National Association of Collegiate Directors of Athletics, the NBA, the NFL and the NHL, among others, predicted bleakly that such sweeping changes in the tax laws would lead to empty stadiums, decaying inner cities, distressed universities—in short, the end of civilization as American sports lovers have known it. While the major spectator sports were in the forefront of the battle and had the biggest bucks at stake, the whole spectrum of sport—from auto, speedboat and bicycle racing to skiing, boxing, and golf—was supposedly on the ropes.

Congress, as it turned out, apparently agreed, and the Tax Reform Act of 1986 that went into effect on Jan. 1 is not nearly as onerous to sports organizations as had been feared. Indeed, most front-office executives and player agents seem delighted with the outcome. However, tax experts caution that the new law may simply be one battle in a long war, which inevitably will lead to dramatic changes in the big business of sports. Observes Joseph P. Hamper Jr., the Baltimore Orioles' vice-president in charge of finance, "I don't think anybody really knows how the new tax law will affect sports."

Like many political acts, the complex 1986 tax revision legislation, passed, by Congress and signed by President Reagan, giveth some but also taketh a lot away. Among the new law's effects on sports:

•The 80% rule. The amount of entertainment expenses that can be deducted from a person's or a company's taxes is reduced from 100% to 80%. So, for example, 80% of the cost of tickets for a Chicago Bulls game is deductible—assuming, of course, that business is discussed before, during or after the game.

•Skyboxes. Those lush stadium redoubts far above the madding crowds, with bars, TVs, stereos and comfortable furniture, cost well-heeled fans as much as $20,000 a year at the Louisiana Superdome and $60,000 at Giants Stadium in New Jersey. Tenants see them as the perfect surroundings for entertaining 10 or 20 corporate clients. But under a provision of the new law, the cost of that entertainment will, after a three-year phaseout, no longer be tax deductible beg‚Äö√†√∂¬¨¬Ænning in 1989.

•Stadium construction. A building boom in major sports facilities has been fueled by the sale of construction bonds that were tax exempt to investors. They won't be under the new tax law. But as we shall see, some members of Congress craftily slipped in exemptions for their pet projects.

•Good seats for big givers. In 1984 the Internal Revenue Service ruled that when a person contributed to a college booster club and got the right to buy prime seats at football or basketball games in return, that contribution was not deductible. Outraged college athletic directors argued that the ruling would discourage financial support from alumni and friends and undermine their athletic programs. Under pressure the ruling was withdrawn, then revised and reissued in '86. The IRS granted a limited deduction for a booster contribution—minus the hard-to-calculate amount that the "right" to buy prime seats would sell for. When a game is a sellout, the IRS ruled, the entire contribution would be nondeductible. The colleges felt that the IRS was still being too severe and tried to get Congress to amend the '86 ruling when it wrote the new tax law. That didn't happen, although two powerful members of Congress did manage to get their own alma maters exempted, and the matter has been introduced again in the new Congress.

•Players' salaries. By 1988 the maximum federal tax on personal income drops from 50% to 28%, which will mean that in most cases, the richest players can look forward to getting even richer.

•"Passive" investments. Under the old law, nonmanaging partners in money-losing sports franchises could use their losses to offset income from other sources. Under provisions of the new law abolishing deductions on "passive" investments, such losses ordinarily are not deductible.

•Tax shelters. Also considered "passive" under the new law and thus no longer deductible are at least some of those losing investments in real estate, livestock, oil drilling leases and the like that have been used by many athletes as a way of avoiding taxes on their huge salaries.

All these changes, while dramatic enough, are a far cry from what might have been. Back in 1984 the Administration introduced its so-called Treasury I proposal, which called for elimination of the business entertainment deduction for all tickets to sports events. The Treasury Department's position paper argued that such favored treatment of business simply encouraged overspending by businessmen, permitting them to entertain at the taxpayer's expense, and led to increased ticket prices for everyone.

Reagan was not the first president to attack corporate expense account deductions. Those deductions have troubled all modern-day presidents, most notably Jimmy Carter, who railed against the "three-martini lunch" to no avail. But in 1984 when Reagan weighed in, Congress had caught the reform fever, too.

Professional teams have come to rely on corporations, with their lavish expense accounts, to buy up the most expensive seats and boxes. Business ticket purchases account for more than 60% of the NHL's annual gate receipts, 51% of the NBA's and 46% of major league baseball's. And while the NFL says it doesn't keep such figures, it is safe to assume its situation is comparable to that of the other leagues.

What would happen, the franchise owners worried, if corporations had to pay for their tickets like normal customers? Not waiting to find out, pro sports executives went to the committees of the House and Senate. Sports franchises lined up with other businesses similarly threatened by the proposed cut in expense account tax deductions.

The NHL, for example, joined a lobby called the MainStreets Coalition, which included representatives from such expense-account-driven businesses as restaurants, motels, hotels and theaters. Its chairman, Moon Landrieu, a former mayor of New Orleans and ex-secretary of the Department of Housing and Urban Development, crisscrossed the country warning of 600,000 lost jobs, devastated downtowns and cultural collapse if entertainment expense deductions were disallowed. "Entertainment is to sales what fertilizer is to agriculture," Landrieu told audiences. In Washington, meanwhile, Congress was hearing dire predictions of the sort contained in an NBA press release that intoned, "The majority of NBA teams simply could not survive if they lost the ticket-buying support of the business community."

Responding to this enormous pressure, not only from sports but also from a host of other affected businesses, House and Senate conferees took the existing 100% deduction for business meals and entertainment expenses and reduced it to 80%—a far cry from the original Administration proposal two years earlier to abolish such deductions altogether. As one senior congressional aide observed, "Congressmen and senators love to go to football games and golf tournaments where they get free meals and entertainment. They weren't anxious to kill that."

Some congressmen also love to play golf. In November, for example, Rep. Dan Rostenkowski, chairman of the House Ways and Means Committee, which helped fashion the new tax law, teamed with U.S. Open champion Ray Floyd to win the amateur part of the Skins Game. That helps explain why Congress gave professional golf special treatment in the new tax law. All PGA and LPGA tournaments raise money for charities. So Congress decided—after heavy lobbying from pro golf—that entertainment expenditures in connection with such tournaments would remain 100% deductible.

"We see that being very positive for tournament golf, and for us in particular," said David Kaplan, executive director of the Atlanta Golf Classic. "If the Coca-Cola Co. buys a pro-am spot for $2,500, it can deduct it all as a business entertainment expense. If it uses tickets to entertain clients, it can deduct the whole price."

The new act even takes into consideration foreign golfers, who are very important to the golf business these days. Foreign players have to limit their time in the U.S. to keep Uncle Sam from taking a tax bite from all their income, including that earned abroad. Under the new law, the number of days foreigners spend in the U.S. playing in charity events such as pretournament pro-ams is not counted against them.

High-priced skyboxes, often rented by businesses and deducted from their taxes as an entertainment expense, have helped underwrite many franchises and college athletic programs. Thirty-four publicly owned arenas and stadiums used by 47 pro teams have skyboxes; 26 colleges currently have skyboxes, ranging from Louisville with only 2 to Clemson with 100; at least a dozen more colleges plan to put in skyboxes.

It was not surprising, then, that lobbyists fought desperately to keep the cost of skyboxes deductible as a business entertainment expense. They even tried to persuade Congress that skybox owners were really making a big sacrifice because they were sitting in the worst seats in the house, way up in the rafters, in order to subsidize the masses in those great seats down below. (Of course, others argued that the reason that ticket prices have soared generally is that high-priced skyboxes, paid for with corporate expense accounts, have set an upward price trend.)

Congress said no to the skybox lobbyists—but it sugared the bitter pill a bit. Under a so-called transition rule, the deduction for skyboxes will be phased out over three years, with a two-thirds deduction in 1987, a one-third deduction in '88 and finally no deduction come 1989. People who sit in skyboxes must also purchase tickets to the event, and those, of course, will be 80% deductible if they are used for legitimate business entertainment.

The effect of ending the skybox deductions is one of the great imponderables in sports business these days. At the Los Angeles Coliseum, where Al Davis moved his Raiders from Oakland, in part to profit from a richer market for skyboxes, construction continues on the boxes that will rent for $50,000 a year. "[The new law] doesn't appear to have too great an effect," says Al LoCasale, executive assistant to Davis. "But it's too early to know."

In Kansas City, meanwhile, Chiefs president Jack Steadman worries about 42 suites on which leases come up for renewal this year. The Chiefs need that income to pay their rent on the stadium to the city. "To lose that suite revenue would be devastating for us," Steadman says. And at the Metrodome in Minneapolis, where the Vikings receive income from 119 private suites (with rents from $28,000 to $32,000 apiece), general manager Mike Lynn echoes the cry of foul being heard throughout sportsdom, when he says, "I think it's unfair to change the rules in the middle of the game."

The Hartford Civic Center, where the Whalers play, recently spent $9 million on the construction of 45 skyboxes; 26 of them opened in '83 and 19 in '85. They rent for between $44,000 and $55,000 a year. David Andrews, the team's vice-president of finance and development, thinks the corporations that rent skyboxes will still do so. "In our case, the companies are favorably disposed to continue," Andrews says. "They may have to dig a little deeper, but we feel we have a good product, and that's what we're really talking about."

While lobbyists managed to burrow a three-year loophole into the skybox issue, they cut a veritable superhighway through the new law putting an end to tax breaks for financing the stadiums themselves.

The U.S. Treasury loses about $15 billion a year by permitting local governments to sell tax-exempt bonds to finance municipal projects such as airports, sewage-treatment facilities and mass transit, as well as sports stadiums and arenas. This federal tax exemption, which makes the bonds very appealing to investors, has amounted to a subsidy for sports, because franchises, colleges and developers stand to profit from use of the facilities. Under the new law, sports facilities would lose that exemption—though not immediately.

To ease the trauma of withdrawal from this federal subsidy, congressmen and senators managed to exempt from the new law certain pet projects in their districts and states, some of which were already under way, while others were only in the planning stages. The total number of exemptions was limited, and members of the House and Senate committees who actually wrote the new tax law were able to get more than their share of them. All told, this "transition rule" cost the Treasury (thus the taxpayers) $150 million in lost tax revenues from 22 sports exemptions, more than half of them claimed by House and Senate tax committee members.

For example, Oregon Republican Robert Packwood, who steered the tax bill through the Senate, saw to it that the University of Oregon got a $4 million exemption so it could spruce up Autzen Stadium, while Oakland Stadium got an $8 million exemption, compliments of House Ways and Means member Fortney Stark (D.-Calif.).

Because politicians don't like it widely known that they give away special tax breaks, the descriptions of these exemptions are sometimes carefully veiled, referred to vaguely by location and design. For example, Chicagoan Rostenkowski came through with an exemption of up to $250 million for what was described, in part, as "a stadium to be used by an American League baseball team currently using a stadium in a city having a population in excess of 2,500,000." The facility in question is a new ballpark for the White Sox.

Another case of a powerful exemption that is so obscurely phrased as to be meaningless to everyone—except to those who count—is a provision that reads: "Treatment of Certain Amounts Paid To or For the Benefit of Certain Institutions of Higher Education." That bit of opaque prose was cooked up by two powerful politicians, Texas Democratic Congressman J.J. Pickle and Louisiana Democratic Senator Russell Long, and masks two exemptions they wrote for their alma maters, the University of Texas and LSU, respectively. The exemptions free the universities from the IRS ruling that states that when big financial givers get special seats at athletic events in return for their generosity, they can't deduct the value of those tickets from their taxes.

The IRS ruling caused an uproar among booster clubs, and with good reason. Clemson, for example, raises some 30% of its athletic budget from big contributors, who in turn get special seating, preferential parking and the like. At USC, "Cardinal and Gold" contributors cough up about $1.3 million a year—and get prime seats for their munificence. "Our goal is to endow 24 starting positions including punter and kicker," says associate athletic director Donald L. Winston.

In trying to get the 1984 ruling scuttled, lobbyists argued that alumni gifts underwrote not only big-time sports but also less visible women's and intramural programs, as well as such sports as skiing, soccer, swimming and lacrosse that don't normally earn money from TV and gate receipts.

When the news broke that LSU and Texas were exempted, rivals pelted their representatives with letters worrying that these two athletic powers would now corner all the talent by offering thicker steaks at the training tables, shinier weight machines and fancier statues outside the jock dorms. But nobody in Congress expects the exemptions to stand as is; most congressional observers accept Pickle and Long's explanation that their parliamentary maneuver was simply intended to open the door for further debate on the IRS ruling, which the two lawmakers found objectionable. As Pickle, reacting to the furor, said, "I just wanted to make the record plain that I think this should apply to all the schools involved anywhere in the country."

The new tax law, with its lowered rate for individuals, probably means even more take-home pay for most of the highest-paid professional athletes. The new maximum tax rate drops from 50% in 1986 to 38.5% in 1987 and, finally, 28% (or 33% in certain cases) in 1988. "In the past it was probably best for players to get as much money as soon as possible," says Larry Fleisher, a player agent who is also director of the NBA Players Association. "Now it's probably better to get a deferral until the rates go down." Mike Trainer, Sugar Ray Leonard's attorney, says that tax considerations didn't figure directly in the timing of his client's comeback fight against Marvin Hagler, but adds, "Obviously, '87 is a lot better year to have the event than '86."

Some money managers anticipate that the fact that the new law will likely allow many athletes to keep more of their gross income may be used by management in order to try to pay lower salaries. "It's a bargaining chip on the side of the payer," says Lester Marks of Ernst & Whinney, a big accounting firm retained by both players and teams.

The new law abolishes income averaging, which hits hardest at young rising stars. A baseball player, for example, may spend several years in the minors, earning as little as $3,500 in a season. Then when he makes it to the big leagues, his annual salary might jump to several hundred thousand or more. Under the old law he could average his highest and lowest income for a five-year period and pay taxes on that figure; now, however, each year's earnings will be taxed individually.

Many of the more questionable tax shelters, which were used by some highly paid athletes to create paper losses for tax reasons, are abolished under the new law. Good riddance, assert most legitimate money managers. "Ray never got involved because I never felt comfortable having him own cattle and apartment houses," says Trainer.

"The promoters tried to make these kids, who are mostly unsophisticated, think all they had to do was not pay taxes," says Fleisher. "Elimination of these is a boon to the average player."

Depreciation, a kind of tax shelter that benefits franchises by reducing their tax bite, has been sharply curtailed. Sports teams now have to depreciate equipment and facilities over a longer period, which means a smaller deduction than before.

Most sports franchises have limited partners with no say in management. Often they are wealthy people who dally in sports, knowing that any losses can be used to offset earnings from other sources. But the new law, which takes effect gradually over four years, says that such "passive" investors will no longer be able to deduct these losses from nonpassive earnings. So, for example, limited partners in a money-losing baseball franchise will only be able to use those losses to offset gains from other similar kinds of investments (another limited partnership, for instance) or when they sell their interest.

Corporations don't fall under this rule, and some experts think that will lead to more corporate ownership of sports franchises and facilities. (The NFL still doesn't permit corporate ownership of teams, although the matter is currently under serious consideration.) Indeed, a current case suggests this is already happening. The city of Pittsburgh lobbied on Capitol Hill for an exemption from the passive investment rule to help it sell the financially troubled Three Rivers Stadium to a limited partnership. "We needed the exemption to conclude a sale to some individuals," says Ronald Schmeiser, the city's finance director. Denied the exemption, the investors backed off. So, says Schmeiser, "We turned to a corporation [which he won't name] and we are negotiating the sale."

One very special exemption was gained by those in the show horse and racehorse business. Under the new law, occupations must produce a profit in at least three of five years or be labeled a "hobby" by the IRS. Hobbies do not qualify for business expense writeoffs. By contrast, those involved with horses will be allowed to show a profit in just two of seven years and still qualify as a business, with all the attendant tax benefits.

If the new tax law left sports executives generally relieved, it did produce one nagging concern: the future of expense-account ticket buying. The drop in the entertainment deduction from 100% to 80% may not be so bad, considering the alternative, but the precedent is worrisome to sports administrators. Sure, corporate spenders will still buy blocks of tickets even though they have lost 20% of their deductions. But what if such deductions are decreased on the next go-around to 70 or 60 or even 50%?

It is because of such concerns that in the aftermath of passage of the Tax Reform Act of 1986, Big Sports, like Big Steel, Big Autos and Big Electronics, has become even more of a fixture on the Washington scene than it was before, as its lobbyists remain poised, waiting for the next battle. Says Joan Cavanagh of the now-permanent MainStreets Coalition, "This thing can be tinkered with."

ILLUSTRATIONNIGEL HOLMESSO LONG, LITTLE DOGIE: No longer can athletes avoid taxes through questionable tax shelters.

ENTERTAINMENT CUTBACKS

The new law snips away at the deduction allowed for business ticket purchases.

1986: 100% deduction
1987: 80% deduction

John F. Berry is a Larchmont, N.Y.—based free-lance business writer.

LOWER RATE, HIGHER TAKE
Lower personal income tax rates mean many athletes will take home more pay.

Tax

Take home

Average annual salary

'86

'87

'88

'86

'87

'88

MLB

50%

38.5%

28%*

50%

61.5%

72%

$412,500

NBA

50%

38.5%

28%*

50%

61.5%

72%

$400,000

NFL

50%

38.5%

28%*

50%

61.5%

72%

$235,000

NHL

50%

38.5%

28%*

50%

61.5%

72%

$158,000

*33% in certain cases

HOLE YARDS PAR R1 R2 R3 R4
OUT
HOLE YARDS PAR R1 R2 R3 R4
IN
Eagle (-2)
Birdie (-1)
Bogey (+1)
Double Bogey (+2)