Private Letter Rulings - Taxpayer Touchdown on Skybox

GiftLaw Note:

Gifts to universities with a benefit of preferential seating at football games have been a contentious issue over the years. In order to resolve the issue, Congress passed Sec. 170(l) and allowed a deduction of 80% of the amount contributed where preferential seating at football games or other sports events results from the gift. The deduction is calculated by first subtracting the value of tickets and then multiplying the net amount by 80%.

In this ruling, Mr. Roger L. French, through his SubChapter "S" R.L.French Corporation, gave $200,000 to the Iowa State University Foundation. In return he was permitted to lease a skybox for the university games for a term of 10 years. Taxpayer inquired whether the Sec. 274(l) skybox limitation of the deduction to the value of the actual tickets would result in denial of the charitable deduction under Sec. 170(l).

The Service did require the $200,000 amount to be reduced by the benefits, including the skybox license, the pre-game parking and the passes for attendees. After this reduction, the net amount was multiplied by 80% and that amount deducted. In effect, the correct deduction is 80% of the payment less all benefits. The Service allowed the deduction under the theory that the specific provision of Sec. 170(l) removed the transaction from the province of Sec. 273(l). Thus, the charitable deduction was allowed for 80% of the net amount.

ISSUES:

Is a portion of the payment to a state university's foundation, for which the donor receives the right to purchase tickets for seating in a skybox at athletic events in an athletic stadium of such university, deductible under 170(l)?
Is a portion of the payment to a state university foundation, for which the donor receives the right to purchase tickets for seating in a skybox at athletic events in an athletic stadium of such university, that is otherwise deductible under section 170(l), disallowed because of the limitations of section 274(l)

CONCLUSIONS:

The portion of the payment to a state university's foundation, for which the donor receives the rights to purchase tickets for seating in a skybox at athletic events in an athletic stadium of such university, is deductible under 170(l).
No, under the provisions of section 274(f), section 274(l) does not disallow a deduction determined under section 170(l) that is specifically allowed a taxpayer without regard to the payment's connection with the taxpayer's trade or business (or income-producing activity).

FACTS:

S Corporation is an accrual-basis subchapter S corporation whose taxable year ends on Date 1. On Date 2, the last day of S Corporation's fiscal year, S Corporation authorized a payment of $A to University's foundation (Foundation). Foundation is represented to be an organization described in section 170(b)(1)(A)(iv) that is organized and operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of University, a state university, which is represented to be an educational organization described under section 170(b)(1)(A)(ii) and an institution of higher education as defined in section 3304(f). On Date 3, the 15th day of the third month following the close of S Corporation's taxable year, in the next calendar year, S Corporation paid $A to Foundation.

Individual, S Corporation's 100% shareholder and a calendar year taxpayer, took a charitable deduction for a portion (as discussed below) of the $A on his Year 1 income tax return.

S Corporation represented that, in return for its payment, it received: (1) a lease for a specific skybox for University home football games in University's stadium for Y years; (2) parking for X cars for each game; and (3) passes for W guests to visit persons sitting in the skybox before the game and at halftime. The terms under which S Corporation could use the Z seats in the skybox were embodied in a license agreement.

S Corporation received a receipt from Foundation, as well as an opinion provided to Foundation by Counsel regarding valuation of the personal benefits received in return for the payment of $A. Foundation provided S Corporation with a receipt in which it calculated as follows:

Y season skybox license value $D
Pre-game parking $E
Passes to visit skybox +$H
___

Total: $C
Payment $A
less benefits valued -$C
___

Amount subject to section 170(l) $B
Times 80% .80
___

Deduction claimed $F

In filing his Year 1 return, Individual took a charitable deduction of $F. On audit, the revenue agent proposed disallowance of the $F deduction under section 274(l) on the grounds that it represented an amount paid for use of a skybox for more than 1 event. Technical Advice was sought on the disallowed deduction of $F pursuant to section 274(l).
S Corporation's representatives now concede that $G of the $B was paid for the tickets for Z seats in the skybox. They concede that the claimed deduction under section 170(l) should be reduced by 80% of that $G (which equals the amount incorrectly deducted). We understand that the per seat ticket price paid by S Corporation was the same as paid for other non-luxury seat tickets in the University's stadium.

LAW AND ANALYSIS:

IS A PORTION OF THE PAYMENT TO A STATE UNIVERSITY'S FOUNDATION, FOR WHICH THE DONOR RECEIVES THE RIGHTS TO PURCHASE TICKETS FOR SEATING IN A SKYBOX AT ATHLETIC EVENTS, DEDUCTIBLE UNDER 170(l)?

Section 170(a) of the Internal Revenue Code allows as a deduction any charitable contribution (as defined in section 170(c) /1/) the payment of which is made within the taxable year. /2/

Rev. Rul. 67-246, 1957-2 C.B. 104, states that, to be deductible as a charitable contribution for Federal income tax purposes under section 170, a payment to or for the use of a qualified charitable organization must be a gift. To be a gift for such purposes, there must be, among other requirements, a payment of money or transfer of property without adequate consideration. The Supreme Court has stated that the "sine quo non of a charitable contribution is a transfer of money or property without adequate consideration." U.S. v. American Bar Endowment, 477 U.S. 105, 118 (1986) (American Bar Endowment).

In American Bar Endowment, the Court observed that a payment to charity might have a dual character and adopted a two-part test to determine whether part of the payment is deductible as a charitable contribution. First, the payment is deductible only to the extent that the payment exceeds the fair market value of the privileges or benefits received. Second, the taxpayer must make the excess payment with the intention of making a gift.

Generally, where a transaction involving a payment in the form of a purchase of an item of value, the presumption arises that no gift has been made for charitable contribution purposes, the presumption being that the payment in such case is the purchase price. Rev. Rul. 67-246. Thus, where consideration is received in connection with payments to a charitable organization, the presumption generally is that the payments are not gifts. If a charitable contribution deduction is claimed with respect to a payment, generally the burden is on the taxpayer to establish that the amount paid is not the purchase of the privileges or other benefits and that part of the payment, in fact, does qualify as a gift. Rev. Rul. 86-63, 1986-1 C.B. 88, superseding Rev. Rul. 84-132, 1984-2 C.B. 55.

Under section 170(l), /3/ the taxpayer in certain circumstances is relieved of the burden of establishing what portion of a dual payment does, in fact, qualify as a gift. Section 170(l) provides that 80 percent of the amount paid by a taxpayer to or for the benefit of an educational organization, which is described in subsection (b)(1)(A)(ii) and which is an institution of higher education (as defined in section 3304(f)), is allowable as a charitable contribution deduction, if such amount would be allowable as a deduction under section 170 but for the fact that the taxpayer received (directly or indirectly) as a result of paying such amount the right to purchase tickets for seating at an athletic event in an athletic stadium of such institution.

Section 170(l)(2) provides that, if a donor makes a payment to or for the benefit of an educational institution both for the right to purchase tickets and for the purchase of the tickets themselves, the portion of the payment subject to the 80 percent rule and the portion representing the ticket purchase are treated as separate amounts for purposes of section 170(l).

In this instance, the benefits that S Corporation received for its payment to Foundation consisted of the right to purchase tickets, the tickets themselves, the right to use the skybox, passes to visit the skybox, and parking. S Corporation made the payment to Foundation, which has been represented to be an organization described in section 170(b)(1)(A)(iv) /4/ that is organized and operated exclusively [for] the benefit of University, which is represented to be an educational organization described under section 170(b)(1)(A)(ii) /5/ and an institution of higher education (as defined in section 3304(f) /6/).

The tickets that S Corporation received the right to buy were for seating at athletic events in University's athletic stadium. Section 170(l) is applicable despite the fact that the seating is located in a special viewing area within the athletic stadium. Thus, the portion of S Corporation's payment to Foundation for the right to buy tickets for seating is considered as paid for the benefit of University under section 170(l), and 80 percent of such portion is deductible under section 170, subject to the percentage limitations and other requirements of that section.

The remainder of the payment, which was for the ticket purchase, the right to use the skybox, passes to visit the skybox, and parking privileges, is not deductible under section 170.

S Corporation contends that it is entitled to rely upon the allocation made by Foundation for purposes of determining the value of goods and services S Corporation received in exchange for the contribution. S Corporation cites section 1.170A-1(h)(4)(i) of the Income Tax Regulations, which provides that:
DONEE ESTIMATES OF THE VALUE OF GOODS OR SERVICES MAY BE TREATED AS FAIR MARKET VALUE -- For purposes of section 170(a), a taxpayer may rely on either a contemporaneous written acknowledgment provided under section 170(f) /7/ and 1.170A- 13(f) or a written disclosure statement provided under section 6115 for the fair market value of any goods or services provided to the taxpayer by the donee organization.
Regulations section 1.170A-1(h)(4)(ii) provides an exception that a taxpayer may not treat an estimate of the value of goods or services as their fair market value if the taxpayer knows, or has reason to know, that such treatment is unreasonable.

We are not addressing the donee's valuation of the skybox, of the right to buy tickets, of the passes to visit the skybox, or of the parking privileges in this technical advice memorandum. Valuation Involves determinations of fact that are best handled in the field.
IS A PORTION OF THE PAYMENT TO A STATE UNIVERSITY FOUNDATION, FOR WHICH THE DONOR RECEIVES THE RIGHT TO PURCHASE TICKETS FOR SEATING IN A SKYBOX AT ATHLETIC EVENTS, THAT IS OTHERWISE DEDUCTIBLE UNDER SECTION 170(l), DISALLOWED BECAUSE OF THE LIMITATIONS OF $274(l)?

Section 274(a)(1)(B) provides that no deduction otherwise allowable under the chapter (sections 1-1400C) shall be allowed with respect to a facility used in connection with an activity referred to in section 274(a)(1)(A) (relating, generally, to entertainment). Section 1.274-2(b)(1)(i) of the Income Tax Regulations further provides that the term "entertainment" means any activity which is of a type generally considered to constitute entertainment, amusement, or recreation.

When section 274(a)(1)(B) was amended in 1978 to read as it applies to the year in question, the legislative history provided that section 274(a)(1)(B) would be inapplicable to expenditures for tickets to sporting and theatrical events regardless of whether the tickets are purchased by a fee which entitles the taxpayer to use a seat, sky-box, lounge, box or other similar facility which provides a viewing area for such a sporting or theatrical event. These costs generally would be subject either to the existing provisions of law relating to entertainment activities, or to those which govern the deductibility of business gifts. H. Rept. No. 1800 95th Cong., 2d Sess. 250 (1978), 1978-3 C.B. (Vol. 1) 521, 585.

Section 274(l)(2), added by the Tax Reform Act of 1986, provides that in the case of a skybox or other private luxury box leased for more than one event, the amount allowable as a deduction with respect to such event shall not exceed the sum of the face value of non-luxury box seat tickets for the seats in such box covered by the lease.

Section 274(f) provides that section 274 shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity). In the case of a taxpayer which is not an individual, the preceding sentence shall be applied as if it were an individual. The legislative history is brief.

The restrictions provided by your committee's bill are not to apply with respect to items which are deductible under specific

provisions of law which apply both to business and nonbusiness taxpayers. Thus deduction for interest paid on a loan to acquire an entertainment facility or property taxes paid with respect to it would continue to be allowed as a deduction, whether or not the entertainment facilities meet the tests of the new provision.

H. Rept. No. 1447, 87th Cong. 2d. Sess., reprinted in 1962-3 C.B. 402, 430.

In this case, the amount S Corporation paid to Foundation in connection with the use of a skybox for more than 1 event exceeded the sum of the face value of non-luxury box seat tickets for the seats in the particular skybox. Under section 274(l), the excess would not be deductible unless, in accordance with section 274(f), a deduction would be specifically allowed, under another Code provision, to a taxpayer (treating as an individual a taxpayer that is not an individual) without regard to the payment's connection with the taxpayer's trade or business (or income-producing activity). As discussed in issues (1) and (3), a deduction of a portion of S Corporation's payment is specifically allowed, pursuant to section 170, without regard to the payment's connection with its trade or business. Accordingly, under section 274(f), section 274(l) does not disallow a deduction determined under section 170 with respect to S Corporation's payment to Foundation.

FOOTNOTES

/1/ Section 170(c) defines "charitable contribution" as a contribution to or for the use of, among others, a State or a foundation organized and operated exclusively for educational purposes.

/2/ Under section 170(b)(1), the percentage limitation on charitable contributions for an individual is 50%, 30%, or 20% of the taxpayer's contribution base (generally adjusted gross income) for the taxable year depending generally on the type of property and the type of qualified donee. Under section 170(b)(2), the percentage limitation on charitable contributions by a corporation is 10% of the taxpayer's taxable income with certain adjustments.

/3/ Section 170(l) was enacted by the Technical and Miscellaneous Revenue Act of 1988, P.L. 100-847, section 6001(a), 102 Stat. 3683 (188), and is effective for taxable years beginning after December 31, 1983.

/4/ An organization described in section 170(b)(1)(A)(iv) is an organization which, as pertinent here, normally receives a substantial part of its support from any State or from direct or indirect contributions from the general public, and which is organized and operated exclusively to receive, hold, invest, and administer property and to make expenditures for the benefit of a college or university that is an education organization (as described in section 170(b)(1)(A)(ii)) and that is an agency or instrumentality of a State or which is owned or operated by a State or by an agency or instrumentality of a State.

/5/ An education organization defined in section 170(b)(7)(A)(ii) is one which normally maintains a regular facility and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on.

/6/ Under section 3304(f), the term "institution of higher education" means an education institution in any State which --

admits as regular students only individuals having a certificate of graduation from a high school, or the recognized equivalent of such certificate;
is legally authorized within such State to provide a program of education beyond high school;
provides an educational program for which it awards a bachelor's or higher degree, or provides a program which is acceptable for full credit toward such degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and
is a public or other nonprofit institution.

/7/ Section 170(f)(13) provides that no deduction shall be allowed under section 170(a) for any contribution of $250 or more unless the taxpayer substantiates the contribution by a contemporaneous written acknowledgment of the contribution by the donee organization that includes the following information: (1) The amount of each and a description (but not value) of any property other than cash contributed; (2) whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in (1); and (3) a description and good faith estimate of the value of any goods or services referred to in (2) or, if such goods or services consist solely of tangible [illegible text] benefits, a statement to that effect.