NCAA v. Commissioner - 914 F.2d 1417 (10th Cir. 1990)

Rule:

Revenue of a tax-exempt organization must be considered unrelated business taxable income if: (1) It is income from trade or business; (2) such trade or business is regularly carried on by the organization; and (3) the conduct of such trade or business is not substantially related (other than through the production of funds) to the organization's performance of its exempt functions. Treas. Reg. § 1.513-1(a). If a taxpayer shows that it does not meet any one of these three requirements, the taxpayer is not liable for the unrelated business income tax.

Facts:

The National Collegiate Athletic Association (NCAA) sold advertising for its program for a final round of its annual tournament and did not report the revenue as unrelated business taxable income on its federal income tax return. The respondent Commissioner of Internal Revenue determined that the NCAA was liable for $ 10,395 in taxes on the revenue. The NCAA claimed that the advertising business was intermittent. The commissioner claimed that the business of selling and preparing advertising was regularly carried on, even though the tournament was seasonal. The United States Tax Court held that the revenue was unrelated business taxable income under I.R.C. § 512 and determined a deficiency in tax due. The NCAA appealed.

Issue:

Under the circumstances, did the NCAA owe tax on unrelated business taxable income? 

Answer:

No.

Conclusion:

The court conducted a de novo review of the tax court's application of law to facts. The court concluded that, under Treas. Reg. § 1.513-1(a), the NCAA's involvement in the sale of advertising space was not sufficiently long-lasting to make it a regularly-carried-on business solely by reason of its duration and that the activity was sufficiently infrequent to preclude a determination that it was regularly carried on. Because the NCAA program was published only once a year, it was not an unfair competitor for the publishers of advertising, so application of the unrelated business tax therefore would not further the statutory purpose. Accordingly, the court reversed the determination of the tax court that the NCAA owed tax on unrelated business taxable income.