Download Summer Sports Camp Revenue

Summer Sports Camp Revenue: Is It Related or Unrelated Business Income?
With summer approaching, this is a good time to review the tax rules relating to the
operation by colleges and universities of summer basketball, tennis, and other types of
sports camps.
In some cases, the institution itself may operate the camp using its own facilities and
employees, while in other cases the school may enter into an agreement with a third
party, often a coach, to operate the camp. Under either scenario, the first issue to be
considered is whether the income derived from the operation of the summer camp is
subject to the unrelated business income tax.
Over 30 years ago, the IRS considered both scenarios in a single ruling (Rev. Rul.
80-297 (www.irs.gov/pub/irs-tege/rr80-297.pdf)). In the first scenario, a school used its
tennis facilities for 10 weeks during the summer to conduct a tennis club that members
of the general public could use for a fee. Two school employees operated the summer
tennis club, collecting fees and scheduling court time. The facts were essentially the
same in the second scenario, except the school leased its facilities to an unrelated
individual for a fixed fee. The individual, together with two employees whom he hired,
operated the club.
The IRS said that the first situation resulted in unrelated business income, finding that
“the school furnishes more than just its facilities” and “operates the tennis club through
its own employees, who perform substantial services for the participants in the tennis
club.”
In the second situation where the tennis facilities were leased to a third party, the IRS
ruled that the activity was an unrelated trade or business, but the income was exempt
under the IRC §512(b)(3) rental income exclusion because the rental income was not
dependent, in whole or in part, on the net income or profit from the operation of the club,
and the school did not provide any services to the third-party individual.
Some Circumstances May Be Related
Clearly, however, there are situations in which a university-operated summer camp will
be treated as a related activity in furtherance of its exempt educational purposes. For
example, in one ruling (TAM 8020010), the IRS concluded that a summer sports camp
operated by a university for disadvantaged youths was related to the university’s exempt
purposes. In another ruling (TAM 8151005), the IRS found that the operation by a
college of a summer hockey camp, which provided athletic instruction for children up to
high school age, was a related activity because it was conducted as “an integral part of
the educational program of the college.”
Finally, in those situations where the institution leases its facilities to a coach or other
school employee, it needs to make sure that the rent charged for the use of the facilities is
set at a fair market rate. Otherwise, any less-than-fair-market-value charges could be
viewed as additional wage income to the coach and could even trigger the intermediate
sanctions provisions if the coach or other third party is a disqualified person.