In March, the Internal Revenue Service issued several proposed regulations regarding the treatment of unrelated business income as it applies to corporate sponsorship payments.

The NCAA has joined with a coalition of colleges and universities to comment on the proposed regulations. I've also written directly to the IRS on behalf of the NCAA to express concern with the proposals.

Among the most significant of the proposals is the tax treatment of "exclusive-provider arrangements" between institutions and corporations. Under the proposed changes, schools that make companies exclusive providers of products or services likely would pay unrelated business income tax on a portion of the sponsorship payment.

For example, contracts entered into by schools with soft-drink companies for "exclusive pouring rights," which generally are structured as tax-free agreements, could change under the proposed regulations. The IRS proposals indicate that the exclusive-provider status, along with the visibility and other promotional perks of a soft-drink agreement, is a "substantial return benefit" to the company, an interpretation that would require the school to treat a portion or all of the soft-drink company's payment as unrelated business income.

This is contrary to legislation Congress adopted in 1997 that provided favorable treatment to nonprofit organizations, including colleges and universities, regarding unrelated business income as it applies to corporate-sponsorship payments. Since 1993, in fact, the IRS has taken the position that the exclusivity agreements could be excluded from tax. Tax-exempt organizations have relied on this longstanding position and have entered into agreements with corporate sponsors with the understanding that income from those agreements would not be subject to tax.

It is not equitable for the IRS, without any statutory or other authority from Congress, to suddenly suggest that this income is now taxable.

For the NCAA and its members, corporate-sponsorship arrangements are a valuable source of income. Corporate support allows schools to provide thousands of young people with scholarships, training and coaching,

equipment, travel, athletics facilities, and academic and program support. Those dollars also provide expanded participation opportunities for student-athletes. The IRS proposals would have an adverse impact on this important income source.

If made final in their current form, the proposed regulations will result in additional tax being placed on corporate-sponsorship arrangements, thus reducing the funds available for schools' educational and student-athlete participation endeavors. Those activities therefore will be either reduced or eliminated. Alternatively, additional direct governmental funding will be required at the federal, state or local level; or tuition and other charges to students and their parents will need to be increased.

Also, some sponsorship payments are pledged for specific purposes, such as repayment of tax-exempt bonds issued to finance a facility. To the extent that amounts not believed to be taxable at the time they were pledged become taxable as a result of the proposed regulations, a school's ability to meet its obligations will be put at risk.

Nonprofit organizations enter into any number of agreements that could conceivably be treated as exclusive-provider arrangements under the proposed regulations. They can range from simple procurement arrangements whereby a single vendor for goods or services (for example, paper products) is selected based on a variety of factors, to complex arrangements involving discounts, cash payments and naming rights.

Many types of contracts are exclusive by nature. For example, it generally is not feasible to have more than one food-service provider operating a school's cafeteria or more than one bookstore operator running the campus bookstore, or to have more than one television network broadcasting the same football game. In some cases, contracts explicitly provide for exclusivity; in others, it simply happens in operation. Many governmental entities, such as state universities, are subject to procurement rules that require or encourage the selection of a single low-cost provider for a particular good or service.

The proposed regulations do not clearly indicate the types of arrangements that are and are not treated as exclusive-provider arrangements. The proposals also do not indicate whether and under what circumstances procurement arrangements are treated as exclusive-provider arrangements; nor do they address the difficulties in determining the fair market value of an exclusivity right or the amount of sponsorship payment in situations where the organization receives discounts or some other form of consideration in addition to, or in lieu of, cash payments.

Taxpayers, including NCAA member colleges and universities, need guidance from the IRS that clarifies their tax obligations. This guidance must be consistent and predictable in order for schools to adequately plan their affairs and properly complete their tax returns and pay the required tax. The NCAA coalition is concerned that the proposed regulations, rather than making schools' tax-paying obligations more clear, make them less so. This is especially true with respect to the proposed treatment of payments under exclusive-provider arrangements. It is important for current IRS regulations to be consistent with regulations that NCAA schools have long abided by; otherwise, schools stand to suffer drastic and unfair consequences as taxpayers.

The NCAA coalition believes that the rules regarding exclusive-provider arrangements should be eliminated in their entirety from the final regulations. In the event that those rules are not eliminated, at a minimum, the final regulations should include a "no inference" rule targeted at exclusive-provider arrangements, which would indicate that payments made under exclusive-provider arrangements are not subject to unrelated business income tax.

The coalition will continue to monitor IRS actions regarding this issue.

The coalition serves as an example of how the NCAA can address challenges collectively on occasions when it would be more difficult for schools to effect change individually.

Cedric W. Dempsey is the president of the NCAA.