## Facts

- The National Collegiate Athletic Association (NCAA) is a § 501(c)(3) tax-exempt association that sponsors numerous intercollegiate athletic championships, including the Division I Men’s Basketball Championship.
- For the 1982 “Final Four” in New Orleans, the NCAA authorized an “Official Souvenir Program” containing editorial content and paid advertising.
- The NCAA contracted with Lexington Productions (Jim Host & Associates) to produce the program and to solicit and sell advertising.
- Under the arrangement, Lexington handled the commercial operations (ad sales, production, distribution) and bore the risk of loss; the NCAA retained approval and control over editorial content and the use of its name and related indicia.
- The NCAA received more than $55,000 as its share of the profits tied to advertising sales in the program.
- The IRS treated the NCAA’s receipts as unrelated business taxable income (UBTI) under I.R.C. § 512, rejecting the NCAA’s claim that the payments were excludable “royalties” under § 512(b)(2).
- The NCAA conceded the advertising was not substantially related to its exempt purposes, but argued the receipts were excluded as royalties (and alternatively argued the activity was not “regularly carried on”).

## Issues

1. Whether the NCAA’s receipts attributable to advertising in the Final Four souvenir program constituted UBTI under I.R.C. § 512(a)(1).
2. Whether those receipts were excludable from UBTI as “royalties” under I.R.C. § 512(b)(2) because they were paid for the use of the NCAA’s intangible rights (name, marks, and event-related rights), rather than from the NCAA’s operation of an advertising business.

## Decision

- The Tenth Circuit reversed the Tax Court and held the NCAA was not liable for the asserted unrelated business income tax deficiency for the year at issue.
- The court concluded the receipts at issue were “royalties” within the meaning of § 512(b)(2) and therefore excluded from UBTI.
- Because the royalty exclusion resolved the dispute, the court did not decide whether the advertising activity was “regularly carried on” under § 512(a)(1).
- After the decision, the IRS issued a formal non-acquiescence (AOD 1991-015), indicating it would not follow the holding outside cases appealable to the Tenth Circuit.

## Legal Principles

- For UBIT purposes, “royalties” under I.R.C. § 512(b)(2) are generally payments for the use of intangible property rights (e.g., trademarks and similar valuable rights).
- A payment can qualify as a royalty even if computed by reference to advertising receipts, so long as the payment is consideration for the use of intangible rights rather than compensation for services.
- Where a third party conducts the commercial advertising activity and bears the related business risks, and the exempt organization functions primarily as a licensor of its intangible rights, the exempt organization’s receipts may be treated as excluded royalty income rather than UBTI.
- IRS non-acquiescence reflects the agency’s position that it may continue to litigate its interpretation in other circuits despite an adverse circuit decision, absent Supreme Court resolution or statutory change.

## Conclusion

The Tenth Circuit held that the NCAA’s share of Final Four program advertising proceeds was consideration for licensing intangible rights and therefore excludable “royalty” income under § 512(b)(2), reversing the Tax Court’s UBTI determination; the IRS later announced it would not apply the decision outside the Tenth Circuit.


Nat’l Collegiate Athletic Ass’n v. Comm’r, 914 F.2d 1417 (10th Cir. 1990)