Wednesday, August 09, 2000

Sale of rights required changes

Marketing deal altered tax status

By Sarah Anne Wright
The Cincinnati Enquirer

        MASON — The Tennis Masters Series Cincinnati tournament, where qualifying matches are under way, has more new this year than a telegenic color change to the courts.

[photo] Pete Sampras is framed by the logo of Mercedes Benz, a worldwide sponsor of the Tennis Masters Series.
(Michael E. Keating photo)
| ZOOM |
        When the nine international host cities of the Tennis Masters Series — Cincinnati among them — sold their exclusive commercial rights collectively to ISL, an international sports marketing firm, tournament officials had to do some behind-the-scenes reorganization, or risk paying as much as $2 million in taxes.

        With the sale of exclusive commercial rights to one sponsor, the IRS could penalize Tennis for Charity Inc., the tax-exempt organization that runs this week's Tennis Masters tournament, and charge the group 34 percent on sponsorship revenue.

        ISL owns everything except the ticketing, hospitality and some on-site merchandising sales at the 10 Tennis Masters events. It is attempting to sell up to 14 global sponsorships to the tune of $8 million to $10 million a year each.

        Currently, the firm has five global sponsors, a big reduction from about 200 corporate associations.

        “Less is more,” said Jack Vincent, head of strategic marketing and branding for tennis for ISL.

        A tax-exempt organization has greater limits on the kinds of revenue it can generate and can be stung by a hefty tax on income — such as sponsorship revenue — that's unrelated to its exempt purpose.

        Sponsorship is no piddly portion of the tournament's revenue. In the past, it has taken more than 60 percent of its revenue through corporate sponsorships, which include hospitality tents and advertising opportunities.

        As an exempt organization, Tennis for Charity works like an annual fund-raiser, hosting a world-class sporting event and giving whatever is left in the coffers — minus a reserve for rainy days and improvements — to charity.

        Many high-profile sporting events, such as NCAA games, PGA tours and tennis championships are exempt organizations, placing their attention on the sport first, and charity second.

        “Our mission is to put on the best possible tennis match we can, and if we make money, that's great,” said Elaine Bruening, the local tournament's associate director.

        The sale of sponsorship rights “was driven by developments in tennis in general; it wasn't stuff happening here,” said Paul Flory, chairman of the tournament, run by Tennis for Charity Inc. “If you wanted the creme de la creme, you had to go along with the plan.”

        To keep the series in Cincinnati, Mr. Flory and other tournaments signed on with the international marketing plan.

        This year, sponsorship revenue from ISL will be paid to Tennis Cincinnati Inc., a for-profit corporation, which will, in turn, put the money back into the tournament, eliminating the tax burden.

        By sandwiching a for-profit corporation between the sponsorship dollars and Tennis for Charity, two things happen:

        • The new sponsorship could make more money for the tourna ment, which could offer more support to charity.

        • It eliminates some oversight. While tax-exempt organizations are required to disclose their financial information and means of revenue, for-profit corporations can keep sponsorship revenue private.

        “This was a very controversial agreement” when it was announced, said Dan Kaplan, who covers tennis for Street & Smith's Sports Business Journal. “There are concerns that the local flavor of the tournaments would be diminished as part of the effort.”

        The tournament will be changing from a “public charity,” which requires broad public support, to a “supporting organization,” now that the bulk of the tournament revenue will be coming from one source.

        Nonprofit does not mean “no profit.”

        The tournament has made money every year under the leadership of Mr. Flory. It has given about 4.25 percent of its net revenue annually to charity, according to Form 990s filed by the group with the IRS for 1995 to 1998.

        The move from public charity to supporting organization is more than a bland IRS tax distinction. It highlights the thorny role of corporate sponsorship at sporting events that are the lifeblood of many charities.

        Most businesses consider sponsorships of big sporting events an advertising cost. Yet the same activity, from a nonprofit perspective, is exempt from taxes.

        Information returns, or Form 990s, filed with the IRS show that as tournament revenue increased each year from 1995 to 1998, expenses rose by similar percentages.

        Prize money, which totals $2.95 million this year, is by far the tournament's biggest expense, about one-third of costs. Other costs include food, facility maintenance, construction, insurance, printing and administration.

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