The NCAA, Tax Exemption, and College Athletics
John D. Colombo | 2010 U. Ill. L. Rev. 109
This Article discusses the contentious topic of the National Collegiate Athletic Association’s (NCAA) status as a tax-exempt organization. In late 2006, Congress asked the NCAA to justify its exempt status, and since that time many have called for a change in that status. Calls for reform cite reasons such as the amount of money paid to Division I football and basketball coaches, the fact that NCAA football and basketball are essentially minor-league systems for the NFL and NBA, and an alleged lack of relation between college athletics and academics. The Article serves two purposes: first, it seeks to clarify the manner in which tax rules apply to the NCAA and universities’ operation of Division I football and basketball programs; and second, it provides a policy-oriented view of whether big-time college athletic programs—and the NCAA—fit into a standard theoretical paradigm for exemption.
The first part of the Article explains that, under the current laws, it would be nearly impossible for the Internal Revenue Service (IRS) to withdraw the NCAA’s tax exemption and the tax exemptions of its member institutions. A more feasible alternative would be to tax Division I athletics revenues using the Unrelated Business Income Tax (UBIT). This option, however, presents its own legal obstacles and, if successful, would likely be a “paper tiger,” as the NCAA and universities would possess little or no taxable net income after applying cost accounting. Further, the disclosures that universities would be required to make under Form 990-T would not approach the level of disclosure desired by reform advocates.
The second part of the Article contends that the tax system should not be changed haphazardly to promote reform of NCAA athletics, and examines whether college sports fall into an existing paradigm for exemption or should be considered a class of their own for tax law purposes. If NCAA athletic programs do not fall into a standard paradigm, Congress would be able to attach conditions to their exemption without damaging established tax principles.
Finally, the Article points out the existence of several regulatory approaches that could be applied to the taxation of college athletics. Those approaches consist of placing conditions upon the use of proceeds from collegiate football and basketball revenues, limiting athletic department expenditures, and mandating enhanced disclosure by the NCAA and its member institutions of financial information as well as the academic progress of student-athletes.