Mark Alesia of the Indianapolis Star reports that the U.S. House and Ways Committee has begun a quiet investigation into whether the NCAA, conferences, and school athletic departments have misused their tax exempt status as non-profit entities (Alesia, "NCAA's Tax Exemption Called into Question," Indianapolis Star, Mar. 11, 2006). The NCAA qualifies for the non-profit exemption because it claims to be "organized and operated exclusively for educational purposes." Although the NCAA denies that it has been contacted by anyone from the Ways and Means Committee, a staff member of the Committee recently interviewed former University of Michigan president James Duderstadt about possible misuse of the tax-exempt status by the NCAA and others.
Brad Wolverton of the Chronicle of Higher Education reports that two other "college officials" have been interviewed by the Committee (Wolverton, "House Committee is Looking Into Whether Some College Sports Revenue Should be Taxed, Three College Officials Say," Chronicle of Higher Education, Mar. 10, 2006). Wolverton also summarizes the legal question:
Aides to the committee asked questions about whether certain revenue generated by college-sports programs and the National Collegiate Athletic Association should be treated as "unrelated business income" and taxed. According to the college officials interviewed by the committee's aides, lawmakers are concerned that big-time sports programs are evolving into commercial entertainment businesses that are only marginally connected to the tax-exempt purposes of higher education.Interestingly, Duderstadt told the Committee that the NCAA, conferences, and school athletic departments no longer represent nonprofit, educational missions: "In reality, they have less and less connection to that. Coaches have compensation in the millions and (athletic directors) are moving up into the stratosphere."
Duderstadt's remarks appear quite true. Just consider the earnings of Duke mens' basketball coach Mike Krzyzewski. He has a lifetime contract with Duke University that pays $800,000 per year, but with other allowances and benefits, earns about $1.5 million per year from the University. He earns another $1.5 million per year from his endorsement contract with Nike. Although he is among the highest-grossing collegiate coaches, many other coaches also do quite well.
And the NCAA's tax-exempt status has drawn critique for some time. Back in 1998, Professor Daryl Wilson wrote, "The NCAA presently maintains a tax exempt status, although its organizational structure and operation is purely corporate. Eighty-two percent of the NCAA's $ 220 million dollar plus budget is derived from television revenues. The televised sports are traditionally big-time athletic events involving big-name schools. Has anyone ever seen any televised event featuring the smaller schools mentioned in this article?" (Daryl C. Wilson, "Title IX's Collegiate Sports Application Raises Serious Questions Regarding the Role of the NCAA," 31 John Marshall Law Review 1303, n. 94 (1998)).
More recently, Erin Guruli writes,
A number of sports and tax commentators have questioned the role of the NCAA with respect to its stated purpose, which is to further amateur sports and to support the educational function of colleges and universities. Specifically, questions have surfaced because, although the NCAA has enjoyed tax exemption based on its nonprofit status and college athletics being an integral part of education, "it has its own marketing and licensing arm, an annual budget of more than $ 270 million, and an executive pay scale that rivals that of any other large business."How about some good arguments in favor of the NCAA's tax-exempt status? Give'em your best shot in the comments section.
Other specific activities undertaken by the NCAA have raised concerns as well. The NCAA has entered into an eleven-year contract with CBS to broadcast the "March Madness" basketball games, which has added to the controversy inherent in the commerciality of collegiate sports. Throughout the term of the contract, the NCAA will be paid $ 6 billion, equaling approximately $ 545 million per year, which is subsequently paid out to the NCAA member schools. Commentators have, again, pointed out that "when it comes to money, there is nothing amateur about the NCAA basketball championship" primarily because of "how much loot is hanging on college hoops" during March Madness. Consequently, the IRS should intervene to determine the actual purpose of the NCAA, and to evaluate the true extent to which certain activities engaged in to promote collegiate athletics contribute to the educational purpose of colleges and universities.
If Congress threatens to tax the NCAA, the NCAA might ultimately be persuaded to implement reforms that will be effective, such as "prohibiting schools from putting players in hotels for home games, saving millions of dollars a year" and reducing football rosters from over eighty-five scholarships to fifty-five players or less, which is comparable to professional football rosters. (Erin Guruli, "Commerciality of Collegiate Sports: Should the IRS Intercept?," 12 Sports Lawyer Journal 43, 58 (2005).
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