Is the NCAA's Tax Exempt Status Endangered?

University of Washington School of Law 2L Martin Bingisser passes along a post by University of Cincinnati law Professor Paul Caron on TaxProf Blog concerning the U.S. House of Representatives' Ways and Means Committee intenstifying investigation into the NCAA's tax-exempt status. Led by Chairman Bill Thomas (R-CA), the Ways and Means Committee is reconsidering whether NCAA's "educational mission" justifies its tax exemption. While we've discussed the NCAA's tax exemption before, a story by Mark Alesia in today's Indianapolis Star sums up the issue and competing arguments really well:

In what amounts to a taxpayer subsidy, the NCAA, conferences and individual athletic programs do not pay taxes because of their tie to education. Donations to athletic programs, including those required for the right to buy premium tickets, are largely or fully tax deductible.

The NCAA budgeted $560 million in revenue for the current academic year. More than 90 percent of that comes from its television and marketing contract with CBS for the Division I men's basketball tournament. (Conferences, not the NCAA, control postseason major college football, because of their historic ties to bowl games.)

The NCAA says 95 percent of its money is returned to individual athletic programs in the form of payments and services. That helps fund the entire athletic department, including its lower-profile sports.

The [Ways and Means] Committee's letter acknowledges that, but says, "To be tax-exempt . . . the activity itself must contribute to the accomplishment of the university's educational purpose (other than through the production of income). How does playing major college football or men's basketball in a highly commercialized, profit-seeking, entertainment environment further the educational purpose of your member institutions?"

But before you think the NCAA is in trouble, consider these remarks by University of Illinois law Professor John Colombo, a tax expert:

Colombo believes the NCAA is in no real danger for two reasons: IRS precedent and the popularity of college sports.

"(The IRS is) going to reverse 40 years of their own precedent?" Colombo said. "And if they do, how will congressmen from Texas and California -- and let's throw Oklahoma in there -- react? It's a political non-starter.

"This is a not-so-subtle warning to the NCAA that its actions have consequences. The message is that Congress could step in and make your life miserable."

I wonder if impending political changes might change the equation here? With the Democratic Party seemingly poised to re-take control of the House of Representatives (especially in light of the apparent cover-up by GOP leaders on the Mark Foley cyber-molestation scandal), it's interesting to think about how a Democratically-controlled House of Representatives would investigate the NCAA. U.S. Representative Charles (Charlie) Rangel (D-NY), ranking member of the Ways and Means Committee, would likely become the Committee's Chairman, and given his background as a reformer and also someone particularly attune to the racial implications of rules and regulations (such as, perhaps, how the vast majority of college basketball and football players are African-American, how they produce the vast majority of revenue for the NCAA, and how they are denied any of that revenue while also being denied access to pro leagues--a separate, but obviously related issue), it might make for some interesting Congressional hearings in the years ahead.

Update: Check out True Hoop for some thoughts on how changing the tax exempt status of the NCAA could affect basketball development in the U.S.

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