With the Final Four upon us, HBO chose this weekend for a scathing critique of the incredibly corrupt system of big time college athletics. If you didn't watch it, you owe it to yourself to track it down.
The college presidents will never dare undertake serious reform. Instead, if there's going to be reform, it's going to come from the outside.
The simplest solution? The unrelated business income tax.
As non-profit organizations, NCAA colleges and universities are mostly tax exempt. At present, that includes the huge profits that are generated by many big time football and basketball programs (of course, not all are profitable; some are cash sinks dragging down the rest pf the university).
These profits go to support enormous salaries for coaches, bowl game officials, top NCAA executives, athletic department staff, and so on. Sure, at some schools, some pittance goes to support non-revenue sports, but that can't excuse the massive corruption that pervades revenue sports.
Congress created the Unrelated Business Income Tax so that income from regularly carried on business activities that do not further the organization's exempt purposes would be taxed as though earned by a for profit corporation. Colleges and universities are getting a free ride on the UBIT right now. Despite the increasingly commercial nature of big time revenue sports--in which everybody but the players is getting rich--the IRS has failed to consider whether college athletics really advances the exempt educational purposes of colleges and universities.
I'm not a tax lawyer, of course, so the arcane rules of the UBIT are outside my expertise. But I know an expert on this subject. My friend and former Illinois colleague John Colombo last year published an article which suggests that my preferred approach won't work, but offers some alternatives:
The purpose of this article is two-fold. First, it will explain the concepts of federal tax-exemption law as they apply to the NCAA and to the universities operating Division I football and basketball programs. As the article indicates, current law makes it virtually impossible for the IRS to withdraw exemption either from the NCAA or universities operating major athletic programs. It is somewhat more plausible that the IRS could tax revenues from Division I college athletics under the UBIT, although even that course of action would have to scale considerable legal hurdles. Moreover, even if the IRS applied the UBIT to big-time athletic revenues, this course of action likely would end up largely a "paper tiger" because the evidence suggests that virtually none of these programs would have taxable net income in the tax accounting sense after applying appropriate cost accounting. Of course, the law can be changed; Congress could certainly attach particular conditions to tax exemption for the NCAA or universities conducting Division I basketball and football programs if it desired.
The second part of this article, therefore, examines the tax policy issues raised by college athletics, particularly whether these programs fit within a theoretical paradigm that demands they be exempt from taxation, or whether instead big-time college athletics should be considered a sui generis exception to general tax policy. The reason this is important is that if major college football and basketball do not fit in any standard theoretical paradigm for exemption, then we should forthrightly recognize that continuing tax-favored treatment for these activities is an "exception" to general tax policy - much like a local community abating property taxes to induce a business to locate there. Such a conclusion, in turn, means that Congress could consider attaching special conditions to continuing tax exemption for the NCAA and universities engaged in big-time athletics without worrying about any damage to established tax policy or principles - in other words, this is the "hook" reformers can use to press their case. While the exact scope of these special conditions should be debated by experts in college athletics, I note in the final section of the article that there are precedents in tax law for (1) attaching conditions on the use of proceeds from an exempt activity (e.g., a requirement that big-time athletic revenues be used to subsidize other charitable outputs, such as increased athletic opportunities in non-revenue sports or for women); (2) expenditure limits such as caps on coaching salaries, and (3) expanded disclosure via a schedule to Form 990, similar to the new Schedule H for hospitals, that would require both the NCAA and universities with athletic programs to provide more information regarding their programs and the academic progress of student-athletes.
In the article's conclusion, John summarizes his findings, explaining that:
... the various tax theories underlying tax exemption and the UBIT do not support exempting big-time football and basketball revenues from taxation. These programs are not consistent with underlying theories of exemption, and in fact are perfect examples of why commercial revenues of charities should be subject to taxation. There is no general tax policy reason to exempt these revenues from tax; accordingly, Congress would be completely justified in attaching special limitations on the continuation of tax-favored status for entities conducting or providing services for college athletics as a means of furthering public policy goals outside of the tax field. These special limitations could take the form of mandating particular use of revenues, limiting expenditures (particularly coaches' salaries and recruiting expenditures), and/or mandating increased disclosure, all of which have current analogues in the Code or IRS procedure.
So even if I'm wrong in thinking that UBIT could be applied to college athletics under current law, I take solace in the fact that tax expert Colombo agrees that the underlying tax policy does "not support exempting big-time football and basketball revenues from taxation."
It's time to tax big time college athletics and to take a good look at those other special limitations too.