Now we get to the rub of the matter. The NCAA makes a compelling argument that athletics are related to its educational (and therefore nonprofit) purpose (here). However, the specific activity, if regularly conducted, must be directly related to the nonprofit purpose. Again, the production of income which is used for the nonprofit purpose is not enough to be directly related. If the activity is not directly related, it is subject to Unrelated Business Income Tax (UBIT).
The IRS long ago found that ticket sales were not subject to UBIT. When challenged about broadcast revenue it could find not distinction. Their reasoning:
an audience for a game may contribute importantly to the education of the student/athlete
in the development of his/her physical and inner strength and to the education of the student body and the community-at-large in heightening interests in and knowledge about the participating schools. In regard to the student-athlete, the knowledge that an event is being observed heightens its significance, which raises the levels of both competitive effort and enjoyment. Attending the game enhances student interest in education generally and in the institution because such interest is whetted by exposure to a school's athletic activities. Moreover, the games (and the opportunity to observe them) foster those feelings of identification, loyalty, and participation typical of a well-rounded educational experience.
The IRS makes two claims here. First, is that an audience helps “the development of his/her physical and inner strength” of the participant. The second is that it heightens “interests in and knowledge about the participating schools.” Let me address the second claim first.
As if it were not obvious, I established in Part III that the principal purpose of big-time college athletics is the direct and indirect production of income for the university. This goes hand in hand with increasing the public’s interest and knowledge about the schools. This, in turn, increases their revenues. This is not an educational purpose. Moreover, as I argued before, the federal government has no interest in raising awareness of one school over another.
Turning to the other argument, this notion that an audience gives additional educational benefit to its students is tenuous. Even if we concede that the players at the University ofTexas got more educational benefit out of playing in the nationally televised Rose Bowl, than say, a player in the Division III field hockey championship, this benefit is only marginal. A marginal benefit is not enough. Instead, the activity (in this case the championship game) must be substantially related to the educational purpose. The defending national championship Division I football program graduated 29% of its players compared to 74% of its student body. Given the apparent inverse relationship between educational performance and big-time college athletics, this notion that the educational benefits are better seems crazy to me.
The IRS position was based on its interpretation of Congress’ intent. Chairman Thomas is signaling that that intent might change . . .
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