Pacerpundit

NCAA Tax Exemption - Part IV

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 . . .  

NCAA Tax Exemption - Part III

The NCAA makes a compelling argument that participation in athletic competition fosters its educational mission.  Its hard to disagree in principle.  However, here's the heart of the matter:

Q.  Educational institutions in other NCAA divisions spend a fraction of the amount Division IA schools spend on their football and men’s basketball programs. These higher expenditures are ostensibly for educational purposes. What additional educational value is received by participation in Division I-A athletics beyond that which is received by participation in other division or intramural athletics? If additional educational value is derived from participation in Division I-A athletics, does the additional educational value justify the higher expenditures?

A. Generally speaking, educational institutions in other NCAA divisions spend a fraction of the amount Division I-A schools spend on any of their other educational programs. For example, the budget for the mathematics department, as well as the athletics department, at Ohio State University is larger than the budget for the mathematics department, or athletics, at Defiance College in Ohio. Even though each institution has invested to a considerably different level, both are providing a quality educational experience and meeting the expectations of their students. In fact, because of higher amounts of outside revenue to support athletics at Ohio State, the athletics budget at Defiance – or any other Division II or III institution – is considerably higher as a percentage of institutional resources than at Division I schools. Is the difference in the educational experience of students at a large public university quantitatively better than at a small private college? It may or may not be, but we generally don’t try to make that quantitative differentiation. We understand that there are different approaches for a variety of reasons and to accommodate a diversity of circumstances. A more robust athletics program is often identified as one of the advantages of attending a larger school. The range and cost of programs – in athletics as well as in academics – are largely responsive to expectations of students, parents, alumni and others, as well as the financial circumstances of each institution and are difficult to quantify. Nonetheless, all NCAA member institutions conduct their athletics programs consistent with the academic missions of their respective campuses.

The question is, if the "educational" benefits an athlete receives from participating in sports is what justifies the exemption of the activity, what additional benefits do football players at say, Ohio State, get, that football players at a Division III school not get?  The NCAA says, basically, the math budget is higher at Ohio State than it is at a division III school, so who's to say what method is best.  Yes, but the math budget is higher because they have thousands of more students.  But what justifies the additional marginal cost PER STUDENT of big-time division I athletes.  Certainly its not the additional educational benefits received by those students.  Indeed, statistics cited elsewhere in the NCAA's response, suggest the relationship is inverse.  That is, the big time athletes get less educational benefit than the participants at small schools and in less visible sports.  Their graduation rates are drastically lower, etc, etc.  

The obvious answer is that Ohio State spends more per football player than a Division III program not because its program provides better educational benefits to the athletes, but principally to generate income for Ohio State.  This income is certainly generated directly through ticket sales, bowl revenues, tv income, merchandise sales, etc.  But it is also generated indirectly.  The success of the football program increases the exposure of the school and increases (dramatically) alumni donations and participation.  This is all fine and good, but Thomas' point is that this mission is NOT a permissible nonprofit activity (see post I).

NCAA Tax Exemption - Part II

There are a couple of comical non-sequiturs in the NCAA's response.  Here's one (quoting only part of the Q&A):

Q.  Some representatives from college athletic organizations have justified the tax-exempt status of college sports based on claims that high-visibility programs help sustain a large pool of student applicants and generous financial contributions. Neither of these arguments is valid from a Federal standpoint. Federal taxpayers have no interest in increasing applicant pools at one school opposed to another.

A.  Many nonprofits engage in activities designed to increase membership, visitors and revenues. Symphony orchestras schedule “old warhorses” that attract more patrons, visibility and contributions than less-“accessible” works. Similarly, art museums schedule “blockbuster” shows of popular artists or artistic movements designed to draw crowds, raise visibility and, again, to encourage membership and contributions. Many charitable organizations advertise in one form or another – on television, on radio, in the print media and by direct mail.

The NCAA is avoiding the question.  The question is, what interest does the federal taxpayer have in exempting income derived from activities whose primary purpose is to get more students to attend (and alumni to donate to) one university versus another.  The NCAA characterizes the issue as one of a non-profits right to promote its activities.  Symphonies are not usually directly competing with other symphonies.  The NCAA members, by contrast, are directly competing.  What Thomas is asking, and what the NCAA is not answering, is what interest does the federal government have in subsidizing this competition.  If the mission of the NCAA member institutions is to promote education, should they really care whether a student chooses their university over another credible institution?

NCAA tax exemption - Part I

For my first sports business post, I want to take on the fascinating issue of the NCAA's tax exemption.  For those of you who don't know me, I am not being sarcastic.  I actually find this stuff interesting. 

By way of background Bill Thomas, the Chairman of the House Ways and Means Commission, sent Myles Brand, the NCAA President, a letter questioning the NCAA's tax exemption.  Thomas noted:

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?

Brand's answer is at http://taxprof.typepad.com/taxprof_blog/2006/10/house_questions.html.  In this series of posts I will address the NCAA's response.