Bill Thomas to Myles Brand: Justify Your Existence
DevilGrad goes tax geek on the NCAA.
Since most of you probably do not subscribe to Tax Notes Today, I wanted to pass along today's fascinating news that House Ways & Means Committee chairman Bill Thomas sent an eight-page letter to Myles Brand on Monday asking a series of detailed questions regarding the continuing justification for allowing the NCAA and major college football and men's basketball to remain tax-exempt.
According to Thomas, "Educational organizations comprise one of the largest segments of the tax-exempt sector, and most of the activities undertaken by educational organizations clearly further their exempt purpose. The exempt purpose of intercollegiate athletics, however, is less apparent, particularly in the context of major college football and men's basketball programs." The letter asks many pointed questions about the NCAA's commitment to academics and the true relationship between big-time athletics and the educational missions of the universities they purport to represent. Two questions are particularly illustrative:
- "From the standpoint of a Federal taxpayer, what benefits does the NCAA provide taxpayers in exchange for its tax exemption."
- From the standpoint of a Federal taxpayer, why should the Federal government subsidize the athletic activities of educational institutions when that subsidy is being used to help pay for escalating coaches' salaries, costly chartered travel, and state of the art athletic facilities."
In USA Today, Tulane sports law expert Gary Roberts was quick to dismiss this as grandstanding because there is "no chance" Congress would act to revoke the NCAA's tax-exempt status. But, with all due respect to Professor Roberts, he is dead wrong on this one because the IRS already has the statutory authority to act on its own in this matter.
At the risk of going geek on you here, Section 501(c)(3) of the Internal Revenue Code grants tax-exempt status to several kinds of non-profit entities, including charitable, educational, and amateur athletic organizations. That exemption, however, is not absolute and is intended to cover only activities and programs related to the organization's exempt purpose, or as Chairman Thomas put it, "the activity itself must contribute to the accomplishment of the university's educational purpose (other than through the production of income)." When otherwise exempt organizations engage in commercial business activities, Sections 511-515 impose an "unrelated business income tax" (UBIT) on those activities, on the theory that activities that would be taxable when done by private corporations should not receive a tax subsidy just because they are done by "non-profit" organizations. (To give you an example, the paradigm case that led to the enactment of this provision in 1969 was New York University's ownership of the Mueller spaghetti company and claim that the income from pasta sales was not taxable because NYU was an educational institution.) Although Thomas doesn't say so outright, he seems to be asking why big-money Division I programs should be permitted to act more and more like professional sports franchises without paying taxes.
Under existing law, the IRS could simply revoke the NCAA's tax-exempt status (which must be reviewed at least once every three years) on the grounds that it no longer serves a primary purpose of fostering either education or amateur athletic competition. If Professor Roberts doesn't believe that could happen, he must not have paid attention to the IRS's recent audit of the NAACP, which sent shockwaves through the exempt organizations community before being resolved favorably to the NAACP. Short of that, the IRS simply could find that major-college athletic departments are subject to UBIT, and I believe it would have both ample statutory authority and factual grounds for doing so.
Thomas is retiring at the end of this Congress, and his views on this matter may not be shared by other members of the Ways & Means Committee. It is also unclear how much appetite the IRS would have for this without strong pressure from the Hill. Still, Myles Brand -- and all of the big-revenue, big-expense athletic departments out there -- just received a serious shot across the bow. Their efforts to justify tax-exemption may only serve to highlight how far college athletics have strayed from their stated purpose. It will be interesting to see how the NCAA and the BCS-type athletic directors respond to Chairman Thomas's implied threat to their livelihoods.
UPDATE: The Indianapolis Star did a much better job with this story than did USA Today. The Star tracked down Bruce Hopkins, author of the leading treatise on tax-exempt organizations, and also a variety of NCAA reformer-types, including our good buddy David Ridpath (who they note is now at Ohio U).
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