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On November 17, Senator Maria Cantwell of Washington sent a Letter to the Chief of Staff of the Joint Committee on Taxation (JCT) requesting assistance to develop legislative proposals to address the tax implications of college athletics. Noting the "evolving market dynamics of college sports coupled with changes in the legal framework affecting college athletes," Senator Cantwell indicates it may be time to "rethink the tax-exempt regime under which college sports currently operate ..."
Colleges and universities have been at the forefront of questions from the current administration as well as the subject of scrutiny for years, including from Congress and the IRS. Recently, the Administration called for the revocation of Harvard's tax-exempt status and issued orders regarding DEI initiatives at colleges and universities, resulting in some institutions cutting such programs or reaching settlements to ensure continued federal funding.
College sports also continue to receive attention. On June 9, 2023, the IRS issued a Generic Legal Advice Memorandum (GLAM) concluding that organizations formed to serve as Name Image and Likeness (NIL) collectives for student athletes do not qualify as Section 501(c)(3) organizations. And, more recently, the House settlement involving the NCAA effectively authorized and directed schools to make payments to student athletes for NIL.
However, the letter from Senator Cantwell is the first to question the tax-exempt status of college athletics more generally by calling for a universal examination, including whether they should continue to be considered activities that further Section 501(c)(3) purposes.
Specifically, Senator Cantwell's letter requests an analysis of the following:
- the implications of no longer allowing schools in the NCAA to operate as tax-exempt organizations;
- the implications of subjecting revenue from college athletics to unrelated business income tax (UBIT);
- whether Congress should codify rules regarding the operation of NIL collectives expressed in the GLAM;
- whether the Internal Revenue Code (IRC) Section 4960 excise tax has been "effective in reigning in excessive compensation to college coaches;"
- whether there are other measures Congress should consider to address excessive compensation for coaches, including compensation paid to coaches who are fired (i.e., through buyouts); and
- how the tax implications for student-athletes differ depending on whether they are classified as employees or independent contractors.
Whether and how the JCT will take action on this request remains to be determined, including if it will address the fact that the IRC Section 4960 excise tax does not currently apply to many public colleges and universities.
Other questions remain. For example, will any conclusion that university athletics constitute a trade or business affect a school's overall qualification for Section 501(c)(3) status, particularly if those activities are or become substantial in relation to an institution's overall activities? Is it possible that the letter and any resulting analysis may result in a deeper look at college and university tax law compliance more generally, similar to the IRS College and University Compliance Check and Report issued in 2013? What would be the result if each college sport were, for purposes of the UBIT rules, treated as a separate activity? Would an institution be prohibited from applying the loss from one sport to the gain from another? Finally, is it possible that the Congress and the IRS could treat some sports as IRC Section 501(c)(3) educational activities and others as unrelated trades or businesses?
For now, these are only questions. But colleges and universities may wish to look more closely at their athletic programs and the revenue from them, as well as overall IRC Section 501(c)(3) compliance more generally to be prepared for any changes ahead.
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