Wednesday, April 30, 2014

Why the Northwestern Football Players Union Decision Isn't Going to Affect the Tax Treatment of Athletic Scholarships Any Time Soon

Though the press coverage of the decision by the NLRB hearing officer to permit Northwestern football players to unionize has quieted somewhat, I still get a number of phone calls every week from reporters asking whether this decision will affect the tax treatment of athletic scholarships.  My answer is "no."  Here's why I think this.

First, some background.  Section 117 of the Code provides an exclusion from gross income for "qualified scholarships" which essentially means scholarships that cover the cost of tuition, books and supplies.  Room and board is NOT included in this provision; hence scholarships for room and board already are included in gross income.  So room and board scholarships are already taxable.

With respect to the tuition/books/supplies scholarships, the argument that flows from the preliminary NLRB decision (it is being appealed to the full Board) is that by classifying the players as "employees" for purposes of the labor laws, scholarships will be taxable because they will be viewed as compensation for services rendered.  In fact, Section 117(c) contains an explicit provision that says that "scholarships" that are in reality compensation for services do not qualify for an exclusion from gross income.

This argument, however, misses several points.  First, in 1977, the IRS ruled that athletic scholarships qualified for the exclusion under 117 because the scholarship did not, in fact, represent compensation for services.  Rev. Rul. 77-263, 1977-2 C.B. 47.   The IRS decision was based upon the underlying structure and terms of the scholarship arrangement, NOT the status of the players as "students" vs. "employees."   The NLRB decision changes nothing about the underlying nature of the scholarship (the terms of athletic scholarships are set by NCAA rules); accordingly, there is no legal connection between the NLRB view of athletes as "employees" and the exclusion for athletic scholarships.  If the terms of the scholarship haven't changed materially, and the terms were the basis of the IRS's 1977 ruling, there is no reason for the IRS to revisit that ruling.

Second, the fact that one is an employee does not make one ineligible for a scholarship.  Indeed, section 117(d), which deals with "qualified tuition reductions" (a fancy name for a scholarship) explicitly contemplates that employees may be offered "tuition reductions" that are excluded from gross income.  In fact, colleges and universities routinely provide scholarships to employees: nearly all graduate research assistants and teaching assistants, many of whom are unionized, receive tuition waivers as part of their "package" with the university.  This package normally includes a (very small!) stipend.   The universities take the position that the stipend is compensation for services, and that the tuition waiver is an excludable "tuition reduction" under Section 117(d), a position that the IRS seems to be quite comfortable with.  In effect, the NLRB ruling that football players are "employees" places them in essentially the same position as grad RA's and TA's.  This analogy will be particularly apt when, as I think is inevitable, universities start paying stipends to the players in big-time sports.  But even now, one can argue that providing meals, training and room and board are the "compensation" elements of the athletic scholarship, and that the tuition/fee scholarship is just that - a scholarship, as it is with grad RA's and TA's.

Finally, there is no necessary connection between the tax law interpretation of a particular legal relationship and the interpretation of that relationship by other bodies of law.  Tax law is a specialized body of law unto itself.  For example, the definition of a "gift" under Section 102 of the Code is not dependent upon, or even related to, the common-law property definition of gift, as Justice Brennan specifically pointed out in the famous Duberstein case.  Similarly, the tax definition of "inheritance" is not dependent on state law definitions of "inheritance" - and so forth.  The fact that labor law might characterize a particular item as "compensation for services" does not control the tax definition of that item.

It is possible that the NLRB's action (again, if that action is upheld on appeal) might prompt the IRS to take an overall look at big-time college athletics and change its positions on many things in the athletic realm (including, for example, its long-standing position that athletics are not an unrelated business subject to taxation).  But I wouldn't hold my breath on this.  In the past, every time the IRS has taken tentative steps to tax certain items relating to college athletics, Congress has slapped the agency hard across the cheek.  Witness the sequence of events dealing with the IRS's private letter rulings that corporate bowl sponsorships were taxable advertising; Congress moved with almost lightning speed to enact a new corporate-sponsorship exclusion to the UBIT, Section 513(i).  Similarly, when the IRS took steps to tax payments for seating premiums by ruling that these items were not donations, Congress responded with Section 170(l) to provide that 80% of these payments were, in fact, deductible - allowing althetic boosters to deduct 80% of their payments for what are essentially "personal seat licenses" at athletic events.

So, is it possible that the NLRB action will influence the IRS to change its ruling on athletic scholarships?  Sure, it's possible - just as it is possible that the United States will mount a manned mission to Mars next year.  Just don't bet the house on it.  

John Colombo

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