Monday, August 18, 2014

Sununu’s Boston Globe Op Ed on the Tax-Exempt Status of Colleges after O’Bannon

In a recent opinion editorial in the Boston Globe, John E. Sununu, former Republican senator from New Hampshire, argues that the recent decision of O’Bannon v. NCAA sounds the death knell for the federal income tax exemption of universities with major athletics programs.  In the O’Bannon case, a federal district judge ruled that the NCAA’s rules prohibiting student-athletes from receiving payments of a share of licensing fees for the use of their names and likenesses violates federal antitrust laws.  Sununu opines that the “ultimate destination” of the O’Bannon case is “a date with the Internal Revenue Service.”

His argument appears to be simple initially: “If universities are going to compensate athletes for supporting multi-million dollar sports programs, the idea that these organizations are tax-exempt nonprofits becomes absurd.”

But then Sununu cites many other factors to support his conclusion that the “far bigger lie is that these major sports schools are nonprofit institutions.”  He continues:

Today, at least a dozen schools generate $100 million per year from sports programs -- a figure that approaches 10 percent of the operating budget for powerhouses like Auburn and Louisville. Paying athletes strips away whatever pretense remains of that educational mission, at least for a significant portion of their student body and revenue base. As payments flow and revenues grow, the school administrators, NCAA officials, and IRS bureaucrats who have colluded to maintain that pretense will have little left to argue.

It’s especially hard to hide behind the educational mission when the highest paid employee at your school is a coach. Last year, 25 college football coaches took home more than $2.5 million each. At Alabama, Coach Nick Saban’s salary topped $5 million. The issue here is not whether they are worth it, or whether the schools are justified in paying that freight, but whether the business entity paying such rich contracts should operate tax-free.

The eye-popping numbers on ESPN’s recent deal for a Southeast Conference Sports Network lay bare the economics at stake. With $800 million in profits, each of the 14 schools can expect yearly distributions of roughly $50 million tax-free. … Paying coaches and athletes, selling tickets and television rights, licensing merchandise and fight-song ringtones. Sounds like a business to me.

Yes, in a non-technical, intuitive sense, it “sounds like a business.”  But I am not nearly as quick as Sununu to jump to the conclusion that O’Bannon means that all universities with major sports programs are now doomed to lose federal income tax exemption.

First, it is doubtful that the payment of athletes for the use of their likenesses – which the O’Bannon court decision permits to be done, subject to an NCAA-imposed cap – is the decisive factor that should transform an institution from “educational” under the law to one that is not.  An educational institution compensates those who perform services in the pursuit of the institution’s mission – including students.  The bigger question is whether what athletic programs do is really properly characterized as educational or otherwise charitable.  A modest payment for the use of a student-athlete’s likeness is probably not sufficient to tip the scales in one direction or another with respect to that larger question.

And although I, too, tend to be shocked at the amount of money some head coaches are paid and feel a sense of disbelief at what such compensation says about the priority that we, as a society, place upon sports, it is also true that large, tax-exempt charitable institutions of many types pay their top executives very well.  My point is not that such compensation is normatively justifiable (although in many cases, it probably is).  My point is simply that under current law, a very large salary is not necessarily inconsistent with a charitable institution’s income tax exemption.  (And of course, if the athletics department were treated as a distinct, taxable entity, the payment of the coaches’ salaries would generally be fully deductible in computing the payor’s taxable income.)

Moreover, even if a school’s athletics program were properly viewed as an unrelated trade or business – a question that I do not intend to answer in this post – it does not follow that the university itself should lose federal income tax exemption because of its athletics program.  The dollar value of these programs is indeed high.  But the significance of these programs does not necessarily surpass that of the clearly educational operations of major universities.  I am far from convinced that a major teaching and research institution fails the organizational and operational tests of the Treasury regulations just because it also operates a prominent national athletics program.

Thus, while I share many of the concerns of Mr. Sununu, I think that the O’Bannon case alone is unlikely to prompt a wave of revocations of university tax exemptions.



Current Affairs | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference Sununu’s Boston Globe Op Ed on the Tax-Exempt Status of Colleges after O’Bannon:


Of the 25 highest paid college coaches, 24 are at public universities. Mr. Sununu is correct that they are not non-profit institutions -- most (if not all) are state government agencies, and at no risk of loss of exemption.

Posted by: Joe Schimmel | Aug 21, 2014 5:55:14 PM

Post a comment