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Ball's in the NCAA's Court

Ball's in the NCAA's Court
October 6, 2006

Myles Brand and company have a homework assignment to complete. Call it what you want -- a term paper, a final exam, a thesis defense. It's due October 30 at a Congressional office building.

The task for the National Collegiate Athletic Association: Explain to the U.S. House of Representatives Committee on Ways and Means why the group's member colleges should maintain the tax-exempt status of their sports programs. Or, in the words of one question in the committee's request: “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 facilities?”

Rep. Bill Thomas (R-Calif.), chairman of the House committee that handles legislation affecting tax issues and nonprofit organizations, sent the pointed eight-page letter to the NCAA earlier this week. He is demanding -- and an NCAA spokesman said the committee will receive -- responses to 25 highly detailed and often sharply worded questions on such topics as corporate sponsorships, graduation rates and coaches' compensation.

The letter is part of Congress's continuing look into the behavior and tax-exempt status of charities and other nonprofit entities. The Committee on Ways and Means has held a series of hearings on the growth of the tax-exempt sector in recent years. The last two decades have seen various attempts by lawmakers and federal agencies, including the Internal Revenue Service and the Federal Trade Commission, to force colleges and universities that play big-time sports to pay "unrelated business income tax" on all or at least more of the revenue their sports programs earn. Nonprofit groups pay such taxes on money they receive from activities that aren't seen as "substantially related" to the primary mission for which they earned their tax exemption.

House staff members have met in recent months with NCAA officials to discuss the association's status. "We disagree with the fundamental assertion of the letter that intercollegiate athletics is not a part of higher education," said Bob Williams, an NCAA spokesman. "Look at the emphasis on academic reform and it shows clearly how we feel."

Questions remain about the muscle behind the House' s efforts. A Ways and Means Committee aide said the main purpose of the letter is to gather information, and that a decision to hold a hearing or pursue further action would depend on the NCAA's response. A spokeswoman in the Senate Finance Committee office, which parallels the Ways and Means Committee and has undertaken its own review of nonprofits, said Sen. Charles E. Grassley (R-Iowa), the committee's chairman, will be interested in the response but doesn't plan to "duplicate the House's work." No hearings are scheduled in that chamber, the spokeswoman said.

Bruce Hopkins, a lawyer whose practice focuses on nonprofit organizations, called the letter “a huge development.”

“It’s the first time in a long time there’s been a formal challenge by Congress asking [the NCAA] to justify exemptions,” he said. “This is a serious, well-researched letter; obviously some time has gone into it from staff.”

Hopkins said that the request places a “huge onus” on the NCAA, and that association officials have their work cut out for them. “They should make this their highest priority for the coming weeks and put together a quality response,” he said. “[Thomas] is striking at the heart of revenue generated by college sports.”

Frank G. Splitt, a member of the Drake Group -- made up of faculty members who outspokenly criticize big-time college sports -- and author of “The Faculty-Driven Movement to Reform Big-Time College Sports," said the letter is the “biggest step forward” in the campaign to reduce what he calls the exploitation of college athletes. “This is the first step in pushing the stone up the hill. There's always the chance this is going to play out.”

But Gary R. Roberts, deputy dean of Tulane University's law school and director of its sports law program, said the House committee's effort is just another case of Washington grandstanding. He said the "college sports establishment" is too strong and the resistance in Congress too heavy for any significant movement to be made.

“There's no way Congress is going to take millions away from college sports," Roberts said. "It's not that there isn't a seed of a good idea here, because commercialization is a legitimate issue, but they should be fighting other battles."

Sheldon E. Steinbach, a lawyer in the higher education practice at Dow Lohnes and recently retired vice president and general counsel at the American Council on Education, agreed that the letter “has everything to do with November 7,” adding that the matter that has strong political appeal. “The NCAA sometimes becomes a political punching bag because their functions and activities are misperceived,” he said.

Hopkins, however, said he doesn't see attacking the NCAA as politically expedient.

The House committee's letter refers in general to the status of college athletics but focuses particularly on the highest-profile sports. “The exempt purpose of intercollegiate athletics ... is less apparent [than that of higher education], particularly in the context of major college football and men’s basketball programs," it says.

Steinbach said that each year around the time of the men's basketball tournament, questions arise about the NCAA's financial arrangements, and the association "dutifully responds with candor." CBS's multimillion-dollar deal with the association, as well as money that comes in from corporate sponsorships and other agreements for the tournament, represent more than 90 percent of the NCAA's annual revenue. That money isn't taxed, and a major change to the status quo could be debilitating, he said.

But James J. Duderstadt, a former University of Michigan president and member of the Secretary of Education's Commission on the Future of Higher Education, said the Congressional inquiry is more likely to produce tweaks than transformation.

"Someone has to hold up the NCAA's hands every once in awhile," Duderstadt said. "I just think it's highly unlikely that the tax-exempt status [of college sports] would be removed."

He said Congress could remove the deductibility of skybox leases, force financial aid decisions out of college coaches' control, and press athletics directors on why a 12th game was added for college football. "The House committee is asking questions that the NCAA ought to be asking itself every time it makes a decision -- how will this move affect the educational objective?"

Hopkins said that for the NCAA to get a passing grade in its response to the House's letter, it will need to stick with the argument that has worked for decades -- that major college sports generate alumni, student and public interest in institutions and promote loyalty.

Some have justified the tax-exempt status of college sports by pointing out that high-profile programs attract both donors and potential students to a university. Hopkins said these are "deadend arguments," and Thomas agrees. "Neither of these arguments is valid from a federal standpoint," the letter says, explaining that taxpayers have no interest in increased student pools at one school over another, and that money given to an athletic department is money not spent on other charities.

"To be tax exempt," the letter says," the activity itself must contribute to the accomplishment of the university's educational purpose (other than through the production of income.)"

 

 

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