Athletics, Antitrust and Amateurism

Scholars argue NCAA and its members can reduce and contain skyrocketing program costs through Congressional oversight of their continuing tax-exempt status.
May 13, 2009

WASHINGTON – As spending on big-time college sports programs has continued to soar, those troubled by the trend have responded with a range of potential solutions.

College presidents and others complain that their hands are partially tied because federal antitrust laws prevent institutions from acting as a group, through the National Collegiate Athletic Association, to limit coaches' salaries and make certain other kinds of cutbacks. They admit, however, that changes in the law are unlikely. The alternative to cost cutting – offsetting the rising budgets with ever-growing and increasingly creative new sources of revenue – has brought calls from Congressional and other critics for a different kind of federal intervention: the revocation of the tax-exempt status of big-time collegiate sports, on the theory that they no longer deserve to be called "amateur."

Some scholars, however, argue that there are more effective legislative ways to contain and reduce athletics costs, and that these options have not received enough attention.

A group of researchers and academics on Tuesday discussed how the NCAA and its member institutions might weather their impending financial crisis and reform spending at a meeting of the Knight Commission on Intercollegiate Athletics, a sports reform group made up of college presidents, former athletes and other officials.

The current reform debate comes at a time when only 19 NCAA institutions have reported generating more money than they spent on operations in 2006 – the most recent year for which data are available. Further broadening the gap between the haves and have-nots in the world of college athletics, only six of the athletics programs that generated a profit have done so consistently for the past five years. For all Football Bowl Subdivision (formerly Division I-A) institutions, the average net operating deficit was $8.9 million in 2006, a figure that rose 25 percent in just two years.

John Colombo, a tax law professor at the University of Illinois College of Law, presented before the commission a set of policy recommendations for critics seeking Congressional action to remedy intercollegiate athletics’ financial concerns.

In late 2006, then-Rep. Bill Thomas, a California Republican chair of the House Ways and means Committee, asked the NCAA to defend its tax-exempt status, citing skyrocketing coaches’ salaries as one of many reasons why the association, in his mind, might not deserve such preferred tax treatment. The ensuing response from the NCAA set off a firestorm between defensive college athletics administrators and critics who sought the revocation of “big-time” athletics programs’ tax-exempt status. Still, Colombo argued that critics like Thomas did not have enough knowledge of tax law to draft plausible reforms to fit their agenda.

“Current tax-exemption and [unrelated business income tax] law makes intervention by the IRS in the college athletics world difficult,” Colombo writes in his article on the subject. “Even if we view Division I football and basketball as nothing more than commercial minor leagues for the pros, the NCAA and individual colleges and universities almost unquestionably meet the current legal tests for tax exemption because of their other activities.”

Although Colombo told the commission that the IRS was likelier to levy additional unrelated business income taxes on the revenues of college athletics programs than to revoke their tax exempt status, he posited that “one could expect that any taxable profit would quickly disappear” as institutions accounted for this change. As a result, he argued, merely threatening to increase taxation would not be a “sufficient stick to induce reform.”

Critics are not wrong, Columbo argued, to believe that major college sports such as football and men’s basketball are “perfect examples of why commercial revenues of charities should be subject to taxation.” As such, Congress would be justified in “attaching special limitations on the continuation of tax-favored status.” Though he said athletics leaders should conceive of their own benchmarks, he suggested a few stipulations for Congress to mandate of these institutions.

For example, Colombo noted that an institution might be required to spend a certain amount of money generated from revenue-generating sports to help fund minor, or non-revenue-generating, sports. After all, he argued, most institutions already tout this strategy in defense of their larger teams’ profits. He also added that Congress might set certain expenditure limits, such as capping salaries for coaches – a move the NCAA has argued it needs an antitrust exemption to implement. Finally, Colombo said it might also make sense for these institutions to disclose more of their inner financial workings, and that Congress should consider mandating that universities file additional attachments to the 990 Form – an information return required of non-profit organizations. He pointed to the the new disclosure form, Schedule H – required of tax-exempt hospitals – as an example. This additional form limits what kind of "account methods can be used to generate the reported numbers."

Other speakers warned of dire consequences if action of some sort was not taken in the near future.

Robert Zemsky, another of the day’s presenters and founding director of the University of Pennsylvania's Learning Alliance for Higher Education, chastised the commission, noting that the state of intercollegiate athletics had “gotten a lot worse on [its] watch." He said he did not believe substantive reform would come to college athletics unless the largest NCAA institutions were forced to respond to other major changes in higher education. As college athletics has lost its sense of what he called "values," he argued that market forces have made the NCAA what it is today.

"There are maybe 40 institutions at the top of the pyramid who set the expectations all the way down, that create the pressure to have the sports," Zemsky said. "I don't see the 40 hitting the wall. That's the real problem. The 40 will find the revenue, and below the 40 they're going to be in serious, serious difficulty. ... This isn’t going anywhere, for all the pain and discussion about money. If athletics changes, it’ll be because the rest of higher education changes and not because higher education decides to change it.”

Commission members had a relatively reserved response to the critics' recommendations.

“While we generally don’t believe that Congressional action is necessary to regular intercollegiate athletics, we are not ready to dismiss any proposals that could provide effective means to address our challenging financial problems,” William E. Kirwan, co-chairman of the Knight Commission and chancellor of the University System of Maryland, said in a statement released after the meeting.

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