Paul L. Caron

Wednesday, February 18, 2015

Schmalbeck: Ending the Sweetheart Deal Between Big-Time College Sports and the Tax System

NCAA LogoRichard Schmalbeck (Duke), Ending the Sweetheart Deal between Big-Time College Sports and the Tax System:

This paper was prepared for the annual conference of the National Center for Philanthropy and Law, held at the NYU Law School, held October 24-25, 2013. The overall topic was “Tax Issues Affecting Colleges and Universities,” and I was asked to address specifically those issues relating to athletics. This paper considers two specific issues that have in common only that they involve college sports, and are plagued by egregiously bad, (in this case, egregiously generous), tax treatment: the failure of the IRS to regard any part of the revenue from college sports as unrelated business income, and the choice by Congress to allow taxpayers to deduct 80% of contributions that they make to colleges or their “booster clubs,” even when those contributions entitle the donors to special privileges in purchasing tickets to college athletic events.

Most readers are probably familiar with the general rules regarding charitable contributions deductions, but a word about the unrelated business income tax may be helpful. An organization may qualify (or continue to qualify) as a tax-exempt organization, eligible to receive tax-deductible contributions, if its activities are primarily charitable. However, if the organization regularly carries on trade or business activities that are unrelated to its exempt purpose, the income from those activities is subject to federal income taxation at the same rates applicable to for-profit corporations. Although those rates are low for small businesses (those earning less than $75,000 per year), corporate earnings in excess of that amount are taxed at a rate of 34% on up to ten million dollars of income, and 35% beyond that amount. The unrelated business income tax raises very little revenue, but is thought to have an in terrorem effect, discouraging nonprofit organizations from engaging in unrelated business activities. While the unrelated business tax exists primarily because of Congressional concerns about unfair competition with for-profit businesses, a better description of its actual effect is that it discourages nonprofit organizations from pursuit of business activities that do not further any exempt purpose.

Scholarship, Tax | Permalink


It seems like an impossible goal to sever sports from Universities, but it is not hard.

First off, you have a natural alliance in the wild-eyed radical Left. They would love to kill collegiate sports.

Meanwhile, Republicans would like to kick out the true Left freaks, and restore a balance of sane Left and Right in most of the curricula. (See Steven Hayward's "Grievance School" in National Review for a good description of the current status.)

A clever leader could use these as the carrot and stick, drive out the subsidized basketball and football minor leagues and restore "balance to the force," as it were.

Posted by: somercet | Feb 23, 2015 4:05:06 PM

Professor Schmalbeck is not just barking up the wrong tree, it is a tree covered with teflon and silicone grease and guarded by rabid pit bulls.

First a couple of technical issues. The reason that a non-profit does not want UBIT is that if it has too much UBIT, it could loose its tax exemption. So yes, it does have an in terrorum effect, but it is very limited. Because, the tax is easy to beat, it does not apply to separately incorporated C corporations. If you have a profitable sideline, you separately incorporate it and go on your merry way.

UBTI is therefore not much of a threat to college athletics. Schools could separately incorporate the athletics programs. Big money makers, like Ohio State and Alabama, might have to pay some taxes, but so what? They have a lot of money. Schools that don't make money on athletics as most of them don't, won't have to pay taxes. This is because the corporate income tax is a tax on income, not gross receipts.

But, the pit bulls are a bigger threat to anyone who wants to cut down college athletics. College athletics is hugely popular. I am sure it is a lot more popular than the IRS, Congress, or law professors.

"ESPN also reached a cable first when the inaugural College Football Playoff Championship game (Ohio State over Oregon), garnered 33.4 million viewers, the first cablecast with an average audience of over 30 million viewers."

"The two semi-final college football games both set audience records on cable. The very first semi-final game (Oregon over Florida State) set a record audience averaging 28.2 million viewers. The record was short lived. The second semi-final game just hours later (Ohio State over Alabama) averaged 28.3 million viewers."

Next month, March Madness will strike again. The most important man on the campus of Professor Schmalbeck's employer will be the basketball coach -- Mike Krzyzewski. Compared to him, law professors are ants.

Nobody, especially not a politician, wants to tangle with that kind of popularity. So UBTI will not be a problem for college athletics at any time I can foresee.

Posted by: Walter Sobchak | Feb 18, 2015 9:08:49 PM