Paul L. Caron
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Tuesday, September 22, 2015

Buchanan Reviews Schmalbeck's Ending The Sweetheart Deal Between Big-Time College Sports And The Tax System

Neil H. Buchanan (George Washington), Using the Tax Code to Help Universities Put Big-Time College Sports in (Some) Perspective (Jotwell), reviewing Richard Schmalbeck (Duke), Ending the Sweetheart Deal between Big-Time College Sports and the Tax System:

Richard Schmalbeck ... describes two tax provisions—universities not having to pay the Unrelated Business Income Tax” (UBIT) on their sports-related profits, and a provision allowing a partial deduction for barely disguised added charges for admission to games—that are “egregiously bad,” and he concludes that “these defects amount to an implicit tax subsidy of college sports that is neither healthy nor in any way justified.” Because of space limitations, I will focus here only on the first provision. Suffice it to say that Professor Schmalbeck’s arguments regarding the second provision are as strong as those for the first, which is to say very strong indeed. ...

What raises Professor Schmalbeck’s ire (and mine) is not that universities are running side businesses. Any nonprofit can do that, if it likes, so long as it pays UBIT. These rules generally should also apply to public universities that run unrelated businesses. Professor Schmalbeck notes, however, that Congress, in enacting UBIT in 1950, went to great pains to make clear that football and basketball could not possibly be subject to the tax. The particular claim by supporters of these giveaways was that big-time sports are meaningfully “related” to the nonprofit mission of the American university. The IRS followed suit, and there is little doubt that any effort today to tax the business activities of the big-time athletic departments would send politicians into a frenzy, defending dear old State U. from the supposedly grasping hands of the tax man.

Professor Schmalbeck’s analysis is especially strong in the section where he challenges a later IRS ruling that “the educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience are substantially similar.” ...

[M]y reason for supporting Professor Schmalbeck’s proposal has little to do with improving the tax code, as laudable a goal as that might be. My concern is with the American university system, which already has enough trouble fighting the many corrupting influences that will always swirl around it. We should pursue any opportunity to reduce one of the most corrupting of those influences, even just a little bit. Whether it is for the good of the tax code, or the good of universities, however, Professor Schmalbeck’s proposals deserve to be taken seriously.

Neil H. Buchanan (George Washington), The Schmalbeck Non-Hail Mary

https://taxprof.typepad.com/taxprof_blog/2015/09/buchanan-reviews-schmalbecks-ending-the-sweetheart-deal-between-big-time-college-sports-and-the-tax-.html

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Comments

Long time listener, first time caller here. I just wanted to mention the likelihood that classifying college sports as unrelated business will lead to less – not more – tax collected. Professor Buchanan points out that “very few universities” actually make money from their football programs. Presumably, the majority of schools will be able to apply their losses against the rest of their UBI. And football is regarded as the most profitable sport. Will schools be able to claim losses associated with their less profitable athletic programs?
The amount of resources devoted to college sports is certainly an issue that merits discussion, but I would submit that the answer does not necessarily lie in Section 511 of the Code.

Posted by: Nick Ferron | Sep 22, 2015 1:48:17 PM