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December 26, 2009 - Should college sports remain tax-exempt nonprofits?

A recent article published in the Austin American-Statesman questioned the nonprofit status of intercollegiate athletics, particularly after the University of  Texas at Austin (UT) increased the compensation of its head football coach, Mack Brown, to over $5 million annually.  The nonprofit status of higher education is based on their performing a social good, education, as charitable organizations.  Because of their status, colleges and universities do not have to pay corporate income taxes.

In 1950, Congress passed laws requiring that a nonprofit's business enterprises be substantially related to its charitable mission. The article notes that the NCAA and other college sports supporters have convinced the Internal Revenue Service that athletics are a genuine part of the educational experience.  And, the revenues generated from nonprofit business enterprises, such as at the University of Texas at Austin, can be substantial.  At UT, nearly all of the athletics department's income comes from self-generated business revenue.  Most of the $11.3 million the UT athletic department earned from the Big 12 conference is from television revenue.  And, 30 years ago the IRS ruled that money colleges earn from the sale of broadcast rights is no different than money collected from stadium ticket sales, which has always been tax-free.

Another benefit educational charities enjoy is tax-deductible contributions from alumni and other benefactors. Often against the IRS' recommendations, Congress has consistently allowed businesses and individuals to write off their donations to college sports endeavors, helping schools to increase their income stream.  According to the article, UT athletics earned $35 million in charitible contributions last year.

In order to remain untaxed, the money earned from a university's businesses must be used "in furtherance of" the school's educational mission, according to tax laws. The NCAA and member institutions have for years argued that money spent on college athletics is money spent on education. In addition, much of the revenue earned by football and men's basketball help to pay for many other non-revenue generating sports, making education opportunities available for many other students through scholarships in other sports.

A Congressional Budget Office report issued earlier this year notes that the money made available through tax breaks leads to more and more money being spent on college athletics to remain athletically competitive and less and less being returned to institutions for academics. "The current subsidy to athletic departments may simply encourage an 'arms race' between schools, in which universities spend increasing resources on measures of athletic success that, at most, benefit their own institutions at the expense of others."

The article quotes John Colombo, a professor at the University of Illinois College of Law, who asked: "Is Texas paying Mack Brown $5 million for his contribution to the educational environment at the university, or because it wants to win football games?"  Colombo offered several reform ideas, presented at a Knight Commission meeting in May 2009:  require universities to prove they spend a certain percentage of their sports revenue on clearly educational purposes; place caps on big-ticket athletic expenses such as recruiting or lavish facilities; place caps on multimillion-dollar coaching salaries; and, enhance transparency.

Results from the Knight Commission's Presidential Survey on the Cost and Financing of Intercollegiate Athletics were highlighted as a perspective of the current landscape in higher education in which presidents of major colleges find that the economic model of college athletics is in need of reform, yet the presidents feel powerless to change it.