Thursday, November 16, 2006

NCAA and Tax Exemption

Recently the House Ways and Means Committee sent a letter to the NCAA asking it to justify its tax exempt status. The NCAA has posted the reply from President Myles Brand. I’ve had numerous conversations lately about exemptions under Section 501 under the Code, and I think this issue regarding the NCAA is perhaps even more interesting than the debate over religious organizations.

The stated tax exempt purpose of the NCAA is to “maintain intercollegiate athletics as an integral part of the educational program and the athlete as an integral part of the student body.” The question raised (or one of the questions raised) by the Committee chairman, William Thomas (R-California) (who will soon be replaced as chair by Charles Rangel of New York), is a really good one. In light of the fact that college football and basketball have become billion dollar industries, what justifies the disparate treatment of professional sport and college athletics?

The reply letter uses familiar (and sometimes very convincing) arguments. It also mentions this statistic which I was unaware of:

However, even if the more inaccurate federal rates are used, student athletes in Division I graduate at 63 percent, two points better than the general student population. Of note, African-American male student-athletes graduate 11 percentage points higher than African-American males in the student body, and African-American female student-athletes graduate at a rate 16 points higher than their counterparts in the general student population.

That alone seems a pretty compelling reason to maintain college athletics. Another familiar and compelling reason to treat the NCAA favorably:

Divisions I and II intercollegiate sports provide $1.5 billion annually in athletics scholarships to help pay the cost of education – including for many low-income students who would otherwise have to forgo the college experience.

But the question that should be asked whenever Congress writes a social-policy-based exception into the Code is, “Is the tax subsidy necessary to encourage the socially desirable behavior?” In the case of nonprofits, the general thought is that an incentive is needed for taxpayers to contribute money to charities. This rationale is clearly borne out by empirical evidence: when the limit on deductions for charitable contributions is reduced, charitable giving declines in lock-step. Another justification is that taxing the income of charitable organizations would discourage the work of the organizations and be antithetical to their purpose. This justification seems fine to me also. Depending on the actual purpose of an organization, nonprofits are generally providing services that the government would otherwise be compelled to provide.

How about the NCAA? Do they need an incentive beyond the insane revenues from television contracts and sportswear sales to encourage them to provide scholarships to talented athletes? Do people actually donate money to the NCAA? Couldn’t football and basketball be spun off into a for-profit corporation?

One of the reasons I have animosity toward the NCAA is exemplified in the answer of Myles Brand. Even though the line between professional sports and college sports are being blurred, one clear distinction remains: the players are not compensated (other than by scholarship). This explanation seems to me to suggest not that the NCAA should continue to get special treatment, but that they should lose their tax subsidy and be required to pay their players. The only people not making big money off college sports are the ones putting in all the work. While it is true that a few students are compensated for their efforts with lucrative professional contracts, the vast majority are left with nothing but bad knees and degrees in communications. How is that a desirable result?


Blogger Expatriate Owl said...

I'm with you all the way on this one, Fishfrog.

The NCAA party line from the pen of Myles Brand (actually, methinks its from the word processer of his secretary and/or research assistant, but hey, executives of multi-million dollar enterprises are very busy people and need to delegate tasks to their subalterns) is a great theory and looks good on paper. In practice, it doesn't always work.

I do not per se oppose athletics. I was a high school jock, and I have seen the benefit conferred upon my son by his past and present athletic activities. And, notwithstanding my multifacet gripes with the American Red Cross, let us not forget that they incorporated many innovations from competitive collegiate swimming to improve the success rate of their water safety programs.

But I think that 80 years later, everyone is still stuck on Mr. Justice Holmes's delusional failure in Federal Club v. National League to recognize Pro Baseball for the entrepreneurial business enterprise it is.

My students who are jocks have run both extremes, from the "A" student who regularly attends classes except when compelled to be absent on account of a tennis meet, to the basketball scholarship girl who doesn't turn in her assignments and doesn't inform me of her absence until after the fact.

A friend and former business partner of mine, who went to college on a jock scholarship and who captured a national collegiate championship trophy (and an alternate seat on the Olympic team), has told me many a story of what REALLY goes on in the athletic side of the campus. Essentially, Gresham's Law applies to collegiate athletics. The academically challenged jocks drive out the brilliant. That was 30 years ago; it has gotten even worse.

The ideal that Myles Brand has put onto paper is just that; an ideal. The reality is that few are even cognizant of, let alone aspire to, the examples set by role model collegiate jocks such as Byron White or Bill Bradley .

8:08 PM  
Blogger Fishfrog said...

It really is a different world now than when the tax-savvy Bill Bradley was in school. Even though Brand says that some of these students wouldn't get to attend college but for the scholarships, the fact is that (at least in the realm of major college athletics, e.g. men's football and basketball) once admitted, these students are expected to put in 40 or 50 hour weeks training and practicing. The teams aren't looking for student scholars, except to the extent an athlete can get good grades without in any way sacrificing practice time. They are expected to be athletes first and foremost. If they find time to be students, good for them.

As a former high school "jock" (I played hockey), I can't imagine missing a tax class for sports. I mean, it's tax! What could be better?

8:27 AM  
Blogger Matt said...

Oh, get a room you two why doncha.

8:57 AM  

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