Should College Sports Revenue Be Tax Exempt?

Robert Goulder of Tax Notes and professor Mitchell Franklin of the Le Moyne College Madden School of Business discuss college sports programs’ not-for-profit status in light of compensation for name, image, and likeness rights.

This transcript has been edited for length and clarity.

Robert Goulder: Welcome to the latest edition of In the Pages. I’m Bob Goulder, contributing editor with Tax Notes.

Now, if you’re anything like me, you probably spend a lot of time watching collegiate sports — honestly, probably too much time. One observation, though: If you’ve been paying attention, you just can’t help but notice that the concept of amateurism has evolved over the last couple of years, especially in the revenue sports, that’s college football and men’s basketball. Increasingly, the relationship between these talented student-athletes and their athletic departments — well, it’s starting to resemble a labor market in certain ways. That’s a big change from how things used to be.

What explains this? Well, first we have the widely used transfer portal, which allows athletes to switch schools without sitting out a year. And then there’s a possibility of third-party compensation through NIL opportunities — that’s name, image, and likeness — and some athletes are really making a lot of money off of that.

This raises all sorts of policy questions, and of course there’s a tax angle; there’s always a tax angle. For starters, should the revenue from college sports be tax exempt because these activities supposedly relate to a school’s educational mission? Well, we know how that question used to be answered generations ago, but is it still valid today?

A piece from Tax Notes examines this question, and we’re delighted to have one of the authors join us. The article is titled, “Athletic Programs and NIL Collectives: Truly Not-for-Profit?” And our guest is Mitchell Franklin, an associate professor of accounting at the Madden School of Business at Le Moyne College in Syracuse, New York. And I should mention his coauthor is Ronald Zullo, a lecturer in accounting at Northeastern University in Boston.

With that said, Mitch, welcome to In the Pages.

Mitchell Franklin: Thank you for having me. Glad to be here today and glad to talk. One of my favorite things: college sports. If it’s not PGA golf, it’s college sports.

Robert Goulder: We’re really talking about a lot of money here. This is not some trivial amount of cash that’s happening here. I’m thinking of the broadcasting rights, when a conference signs a deal with a television network. Or maybe a better example is when the NCAA itself signs a contract for the broadcasting rights associated with March Madness, which is coming up. We’re all on the edge of our seats hoping our teams do well. That’s a huge contract. How much money are we talking about?

Mitchell Franklin: I mean, it’s huge. And you look at some of these contracts — you do a little bit of searching and you’ll research some of these conferences — you’re going to see contracts in the $200-300 million range, and you split that up amongst the schools, you’re still getting well into tens of millions for each school in a conference. So it’s a lot of money, and the TV rights are only a part of it. In addition to the TV rights, you have the additional contracts with things such as Nike and Adidas and all the other types of things. So there’s a lot of money in college sports.

Robert Goulder: The next obvious question is, well, where does it go? I mean, who’s getting it? Who’s not getting it? Who’s getting more than they should, and who’s just starting to get it?

Mitchell Franklin: Yeah, and I think that’s a real interesting question. And I think in some cases it’s hard to know specifically, because you’ve got public universities and you have private universities. Public universities have to be a lot more transparent with where money goes than a private school, where a private school really has to disclose next to nothing. But you know what you find if you talk to a lot of athletic directors, and if you believe it, is how many sports programs do each of these schools offer? You have a lot of sports.

You have the primary ones that generate revenue, but then you also have all the non-revenue sports. So obviously you’re first paying for all the scholarships of the athletes who get scholarships, and then after you pay for the scholarships, you have to fund all the non-revenue sports, the travel costs, the facilities costs, and the large sums that go into those sports. The travel alone — thinking about some of these conferences, they’re so spread now. You look at a conference like, I’ll say the Big East for example, it used to be just on the East Coast, and now you’re going out to Nebraska for an eastern game. So there’s a lot of cost to get those non-revenue sports moving in ways like that. Then the question is, where does the extra go once the basic operating costs are covered?

Well, obviously I think from a recruiting standpoint, you have a facilities race. Every school’s got to have the best facilities to get the recruit, so schools are investing very heavily in facilities nowadays. And then if there is any extra, some schools do reinvest it in the academics. Now I’ve been on campuses before, you walk into a classroom and you see a sign that says, “The technology in this classroom was purchased with the proceeds from the X, Y, Z bowl game.”

So some of it is making it back, but I also think nowadays, with the cost structure getting so high, not as much is making it back. And if colleges have surpluses, they’re using it to reinvest in generating revenue for the college athletic program in the future because the costs have gotten so high. So in a lot of ways, the athletic programs are separate entities [from] the college with the college name on it.

Robert Goulder: Let’s talk about the portal, because it’s such an interesting concept. In the old days, if you had a prospect coming out of high school and they signed a national letter of intent, there was sort of an implied understanding that they’d be around for four years, and maybe even a fifth year if there’s a red shirt or a medical gray shirt or something like that. That’s all changed now. How did it change? And am I correct in thinking this sort of turns student-athletes into free agents?

Mitchell Franklin: I like your term “free agent.” I think that’s what they are. Just to be clear, I’m the tax guy, I’m not the NCAA expert, so I’m being general with the rules here, but though there are some restrictions on how often you can use the portal and things, it leaves it pretty open for students to transfer. Back in the pre-portal days, if you wanted to transfer you had to sit out for a year, and they made it very, very hard to transfer. And if I remember, before the portal, the only way you could transfer and not sit out was if you received your degree at the school you were at and went to another school and took a major/program that was not offered at the school where you were, I believe was the rule.

But then this whole portal came along, and the portal is basically a market for you to put yourself on. And if you’re at a school and you’re not happy or you feel you want to move for whatever reason, you put yourself out on this market and you can communicate with other schools and you can basically go play where you want to play, find arrangements.

So it makes it very, very easy to move around. And I think if you were to look at most of these athletes who are transferring in the portal is when these athletes are making decisions to transfer and go in the portal, are they making these decisions to go into the portal because they want a school where they like the coach better? Where they get more playing time? Or are they going into the portal because they’re unhappy with the professor within a certain major and they want to get to another school where they can get the major that they want?

I don’t have scientific data to support this, but I think you can make a reasonable assumption which one of the two reasons or why students are transferring schools, and the academic classroom experience probably in most cases is not the primary reason.

Robert Goulder: I think so. I think that’s a very safe assumption. You mentioned there used to be a rule previously about grad transfers, right? Grad transfers didn’t have to sit out a year, and now it’s almost as if everyone’s a grad transfer, that whole sitting out thing.

Mitchell Franklin: Yeah, you come to a college, you spend a year there, you say, “I don’t like this.” You can go, and you really don’t need a reason. That’s where NIL comes into this; there might be money involved.

Robert Goulder: Yeah. And that is such a chilling effect, like you said — the requirement to sit out a year, I mean, that’s a real disincentive. The old rule was really saying, “We want you to stay put, we’re going to make it hard.” Now it’s just the opposite. All right, so that’s the portal.

Now, NIL — and we should clarify that it’s not payroll, right? It’s not pay-to-play, at least not officially, but there’s these collectives. So the gray area in my mind is, to what extent can a university be involved in NIL — and they’re doing it through these collectives, but how does it work? Walk us through this if you can.

Mitchell Franklin: Yeah, and I think it is a gray area, and the NCAA still says very, very clear: “You cannot pay to play.” A collective is not designed to be a pay-to-play, but it’s a gray area. And I’m going to guess if I were to look forward over the next year or two, there’s going to be some legal challenges that haven’t happened yet. They’re probably going to try and clarify what some of this gray area is, especially if there’s NCAA crackdowns on some of these programs and they end up going to court, which I would guess probably has a pretty reasonable probability of happening.

So what a collective is — it’s typically booster driven. You typically have a few boosters who are of a very high net worth who give a lot of money to the school, and they form a not-for-profit — I’ll call it a not-for-profit organization just to be simple here — they form a not-for-profit organization that we call “collective.”

And they recruit people to donate to this collective, and they accumulate money from pretty much any booster who wants to support this collective. And again, here’s more of the gray area: They’re booster set up, they’re booster run, but many universities are endorsing them. And you can go on the website of many colleges and universities and you can see links on the college website saying, “Donate to this collective.” Or you can walk through — I’ve been to different college stadiums across the country during this year for different games I’ve been to — and you can walk in the stadiums and sometimes see signs that say, “Donate to this fund for the collective.”

But what they are, again, it’s a not-for-profit; they’re given not-for-profit status for now — that’s being looked at, also — and supposedly are independent from the college or university. And what they do is they are used to provide financial opportunities to players, and these players can sign what you call an NIL agreement. Again, to be clear, the NIL agreement, no place in it can say, “You are paid in exchange for playing basketball, football, whatever the sport,” nor can they even say that you have to be part of a certain college or institution. But again, they’re part of the institution, but typically they’re worded somewhere along the lines of, “We’ll give you this amount of money, and in exchange for it you will live in a certain geographic area, and you will attend and take part in certain events over the period of the agreement.” And very often they’re charitable agreements, charitable events — make a charitable event for this organization, sign autographs for this fundraiser — and you do these events in exchange for the compensation.

So the gray-area university involvement in it, are they involved in it? But also, though they don’t require the athlete to play ball, if they don’t play ball at the school where the agreement is affiliated with or if they go play ball at a local community college or something instead, or if they decide not to play, what marketability can they have at these charity events anyway where they go to collect the money? So there’s nothing written, [it’s] implied. But you have to think that, again, a lot of things in the legal system can be implied. There’s always an implication that you play. And some of these deals, again, you can Google the internet for almost any large institution — Big 10, ACC, any of the conferences — there’s donors who tout multimillion-dollar-plus deals for players out there.

Robert Goulder: How far can boosters go in terms of recruiting? To actually get the kid to commit out of high school? Your article mentions a story about some blue-chip recruit, I forget what sport it was, but he was flown around on a private jet with a couple of his favorite rap stars, and surprise, two days later he commits to that school.

Mitchell Franklin: Boosters still technically are not supposed to recruit. And there’s still NCAA guidelines on that. And again, I don’t believe those guidelines have been loosened at all.

But again, here’s where it gets complicated: They’re not allowed to recruit, but many of these boosters who are doing this are the ones who run the collectives, and they’re the ones who signed the contract with the collective, because the NIL is not coming from the university, it’s coming from the booster. So you have to have an interaction with this person to get the deal signed. So, “I’m not recruiting, I might bring this person on my plane, I might bring this person to the game,” I use that as one example, but I think you look at any major power conference school out there, you’re going to see these same examples.

You can’t cite them all, so I cited one that I knew about that really made an impression on me. And as was the case, I believe in this one from memory of the whole story: “Yeah, I had the person, but we didn’t talk about the college or school at all on the visit; I just had him as my friend on this visit, and we talked about doing charitable work for me exclusively.” So again, a gray area, you’re not supposed to recruit. “I didn’t recruit.” What’s said versus implied?

I think that’s something that probably courts are going to decide because, again, if the NCAA comes after a school like this or any other school, some of the schools are probably going to go to court to protect their rights. And being that it’s new, there’s still a lot of gray area. And to me this is an example of a gray area that’s going to have to get cleaned up.

Robert Goulder: Well, we’ve reached the money question, literally. Should NIL collectives benefit from this nonprofit status? You explained in the article that some lawmakers in different parts of the country are making some preliminary inquiries into this, and you actually call for those inquiries to expand. Can you explain your thoughts on this?

Mitchell Franklin: There is a bipartisan effort from a couple senators — [Benjamin L.] Cardin (D-Md.) and John Thune (R-S.D.), I believe — and they want to look at these collectives. What they’re really concerned about is, are they really not for profit? And should a donor be allowed to put a large sum of money in this collective and deduct it on their tax return as a charitable contribution, because is that money really going to a charitable cause? I mean, the collective is taking the money and turning it around to these athletes. And what these senators are basically saying is that “this isn’t a collective; it is a pay-to-play. It’s essentially just the university funneling the money through the collective to pay the athlete instead of the university paying the athlete.”

Because think about it: Who’s donating to these collectives? The alumni are donating to these collectives. If the alumni and boosters didn’t donate to the collective, they’d give it to the school directly instead. And again, I’m not giving my own personal opinion, I’m giving the opinion of these senators who are trying to get this bill through, but saying, “Is that really what a not-for-profit is by definition?” How much steam it’s going to get, I don’t know.

I know from these two senators — what they observed, I think it was Ohio State University and University of Texas in particular that got these senators on board to try and do this. And from my perspective, if something is passed here and if the collective is really paying the athletes to get around NCAA rules, and if the laws are changed here, the players are profiting, but also the universities and colleges who use this are profiting because they’re getting players that they might not have gotten otherwise. They’re winning games that they probably wouldn’t have won otherwise. And the colleges are getting a lot more attention from this; they’re going to get better endorsement deals because of it.

So the colleges are also highly profiting on this, and colleges are becoming commercialized in terms of their athletics. And if you look at the revenue rulings that in the past have clearly said that athletic programs are not for profit, these all come from the 1960s. And the perspective here is college ball was a lot different in the 1950s and 1960s. A vast majority of the players back in the day, you played in high school and you went to a college that you thought was an academic fit, and whatever college you went to, you played. And you were a student, you played, stayed at the same school, and left.

Now when somebody’s holding all this money in your face from an NIL deal, are you picking that school because you like the accounting program and the business school, or are you picking that school because you see an opportunity to really make an impact on yourself for that college on the team? And it’s commercialized the entire environment for the college/university, also. As the team wins, as the team gets successful and as they sign more endorsement deals, it’s become a commercialized effort for the university. And when you look at the not-for-profit rules and you look at some case law of different types of not-for-profits that have happened since these rules were signed in the ’60s, the revenue rulings in the ’60s — once you get commercialized, you historically violate not-for-profit rules. Is this commercialization in conflict with the current laws? And saying, “Maybe this athletic program shouldn’t be not for profit and maybe the university shouldn’t be paying income tax on the extra income that these universities are generating as a result of all these NIL changes.”

If you’re a donor and you donate to a university, donating to the academic programs, yeah, [those] definitely are deductible. You donate to an athletic program that’s operating as a commercial entity and making a large profit, is that the same thing? Should that be a tax-deductible donation? And some of that’s already been — and I’m going a little bit beyond what I wrote in the paper — but if you think about it, they have already cracked down on that a little bit, back in the Tax Cuts and Jobs Act. You no longer can deduct donations that give you seats. That aggravated a lot of season ticket holders to games, obviously. Should that be expanded?

And again, I didn’t mention that in the paper, but looking at the NIL, it might make sense to expand it. So in my article, I’m not demanding that colleges pay tax on all of this, but what I’m saying is that this probably should be looked at. If they’re going to look at the NILs, the colleges should be looked at also. And people sometimes at levels within colleges/universities above that and the athletic director might need to look at the behavior of the athletic department and look at where the money’s coming from and where the money is going. And if that athletic program really isn’t focused on the academic mission first, they might have to change the rules or risk being taxed. And that’s sort of the gist of what Ron and I are writing here.

Robert Goulder: Well, it’s not that radical a concept, what you’ve just explained to me. I’m thinking, here we already have a recognized legal doctrine, the unrelated business income. I mean, it’s already there. There are code sections on it. You don’t have to invent new legal theory to do more or less what you’re saying; you just have to fit those facts and circumstances into the legal concepts that are already there and have been there for a long time.

Mitchell Franklin: Yeah, it’s nothing new. It’s just as the game has changed, where does it fit? Does it fit into the revenue rulings and say they’re not for profit, or has the business model changed so significantly we can say, “Hey, you’ve got to update the rulings that say they’re not for profit because it now looks more like unrelated business income than what it was.”

Robert Goulder: Yeah. That would be a great next step to update some of those revenue rulings, because you read them and you think, “How well does that fit?” And then you look at the date and it’s 1967 or something like that. It’s like a totally different world back then. But we love our sports, and we love parity too. We want a level playing field, and we also want our favorite teams to do well and prosper. You don’t want them to be fighting with one hand tied behind their back if they’re not taking advantage of these things.

Mitchell Franklin: As a college professor and die-hard sports fan myself, if I’m not working, I’m always watching sports — again, if I’m not watching college sports, I’m watching PGA. I’m always watching sports. But you look at college sports, they are students first, and they’re supposed to be students first. The mission is always students first in any college program. And you look at what NIL is doing — though, again, it’s not the college doing it themselves — it’s really not students first. And I don’t think anybody’s doing anything wrong. I’m not saying these colleges are involved in any illegal wrongdoing. I’m not saying that at all. I’m just saying I think everybody needs to take a step back and look at how it’s changed and look at the rules and say, “Should there be changes to get things more reflective of what’s actually happening?”

Robert Goulder: There you have it. You can get all the details by reading this article in Tax Notes. Again, the article is called, “Athletic Programs and NIL Collectives: Truly Not-for-Profit?” The authors are Mitch Franklin and Ronald Zullo. And Mitch, thank you so much for joining us. We’ll have to do this again sometime; maybe if the IRS or Treasury does issue some new regulatory guidance, it would be great to do a follow up at some point.

Mitchell Franklin: Anytime. And maybe we can catch up at a Final Four one day and talk when one of our favorite teams are there one of these years.

Robert Goulder: That would be great. Enjoy the tournament and enjoy March Madness.

Mitchell Franklin: All right, thank you. You too. Thank you very much.