VII. Tax and Criminal
A. Internal Revenue Service
Tax law and policy have played a small but interesting role in college sports.
The NCAA and Power 5 conferences are organized as private, education 501(c)(3) nonprofits and pay no federal taxes.
As 501(c)(3)s, the NCAA and Power 5 are not supposed to be engaged primarily in profit-seeking activities. Similarly, IRS rules place substantial restrictions on 501(c)(3) nonprofit lobbying activity and “excessive” salaries.
In the 21st century, as the market value of college football and men’s basketball skyrocketed, some external regulators questioned the legitimacy of the NCAA’s nonprofit designation.
In October 2006, the Chairman of the House Ways and Means Committee, Bill Thomas (R-CA), sent a letter to then-NCAA President Myles Brand, challenging Brand to explain and defend the NCAA’s nonprofit status, particularly concerning football and men’s basketball.
Thomas suggested that the NCAA’s nonprofit tax status should be revoked entirely, or, in the alternative, major sports revenues should be subject to the Unrelated Business Income Tax (UBIT). Under the UBIT, the NCAA and Power 5 would pay taxes on their football and men’s basketball revenues but retain their nonprofit status.
Note: For a discussion of the tax implications of the NCAA/Power 5 business model and a critique of Thomas’ letter, see John D. Colombo, The NCAA, Tax Exemption, and College Athletics, 2010 U. Ill. L. Rev. 109 (2010).
In response, Brand leaned into his formulation of the “collegiate model” and the integration at the definitional level of the business activities of big-time sports with the broader values of higher education.
The IRS did not get involved, and nothing came from the Thomas-Brand exchange.
The propriety of the NCAA’s tax-exempt status has been discussed in academic circles over the years but has not gained traction as a serious policy issue.
However, the IRS recently invoked its regulatory authority to challenge the legitimacy of nonprofit NIL collectives.
The nonprofit collective issue became a legal and policy issue in September 2022, when Senators John Thune (R-SD) and Ben Cardin (D-MD) introduced the “Athlete Opportunity and Taxpayer Integrity Act” that would regulate nonprofit NIL collectives to make them compliant with IRS nonprofit tax rules and regulations.
Nonprofit collectives were treating donations as tax deductible.
Thune has been a consistent NCAA/Power 5 ally in Congress, supporting NCAA and Power 5 positions. Nonprofit collectives play a small role in the current NIL marketplace. When Thune’s bill was released, fewer than 200 NIL collectives operated as nonprofits.
However, one potential benefit of the Thune-Cardin bill was that it could crack the dam on Congress’s historic ambivalence on passing legislation that substantively regulates college sports. A noncontroversial bill like theirs might provide momentum toward further congressional action.
On May 23rd, 2023, the IRS issued an “Advice Memorandum” suggesting that nonprofit NIL collectives do not further a legitimate tax-exempt purpose under 501(c)(3). While the memo does not have the force of law, it supported NCAA/Power 5-friendly themes (“...this Office also finds significant the numerous statements by athletics directors, boosters, and others on the importance of NIL collectives, including nonprofit collectives, to the retention and recruitment of student-athletes.”).
The memo also relied on NCAA-Power 5 friendly sources to set the framework for its analysis, including the advocacy-oriented Hearing Memo from the March 29th, 2023 House hearing in the Innovation, Data, and Commerce Subcommittee chaired by Gus Bilirakis (R-FL).
The memo received little critical coverage or analysis in the media, but it raises several red flags.
First, the IRS is conservative in its issuance of Advice Memoranda. They are typically reserved for tax policy issues of significance and scale. Targeting a group of less than 200 actors in a niche market hardly seems worth IRS emphasis.
Second, of all the potential tax issues in the big-time college sports marketplace, why choose nonprofit collectives?
The concerns raised in 2006 by Bill Thomas on the legitimacy of the NCAA and Power 5’s nonprofit status are even more relevant today, given the exponential growth in the professionalization and market value of big-time football and men’s basketball. (see images below; Senator Chris Murphy’s [D-CT] “Madness, Inc.” and chart from 2020 article by Garthwaite, Craig, Jordan Keener, Matthew Notowidigdo, and Nicole Ozminkowski. “Who Profits from Amateurism? Rent-Sharing in Modern College Sports” (2020).
Similarly, the IRS could have chosen to target the NCAA’s excessive executive salaries that challenge the blush test in the education nonprofit world. (see image below of NCAA 2022 Form 990 tax return, Schedule J)
Additionally, the IRS could have questioned the NCAA and Power 5’s aggressive and widespread lobbying activity, both in Congress and in public. The IRS places limits on nonprofit lobbying activity.
Note: For a discussion of the NCAA/Power 5 lobbying campaign, see the Lobbying Tab and the Lobbying Chart in the Explore menu on the Homepage; see also the DYK Podcast interview with Shiela Krumholz, former Executive Director of OpenSecrets.
Importantly, no representative from the IRS has testified at any of the eleven congressional hearings held over the last four years.
B. U.S. Department of Justice Criminal Division
The DOJ’s criminal Division enforces all federal criminal laws except those statutorily assigned to the Antirust, Civil Rights, Environment/Natural Resources, or Tax Divisions.
In September 2017, the DOJ, through acting U.S. Attorney for the Southern District of New York Kim Joon, announced criminal prosecutions of big-time college basketball assistant coaches, shoe company representatives (adidas), and athlete agents/financial advisors.
After an extensive FBI investigation, the defendants were accused of paying prospective athletes to attend a particular adidas-sponsored university or paying enrolled athletes to sign with a specific agent/advisor in violation of federal wire fraud and conspiracy laws.
The NCAA’s amateurism-based compensation limits formed the legal predicate for the wire fraud charges. In the Gatto case, Southern District of New York judge Lewis Kaplan articulated the “Victim University” theory.
Judge Kaplan contended that because of amateurism rules, the conduct of the defendants (1) denied schools the ability to allocate athletic scholarships because ineligible athletes received scholarship money, (2) subjected schools to an increased risk of NCAA violations, and (3) induced the schools to rely on false attestations by athletes that they had not violated amateurism rules.
Alleged payments to prospective athletes ranged from $40,000 to $100,00. All the athletes and assistant coaches were African American. No head coaches (predominately white) were prosecuted.
The defendants were ultimately convicted and received prison time or probation.
Many (including some judges tasked with processing the cases) questioned the wisdom of using substantial federal law enforcement and judicial resources to investigate and prosecute such low-level “criminal” activity.
Is it likely that federal prosecutors would have even consideredal case on the same or similar facts after the U.S. Supreme Court’s unanimous decision in Alston, which making a crimin called into question the principle of amateurism?
