A Pressure Point for the NCAA?

By Yevgeny Shrago

When the National Collegiate Athletic Association’s proposal to permit multi-year athletic scholarshipssurvived an override vote earlier this month, some of the legal implications were obvious. The Department of Justice had already conducted a preliminary inquiry into the antitrust status of the NCAA’s old scholarship rules, which permitted scholarships to be granted for only one year at a time. Various powerfulpolitical figures, including the President, have expressed their displeasure with the way the NCAA handles its football national championship and conference realignment and the DoJ has hinted that there may be antitrust violations to be found in those parts of the sport as well.  It’s hard not to see the DoJ investigation as a message to the NCAA that it can no longer hide behind protestations of amateurism and higher education and that it must acknowledge that it has become a billion dollar business and act accordingly.

With the passage of this new proposal, the NCAA may have staved off one line of inquiry, but college sports are a dirty business on many levels and federal intervention will continue.  One criticism raised by flacks for the college sports industry is that DoJ must have better things to do.  They’re right: using the DoJ to make changes in college sports is not the most effective use of federal resources.  The US government may have a far more powerful weapon against the NCAA, one that the recent change has made even more available.  This weapon is the tax code.

Under Section 117 of the Internal Revenue Code, qualified scholarships are excludable from gross income (this means you don’t need to report them as income when you file your taxes).  Subsection (c), however, eliminates those scholarships for which the recipient must provide some service in order to receive the scholarship from the scope of this provision.  The examples provided are teaching and research, but playing football can just as easily qualify.  Currently, athletic scholarships are not counted as taxable income by the IRS, as long as they meet certain other basic requirements, like the student working toward a degree.

Probably the most plausible argument for not taxing these scholarships (aside from the generally bad optics of taxing education) is that those scholarships were previously one-year renewable scholarships. Technically, a player could arrive on campus, quit the team the first day and still reap that first scholarship payment.  She simply wouldn’t receive another scholarship offer at the end of the year.  This guarantee is the distinction between a  lacrosse player and his TA.  With the passage of the four year scholarships, things suddenly change.  Now a player can actually lose something she had by refusing to continue playing.  If the IRS chose to assess a tax on scholarships now, it would have little trouble justifying its decision in court.

If the NCAA is going to continue running football and basketball like a business, even as its defenders claim that athletes are being paid via their scholarship, then the case for taxing scholarships grows even stronger. This is not to suggest that the IRS should deny lower-income students the opportunity to obtain a college education through athletics, but the administration should use this leverage to force the NCAA to treat its student-athletes more like students and less like commodities.

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