We mentioned last week that college football players pushing for union recognition likely have not thought through all the ramifications of their success, however unlikely it may be. Unions consist of employees. Employees must pay income tax on their earnings. Taxable income does not have to be cash. Scholarships have value as do all the other benefits received by scholarship athletes – all would be taxable and the taxman is impatient.
The question if student athletes become employees will be with regards to whether what they’re doing has become more entertainment-based than educational. If so, the IRS could determine that athletic departments should not be tax-exempt organizations (if they hold their own exemption), or that the athletic department’s revenue should be subject to Unrelated Business Income Tax. That tax could range from 15-35 percent at the federal level and would vary at the state level.
Maybe you’re thinking athletic departments shouldn’t be tax-exempt anyway, so what’s the big deal? The big deal is that most athletic departments generate more money from donations than from all those millions in television money you hear about in the news. For example, in fiscal year 2012, University of Florida’s athletic department reported contributions of $46 million. Its conference distribution, which included revenue from the conference’s television contract and payouts from bowl games and March Madness, totaled $22 million.
What if those donations weren’t tax deductible? Sure, maybe you’d still make the required donation for your seat at the football or basketball game, but would big-money donors who generally kick start capital campaigns still make those donations? University of Central Florida’s athletic department recently received the largest gift in its history: $4 million from the Wayne Densch Charitable Trust for a new leadership center for student athletes. As a charitable trust, the gift would not have been made to a for-profit entity. Not to mention, gifts over $14,000 would be subject to the gift tax. So, not only would big-money donors no longer get a tax deduction, but now they’d be paying for the right to donate to the athletic department.
The loss of tax exemption would have a number of other implications. Naming rights would no longer be tax deductible for facilities owned by the athletic department. That might mean no $15 million naming rights deal at UCF for Bright House Networks Stadium or no $60 million naming rights deal at University of Illinois for the State Farm Center.
There would also be implications for bowl games, which enjoy a tax-exemption because they support amateur athletics. If football players were employees, it’s likely bowl games would lose their exemption. Athletic departments would no longer be issuing tax-exempt bonds to build stadiums and arenas, although the university could still do so. Otherwise, they’d be looking at higher commercial loan rates.