College Athletics – Teamwork, Dedication, Talent and….Taxes?
The question of whether student athletes in big-time college programs should be considered students who play sports or athletes who attend college is nothing new.
Along with the various social and economic questions often raised by this issue, last year's case of O’Bannon et al. v. NCAA has added taxation to the list of uncertainties that surround the debate.
In O’Bannon, a federal court for the Northern District of California ruled that NCAA regulations prohibiting payments to student athletes violate antitrust laws. The lead plaintiff, former UCLA basketball star and member of the 1995 UCLA national championship team Ed O’Bannon, filed suit in 2009 after discovering that his likeness was being used in a video game without his consent. In finding for the plaintiffs, the court ruled that colleges with Top 10 conference football teams and colleges with Division I men’s basketball teams may offer recruits a share of:
- Revenues from the use of the athlete’s name, image and likeness while they are in school. This amount may be capped by the NCAA while the athlete is still in school so long as the cap is not less than the full cost of attending school.
- Licensing revenue to be deposited annually into a trust for the athletes’ benefit and paid once the athletes leave school or their athletic eligibility expires. The NCAA can cap this amount as well so long as it is not less than $5,000 per year per athlete. Schools can also individually choose to pay lower amounts.
The decision, which has been appealed by the NCAA, becomes effective July of 2016, meaning the new rules will not apply to anyone enrolling in college before July 1, 2016. From a tax perspective, O’Bannon is significant because these amounts can be in addition to what would be considered a full grant-in-aid (i.e. full scholarships).
As was discussed in the September issue of For the Record in “Student-Athlete/Athlete-Employee: Tax Consequences, For Sure,” athletic scholarships are not considered income if they are “qualified.” Under Sec.117 of the Internal Revenue Code, for a scholarship to be qualified, the recipient must be a degree candidate at an eligible educational organization and the scholarship must be used for qualified expenses. Qualified expenses are defined as tuition, fees, books, supplies and other equipment required for coursework. Note that room and board are not considered qualified expenses. In addition, with limited exception, if the student is required to perform services in exchange for the scholarship, the funds received attributable to those services are considered taxable wages.
Revenue Ruling 77-263 further provides that if the amount awarded to the student-athlete exceeds the amount of accepted educational expenses (including room and board), it will no longer be considered a scholarship, but instead compensation for participation in intercollegiate athletics. The ruling also specifies that a school may not require the student to participate in a certain sport nor require participation in any other activity in lieu of such sport. Failure to meet these requirements would not only cause the scholarship amount to be taxable, but, under NCAA rules, could potentially disqualify the student-athlete from further participation in college athletics as well.
Of the most immediate tax implications, given that the O’Bannon ruling itself refers to a student-athlete’s share of potential revenue from use of his or her likeness as compensation, it may be hard to define this revenue as anything but taxable income. In addition, if a school pays licensing revenue by contributing annual deposits in trust for an athlete’s benefit, such income would also likely be considered compensation. That a student-athlete may not withdraw any of these funds while still in school does not necessarily mean the student would not be immediately taxed on such funds, thereby giving rise to phantom income.
Further, if the annual trust deposits are indeed compensation for services, the implication is that such payments are contingent on the athlete participating in the sport. Since qualified scholarships cannot require participation in an athletic program, such interpretation may cause the entire scholarship to be considered unqualified and therefore taxable. Although these issues were not addressed by the court, they clearly have far reaching implications for both schools and student-athletes alike.
While there is little doubt that college sports is big business, the role of the student-athlete in that business remains up for debate. For those who argue that these athletes should receive some economic benefit over and above a scholarship for their efforts, O’Bannon is likely seen as a victory. However, once all the implications of this case are realized, star college athletes like Ed O’Bannon may find they get more than they bargained for, namely a tax bill from Uncle Sam.
