More than an Athlete: The Student-Athlete Compensation Debate and Its Potential Tax Consequences on the NCAA.

AuthorRichard, Molly

"The NCAA's business model would be flatly illegal in almost any other industry in America. All of the restaurants in a region cannot come together to cut cooks' wages on the theory that "customers prefer" to eat food from low-paid cooks. Law firms cannot conspire to cabin lawyers' salaries in the name of providing legal services out of a "love of the law." Hospitals cannot agree to cap nurses ' income in order to create a "purer" form of helping the sick. News organizations cannot join forces to curtail pay to reporters to preserve a "tradition" of public-minded journalism. Movie studios cannot collude to slash benefits to camera crews to kindle a "spirit of amateurism" in Hollywood. Price-fixing labor is price-fixing labor." (1)


    In 2017, the National Collegiate Athletic Association (NCAA) reported one billion dollars in revenue for the first time in history. (2) The majority of that revenue is generated by television broadcasting rights and championship tournaments. (3) While earning billions of dollars in annual revenue, the NCAA also qualifies as a charitable organization under the Internal Revenue Code (IRC) and is exempt from paying federal income tax. (4) Under IRC [section] 501(c)(3), one way to qualify as a tax-exempt charitable organization is to "foster national or international amateur sports competition." (5) According to the NCAA bylaws, NCAA athletes are only eligible to compete if they are "amateur student-athlete[s]." (6) Thus, the amateur status of college athletes helps protect the NCAA from paying a hefty tax bill. (7)

    Some Division I student-athletes receive athletic scholarships to attend their colleges and universities, but historically, they could not receive any other compensation for their athletic participation pursuant to NCAA bylaws. (8) College athletes took legal action against the NCAA, specifically claiming it is a violation of antitrust laws to prohibit a student-athlete from receiving compensation for the use of their name, image, and likeness (NIL). (9) It was not until recently that athletes had major success in the courts, in both O'Bannon v. NCAA and NCAA v. Alston. (10)

    In 2019, California lawmakers enacted a law that makes it illegal for California colleges and universities to prohibit NCAA college athletes from profiting off the use of their NILs. (11) The law, known as the Fair Pay to Play Act (FPTP Act), went into effect in 2021. (12) On June 30, 2021, the NCAA implemented a temporary NIL policy allowing NCAA college athletes to benefit from the use of their NILs. (13) After the new NIL policy, Division I athletes immediately started entering partnerships with companies such as Cameo and Barstool Sports. (14) Even Tom Brady took advantage of the new NIL rule, partnering with college athletes to represent his new clothing line. (15) Allowing college athletes to receive NIL payments will likely affect the amateur status of student-athletes, which could have an effect on the tax-exempt status of the NCAA. (16)

    This Note examines the NCAA and its potential tax consequences as a result of a new rule that allows student-athletes to receive compensation for the use of their NILs. (17) This Note covers the history of the NCAA from its origins to its present operations. (18) Part II looks at the definition of amateur and its meaning to the NCAA and IRC. (19) Part II also discusses the O'Bannon and Alston decisions and concludes with the NCAA's response to the new NIL rules. (20) Part III analyzes whether paying college athletes--particularly Football Bowl Subdivision football (FBS football) and Division I men's and women's basketball players--will void the NCAA's 501(c)(3) status and result in major tax consequences. (21) This Note concludes by suggesting the Internal Revenue Service (IRS) review the tax-exempt status of the NCAA following the recent NIL rule change and the expanding commercial enterprise of college sports. (22)


    1. The NCAA: A History

      1. The Origin of College Sports

        Students largely managed early intercollegiate athletics themselves. (23) The first college sporting event was a regatta between Harvard and Yale at Lake Winnipesaukee in 1852. (24) By 1858, college students started creating sports societies for rowing, baseball, and track and field. (25) In 1869, the first college football game took place between Princeton and Rutgers; in 1876, Harvard, Princeton, and Columbia established the Intercollegiate Football Association. (26)

        College sports administration quickly became financially demanding and time consuming, forcing a transition from student to faculty oversight by the 1870s. (27) Despite the transition, officials grew concerned about the safety of intercollegiate athletics; in 1905 alone, there were eighteen deaths and hundreds of injuries in college football. (28) In addition to injuries, college presidents also worried about the commercialization of college sports; one opined that "it will soon be fairly a question whether the letters B.A. in the college degree stand more for Bachelor of Arts or for Bachelor of Athletics." (29) In response to these concerns, President Theodore Roosevelt, White House officials, and officials from major college football programs led a concerted effort to regulate college football rules and formed the Intercollegiate Athletic Association (IAA), which was renamed the NCAA in 1910. (30)

      2. The Enforcement Authority of the NCAA

        By the 1920s, college sports were an integral aspect of higher education. (31) With the increase in popularity came increasing commercial possibilities and pressures, taking away from the health and wellness benefits of athletics. (32) The Carnegie Foundation for the Advancement of Teaching's 1929 report noted the negative effects of commercialism in college sports. (33) Following the Carnegie Report, the NCAA revised recruiting rules in an effort to restore integrity in college sports. (34)

        In 1948, the NCAA developed the Sanity Code, intending to "alleviate the proliferation of exploitative practices in the recruitment of student-athletes." (35) The Sanity Code prohibited schools from giving athletes financial aid based on their athletic ability and expelled schools from the NCAA if they violated the rules. (36) Due to the Sanity Code's unreasonable expulsion punishment, new NCAA amateurism rules replaced it after only two years; the new rules allowed schools to provide scholarships to students in exchange for athletic participation. (37) In addition, a new enforcement division within the NCAA--the Committee on Infractions--gained the authority to dole out more proportional penalties to members that violated the rules instead of expelling them. (38)

        The NCAA gradually became a powerful governing authority over college sports. (39) In 1985, the Presidents Commission--comprised of college presidents--called a special convention to confront the enforcement authorities within the NCAA and establish their role in ensuring academic integrity in athletic programs. (40) Today, the Board of Governors is the NCAA's highest governing body, consisting of twenty-five members--including the NCAA's President as well as college presidents and chancellors from each division-committed to upholding the NCAA's core values. (41)

      3. Television Broadcasting Rights

        With the governance of the NCAA sorted, college sports quickly became big business. (42) In the 1950s, the NCAA signed its first television broadcasting contract, valued at over $1 million, to air college football games. (43) Fearing the adverse effects of live television on in-person football attendance, the NCAA developed a plan to limit the number of televised games each season. (44)

        In 1979, the College Football Association (CFA) believed that major football programs should have more power in deciding which games were televised and negotiated their own contract with NBC. (45) In response, the NCAA announced that they would take disciplinary actions against any CFA member that complied with the NBC contract. (46) Soon after, the University of Oklahoma and the University of Georgia filed an antitrust action against the NCAA in NCAA v. Board of Regents. (47) Ultimately, the Court upheld the district court's finding that the NCAA television plan violated antitrust laws and forced the NCAA to overturn policies limiting the games broadcasted each season. (48) In its analysis of the college sports industry, the Court stated, "[i]n order to preserve the character and quality of the 'product,' athletes must not be paid." (49) Although Board of Regents represented a win against the NCAA's television policy, Justice Stevens's famous words have since been used against student-athletes in antitrust litigation. (50)

    2. Fighting for Their Rights: Student-Athletes' Legal Battles Against the NCAA

      1. The Antitrust Argument

        Following the universities' success against the NCAA in Board of Regents, student-athletes began challenging the restrictive practices of the NCAA under the Sherman Act. (51) The Sherman Act is the United States' antitrust law intended to prevent unreasonable restraints on trade. (52) In NCAA antitrust litigation, courts apply a "rule of reason" analysis to determine if there is an unreasonable restraint on trade in the relevant market--typically defined as the market for athletic services in Division I basketball and FBS football. (53) Courts follow the rule of reason's three-step framework:

        (1) The plaintiff bears the initial burden of showing that the restraint produces significant anticompetitive effects within a relevant market. (2) If the plaintiff meets this burden, the defendant must come forward with evidence of the restraint's procompetitive effects. (3) The plaintiff must then show that any legitimate objectives can be achieved in a substantially less restrictive manner. (54)

        In 1988, Southern Methodist University (SMU) filed a lawsuit against the NCAA, claiming the NCAA's restrictions regarding player...

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