Sportsgeekonomics

Musings on Sports Economics

A simple generic example of how Title IX might work in a free market

In our hypothetical, there is a valued Product — call it Product M.  There is also a law saying that every dollar you spend to acquire Product M, you must also ensure that your spending on various Product Ws is roughly proportional, though you don’t need to spend it all on a single Product W, can spread across many Ws.

Let’s assume Product W doesn’t ever add profit, even though of course in most real-life uses of this hypothetical, it might.  You can think of this as being a situation where current spending on Product W is at or above the equilibrium amount, so that additional spending on Product W is not profitable, if that makes things feel more realistic for you.

Product M (in this hypothetical) is purchased in a very competitive bidding market, where dozens of would-be purchasers calculate the benefit of Product M to their overall revenue (and profit) position, and the highest bidder (in some overall sense) wins.  While the highest bidder (Buyer 1) obviously needs to outbid everyone, most importantly, to win the bid, the highest bid needs to outbid the second highest bidder (Buyer 2).  (This is a little like the old joke that say you don’t have to actually outrun the bear, you just need to outrun the other guy — if you beet the second highest bidder, you automatically beat the third highest, the fourth, etc.) Thus, we can ignore all the other bids and just treat this like a two-person race.  And to win that race, you need to bid just a tiny bit more than the maximum amount of value the other firm places of Product M.

Thus, if we ignore the matching law for a moment, the winning bid is something like (Total Profit of Buyer 2 from acquiring Product M) +$1. 

Imagine that Buyer 2 places a maximum value of $500,000 on a specific Product M, figuring that adding Product M to its production function would increase profits by slightly more than $500,000.  Thus the winning bid might be $500,001, because with that bid, the profit to Buyer 2 of adding Product M to its firm would be negative ( $-1).

[This is a generic hypothetical. Obviously in some uses, it might not literally be $1 — it might climate, or a nicer set of buildings, or closeness to home, or any non-pecuniary benefit.  I don’t think this simplification affects the outcome of the analysis, but feel free to email me if you disagree and I might add nuance to a future model.  And when I use Profit, you can think of it as “net benefit” if you’re one of those people who thinks the word profit isn’t applicable to other situations that involve costs & benefits, such as non-profits’ purchase decisions.  So the idea is if the profit is negative, that’s including *all* of the non-cash benefits too — negative profit here literally means you are worse off, in total, with the product than without it.]

Ok.  But now let’s add the law that says for every dollar spent on Product M, you must also spend a dollar on some number of Product Ws.  And let’s look at what that does to Buyer 2’s valuation of Product M.

Previously, Buyer 2 figured out that adding Product M would increase profits by $500,000, and so it was willing to spend up to that amount to acquire Product M, but after that, on balance, Product M would cost more than its benefits.  But now, each dollar you spend on Product M brings with it a matching dollar of spending on Product W. 

Since Product M adds $500,000 to Buyer 2, now the maximum Buyer 2 will spend on Product M is $250,000.  This is because that $250,000 purchase of Product M brings with it a second $250,000 of spending on Product W, and so by spending any more than $250,000, Buyer 2 would incur negative profits.  For example, spending $300,000 on Product M would bring with it $300,000 of spending on Product W and the total, $600,000 exceeds the benefit of bringing Product M into the fold, resulting in a loss of $100,000.  Thus Buyer 2 won’t bid more than $250,000, and the winning bid for Buyer 1 is now $250,000 plus $1.

So the winning bid drops by 50%.  But before Buyer 1 gets too excited, don’t forget that buyer also has to obey the law and spend an equal amount on Product W.  So Buyer 1 win outbids Buyer 2 with a $250,000 (and a penny, whatever) bid, but then must set aside $250,000 for Product W.  The result is that Buyer 1 spends the same amount as it would have in a market without this law linking Product M and Product W, but now instead of the payment going exclusively to the seller of Product M, half of it goes to the makers of Product W.

The law cannot raise the net value of Product M.  And the law cannot raise the total best amount of spending on Product M.  But what the law can do is, in essence, tax spending on Product M, and give the tax receipts to Product W.  This, in turn, depresses the market rate for Product M.  Since the tax ends up being 50% of total spending, the result is that the market rate for Product M is cut in half, but total spending remains the same, with the other half going to Product W.

That’s how an auction/bidding market would adjust to the imposition of a law tying spending on one product with spending on another.  This is generic economics, but you can think of it as a model for how Title IX would work in a market where (some) male athletes received competitive offers without a specific maximum cap.  I used Product M and Product W, but if you want to, you can imagine Product M was Andrew Wiggins and Product W was spending on women’s sports at the various schools that would have been bidding for Wiggins in an open market when he was coming out of high school.  The way I describe the law in the example is not exactly how Title IX works — Title IX has not resulted in dollar-for-dollar matches between financial aid spending on men and on women (which is more like 60/40), and it certainly has not resulted in equal spending on men’s and women’s sports overall (which is far closer to 80/20 than 50/50, at least in FBS).  But we can imagine it is a true dollar-for-dollar match and the example above then tells you why it doesn’t break the bank.

Posted by
Andy Schwarz

James Brown and the Rhetoric of Giving vs. Opening Up Doors

James Brown wrote and sang, “I don’t want nobody to give me nothin’, open up the door, I’ll get it myself.”

I’m reminded of those lines whenever I read discussions of the economics of college athletics.  People in power are always using words like “give” AND “provide” — as if the debate is about delivering sufficient benefits for subsistence, rather than opening up a framework for athletes to earn what they are worth in an open market. 

Some very recent examples, though not the only ones:

Secretary of Education Arne Duncan on Meet The Press

"… the common sense middle ground in all these things, making students are fed, making sure it if there’s an emergency at home and mom gets very sick or dad passes away, they have the ability to get home and attend the funeral. some students show up with one little bag of clothes, all they have in the world. there’s some things you can do there.”

Stanford Coach David Shaw

"I’m curious what’s really driving it. I’ve seen everything, and everything that’s been asked for, my understanding is it’s been provided. I think Northwestern does a phenomenal job providing for their kids, …"

University of Connecticut:

"…scholarship athletes are ‘provided the maximum meal plan that is allowable under NCAA rules.’"

(I’m sure there are better examples, I might even add them later.)

The very phrasing of the now familiar question “should college athletes be paid?” buys into the paternalism inherent in the current system.  The question is not should they be paid, but would they be paid, if the doors were not shut by collective agreement?

We don’t ask whether administrators should be paid; instead we let the give-and-take of salary negotiations figure out what the right pay is.  If a willing school wants to pay a willing athletic director half a million dollars, without first clearing it with its competitor schools, we don’t require society to grant permission. In the 1990s, there was a collusive effort to cap the amount that some college basketball coaches could earn, and the courts found it to be illegal because collusion to prevent pay “ultimately robs the suppliers of the normal fruits of their enterprises.”

In essence, the court said — open up the door, let the free market in, and let the coaches do it themselves.  And did they!

Management tends to be pro-market, except in the rare cases where in open-market negotiations, labor might have the upper hand.  Then the rhetoric invariably shifts to words that imply more of a noblesse oblige attitude.  “This is good enough.”  “Be happy with what we give you.” “I doubt you’re really all that hungry, and even if you are hungry, it’s good for you.”   Instead of market competition, big-time college sports have formed what is essentially an owners union.  The owners union decides payment collectively knowing, of course, that competition among themselves would drive the market rate upwards.

At the same time, the owners union (and many members of the sports media) often argue “Don’t we give these kids enough already?  What else do they want?”

I can’t speak for “these kids” (who are actually all adults) but I can tell you what I think they want, just the same thing James Brown advocated: open up the door to let them get it themselves, whether it’s at a collective bargaining table or in individual negotiations.  Competition policy is about is self-empowerment.  Currently, 351 independent colleges and universities collectively deny thousands of young men the opportunity to realize their earning potential in a potentially lucrative market.  The issue shouldn’t be whether the food allotment they are given cuts off at 7pm or 11pm.  It should be whether the door to negotiate the terms of the player-team agreement is open or closed and why that’s so.

The closed door keeps some athletes so poor they qualify for Pell Grants; for some of those athletes, the market price would lift them up, so they would no longer need government assistance.  Wouldn’t that normally be an American success story, how a young man turned his unique talents into a well-paying job instead of burdening the taxpayers by staying poor and qualifying for government grants?

I want the young men with these sought-after talents to have the opportunity to realize their earning potential in a lucrative American market that already exists, not to have to go to Europe to do it, not to have the benefit limited to 60 or so per year of the very best.  I want the door opened, and then to let them do it themselves. 

Instead, what we end up with is athletes, who would earn money but-for the collusive rules prohibiting it, taking federal welfare in the form of Pell Grants. 

The doors are closed through collusion. This is not a system any American would design, except those doing the door-closing and letting the rest of us, who pay for the Pell Grants, etc., foot the bill. 

Though James Brown was talking about a different era and a different problem, he said it well: 

Some of us try
As hard as we can
We don’t want no sympathy
We just wanna be a man

I don’t want nobody
To give me nothing
Open up the door
I’ll get it myself
Do you hear me?

Posted by
Andy Schwarz

The Conspiracy is not the Fault of the Competitive Fringe

This is a post about the current trend to blame the lack of economic competition for college athletes on the NBA or the NFL.  But I’m not going to discuss sports specifically.  You will have to draw your own parallels.  So yes, this is another one of my parables.

—-

In this parable, there are 351 gasoline car manufacturers, plus Tesla.  Imagine that every car manufacturer except Tesla got together to fix prices and to ensure that gas mileage was no more than 20 mpg.  They did this is the name of competitive equity, saying if they competed on better gas mileage, the less good manufacturers might drop out of the industry.  They did this in the name of charity, saying the profits from their high-priced cars were used to fund a series of otherwise commercially unviable  thrift stores that employed low-income people who might otherwise not have an opportunity to work.  They blamed Federal law for requiring them to pay a portion of their sales revenue in taxes, which made running a Car Department more expensive than if they did not have these Federal obligations to set aside some of their money for others.

In this parable, Tesla only has one small factory and it is making every car it possible can.  It doesn’t want to make more cars.  It’s offering really nice, expensive-but-worth it, cars.  They get better gas mileage and they are a totally better deal for the money.  But their factory is really small; it basically can only make 60 or so cars per year.  Some of the cars are sold to young men who haven;t even finished college.  Some are sold to recent college graduates.  A few go to guys from Europe willing to ship the car over to them. 

After a long period of this system, people begin to ask why the other 351 car manufacturers didn’t have to compete with each other.  Why was every car offered at an agreed-upon price?  What was every car 20 mpg?  They arguments put the gasoline manufacturers on the defensive, but then they focused grouped the issue and stumbled on a great idea.  Blame Tesla!!!  The problem is that Telsa only makes 60 cars a year, they said.  It’s not that we’re price-fixing the other tens of thousands of cars, or that we’re all agreeing on the features of the car we make.  No!  The problem is that Tesla is not aggressively growing the number of cars it makes and stealing business from us.  The problem is that Tesla is perfectly content to make profits in the shadow of our price-fixing conspiracy, and that if you are made at us for fixing prices or limiting options, your anger is misguided.  It’s Tesla’s fault!!!

If Tesla just sold to the best of our customers, we’d have fewer high-quality customers and so it would seem less unfair.  If Tesla actually opened a second factory and made a slightly less high-quality Tesla and sold to more of our customers, it would be even better!  Yeah, it’s Tesla’s fault for not being a stronger fringe competitor, not our fault for cartelizing 99% of all car sales.

Except, no, it’s not Telsa’s fault.  Our economic system lets individual firms make individual choices.  And it also lets firms, acting with their unions, make decisions that might limit their competitive efforts in other markets.  But our economic system does not excuse collusion among many firms just because one fringe competitor choose not to take advantage of the market opportunities left open to them by collusion. 

With its limited capacity, Tesla can only sell 60 cars.  If it sells one to a current gasoline customer, someone else won’t get one.  If  kid with only one-year of college buys one, some kid with 2-years of college won’t.  For every person who gets a better deal, some else is getting forced back into the clutches of the colluding gasoline car manufacturers.

Yes, if Telsa opened a second factory, it might put pressure on some of the higher-end car manufacturers to offer better gas mileage or better prices.  But it’s not Tesla’s jobs to solve the problems created by the gasoline car monopoly.  It’s not Tesla’s fault the collusion exists, and it’s not Tesla’s fault that the people buying gasoline cars are forced into the grips of a monopolist.  Put the blame for abuse of monopoly on the creation of that monopoly power, through collusion.  Looking anywhere else, and you’re falling for the cartel’s latest focus-group-tested spin.

Posted by
Andy Schwarz

Quiz: Can you tell the difference between a profitable and unprofitable industry?

A profitable industry typically has new firms entering, new hires, wages rising. An unprofitable industry has firms exiting, layoffs, stagnant pay.

How here is a quiz.  One of these industries is unprofitable and one is profitable:  College Sports and Print Journalism.

Which is which?

Here are two articles to help you decide:

College Sports: http://www.usatoday.com/story/sports/ncaab/2014/04/02/ncaa-tournament-basketball-coaches-compensation-obannon-case/7208877/

An analysis of what the NCAA labels “generated revenue,” such as money schools collect from TV rights, ticket sales, sponsorships and donations, shows it is the major driver of revenue growth in college sports. Among the 55 public schools in the major conferences, generated revenue amounted to $4.5 billion in 2012-13, an increase of $734 million, or 19%, in just four years.

But another category grew even faster — the total pay for coaches in all sports rose 26% in the major conferences over the same period. And while more and more basketball coaches are landing huge deals, they still trail their football counterparts, 50 of whom made at least $2 million for the 2013 season, according to a database released by USA TODAY Sports in November.

Print Journalism: http://www.nj.com/news/index.ssf/2014/04/star-ledger_cuts_170_jobs_including_40_newsroom_positions.html

In a grim day of reckoning at the state’s largest newspaper, the owners of The Star-Ledger today said they were eliminating the jobs of approximately 167 people, including 25 percent of the newsroom.

The sweeping job loss was part of a plan announced last week in an effort to greatly reduce costs and combine resources by consolidating the operations of The Star-Ledger, along with its sister publications in New Jersey and its online partner, NJ.com, which also announced cutbacks today.

The Star-Ledger, which has won three Pulitzer Prizes and several national awards, currently has 750 employees, of which approximately 500 are non unionized. None of the cuts announced today will affect unionized personnel, who are covered under existing labor contracts.

The cuts will mean the loss of 40 of the 156 reporters, editors, photographers and support staff in The Star-Ledger newsroom, which had already seen a parade of people leaving in recent weeks over concerns about the paper’s future and the continuing fiscal pressures affecting newspapers across the country. One of those leaving voluntarily had been slated to be cut.

The newsroom is not unionized.

Posted by
Andy Schwarz

Good Reads: Travis Waldron, Dan Wetzel, and Tim Dahlberg

Travis Waldron gets at some of the problems with the recent Meet the Press “debate” namely improper question and it was missing (at least) one side of the argument: http://thinkprogress.org/sports/2014/03/26/3419050/how-meet-the-press-failed-to-provide-fair-debate-about-college-athletes-compensation/

Dan Wetzel exposes how Ohio State is paying for wins, just whom you’d expect: http://sports.yahoo.com/news/college-wrestler-wins-title—athletic-director-gets—18-000-bonus-210331816.html  He ties this in to the same meet the press arguments.

I particular like this sentence:

It about free markets for the bosses but not for the players, who can neither individually nor collectively negotiate anything.

It reminded me of a post I made a while back called Capitalism for All, Socialism for College Athletes.

Tim Dahlberg ties the wrestling in to other issue of voice: http://abcnews.go.com/Sports/wireStory/column-profits-players-ncaa-23058135?page=1

Posted by
Andy Schwarz

NYT takes the Sportsgeekonomics approach to Title IX

Worth a read in full, so go check it out:

http://www.nytimes.com/2014/03/23/opinion/sunday/pay-for-play-and-title-ix.html?_r=1

But here is the key section:

Under Title IX, the total amount of financial aid available to male and female athletes must be “substantially proportionate” to their overall participation rates. Paychecks would presumably be held to the same standard. If, for instance, a court ordered a university to give a share of its television revenue to male players, an equitable percentage would have to flow to female athletes.

Similarly, should the courts decide that elite athletes are entitled to stipends in addition to scholarships, colleges would have to distribute money proportionally between the sexes.

There would be no cause for bankruptcy in either case. Like any business confronting a new expense, colleges could reduce overhead or raise prices. Right now, the highest-paid public employee in many states is the football coach. That may not be possible once players get a cut.

Title IX might not come into play at all if the N.C.A.A. allowed athletes to negotiate licensing agreements independently. Money would flow to athletes directly, and the colleges would not be involved. Although the vast majority of athletes would earn nothing, a few stars would get sizable paychecks.

None of this is to say that the end of amateurism, if it ever arrives, will be seamless. Colleges will have to make some tough choices. But they should be putting their energy into preparing for that possibility, instead of dreaming up reasons to stop it.

In my own writing, I’ve discussed this a bunch.  Here are three spots:

Title IX in its own words

Myth 6: We can’t pay them or else we’d violate Title IX

See also, Myth 4 of

http://www.slate.com/articles/sports/sports_nut/2014/01/paying_college_athletes_a_point_by_point_evisceration_of_the_ridiculous.3.html

Posted by
Andy Schwarz

Today’s economic essay question

Hypothetical: you run a major college sports conference. You believe that paying athletes more than a GIA (or alternatively, full COA) will lower interest in your sport and thus reduce revenues. The current rules mandating a maximum GIA level go away, the sky is the limit.

Discuss: what level of compensation does your conference choose to offer? If it is above the point where demand for the product decreases, explain the underlying economic model that predicts demand-reducing actions as an equilibrium.

Posted by
Andy Schwarz

This is what non-collusive competition for students looks like

In real life, law schools compete for the best students by offering them, gasp, money in addition to scholarships to come and help the school up its game:

Question: I was accepted to University of Chicago Law with no scholarship and UT-Austin law with 60,000 plus in-state tuition. I plan on practicing in Texas (Houston/Austin/Dallas). Would you choose UChicago over UT?

No one worried about whether UT first agreed with Chicago over how much to give this student.  No one worried about all of the complexities of figuring out what this student was worth.  Chicago decided to offer him nothing more than the chance to pay for and earn a prestigious Chicago degree.  Texas decided that to compete with that, they needed to offer more.  Problem solved, the market way.

Read all about it at: http://lawschooli.com/university-chicago-law-university-texas-austin-law-school-big-scholarships/?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+LawSchooli+%28LawSchooli%29

Posted by
Andy Schwarz

Taxation of College Sports is NOT at issue in the debate over market-based competition

The paper I wanted to write, but found it has already been written

Spoiler: If you’re going to write an article claiming that paying athletes is going to result in colleges or the NCAA paying taxes on their sports earnings, you’re basically wrong.  Even if college sports were totally taxable, there’s little chance of anyone actually owing any tax.

If you follow me on twitter, you may have seen me arguing one of my pet peeves, which is that I do not buy the argument that the tax-status of the NCAA or of major college football programs is an impediment to market-based compensation for college athletes.  In essence that argument goes something like this:

1)     Section 501(c)(3) of the tax code is explicitly reserved for promotion of “amateur” sports.

2)      Absent amateurism, the NCAA and its member schools’ sports programs (or more narrowly, their college football and/or men’s basketball programs) would become taxable.

3)     Thus donations, ticket sales, broadcast revenue, etc., would all be taxed,

4)     Bringing college sports to, at the least, a much lower level of profitability or, in the extreme, vaporizing college sports to a virtual nothing.

5)     Herpes.

I’m exaggerating a bit (though not that much), but as one example of this argument [absent the Herpes joke!], consider this excerpt from a blog post by Kristi Dosh, in which she explains her version of this argument (which also appears in her book “Saturday Millionaires”):

The real cost, however, is in the athletic department losing its tax exemption under Internal Revenue Code Section 501(c)(3). Currently, athletic departments (which are generally a separate legal entity from the university), athletic foundations/booster clubs and bowl games enjoy tax exempt status because they “promote amateur athletics,” an exempt purpose under the Code. If college athletes were compensated and found to be employees, revocation of this tax-exempt status would surely follow.

This would also be the case if college athletes, instead of being compensated by the athletic department, were allowed to profit from endorsements. It would only take a finding by the Internal Revenue Service that these athletes were no longer amateurs (ad I’m sure they’d hate to add another revenue source). And if college athletes are no longer amateurs it’s not just athletic departments who lose their 501(c)(3) status, it’s bowl games as well. 

In addition to the taxes each athletic department would have to pay on any income, they’d likely lose large amounts of revenue as a result of donors no longer being able to make tax-deductible contributions. How would that impact athletic departments, which rely heavily on donor contributions to survive? A CFO at one FBS school told me a “very conservative estimate” would be athletic departments losing 50% of their current donations. I polled ten athletic department executives in total and the range was 25-50 percent.

Kristi and I have argued over this issue before.  In a moment of agitation, I’ve told her consider this to be “concern trolling” where the actual issue isn’t a big deal but in the guise of making sure people are aware of the (overstated) ramifications, the author makes it seem like change is impossible.  Kristi basically told me that if I was so smart, I should go write a paper on it.  [Though she said it much more nicely than that!]

And so I started to do just that.  I have the real luxury of being the nephew of one of the foremost scholars of the U.S. tax law of non-profits, Professor Stephen Schwarz of UC-Hastings College of Law.  He literally (co-) wrote the book on non-profit tax treatment.  I asked him if he’d co-author a paper with me.  As politely as he could, he told me that what I wanted to study had already been done, and done quite well, by Professor John D. Colombo, a chaired professor at the Unveristy of Illinois.  If you’re the kind of person who really enjoys reading a tax law paper over lunch [/raises hand sheepishly], you should go read Professor Colombo’s paper here:

Colombo, John D., The NCAA, Tax Exemption and College Athletics (February 19, 2009). Illinois Public Law Research Paper No. 08-08. Available at SSRN: http://ssrn.com/abstract=1336727 or http://dx.doi.org/10.2139/ssrn.1336727

Professor Colombo starts out with an important warning for those who might dive in without actually understanding tax law:

Unfortunately, most of the folks who opined on the subject [of the NCAA’s tax exemption] revealed virtually no knowledge of the actual law surrounding tax exemption for the NCAA or, more broadly, exemption for universities engaged in Division I football and basketball

Despite that warning, I’ve decided to turn this blog post into a sort of annotated book report, to summarize Prof. Colombo’s analysis, and offer it up to any would-be analyst of the economics of college sports.  I know almost as little as the next economist about the intricacies of the tax code with respect to non-profits and tax exemption, but (rather than stay at a Holiday Inn Express), I have read Professor Colombo’s paper and I am prepared to help the world gain its wisdom. 

Here’s what Professor Colombo’s excellent paper explains (with my own gloss provided in italics):

  • There is an important distinction between an organization as a whole losing its tax-exempt status under 501(c)(3) and that same organization remaining exempt on the whole, but having certain lines of business subject to the Unrelated Business Income Tax (known as UBIT).[1]     
    • I mention this first because I think it gets confused in the public eye.  In essence, there are two questions, first whether the organization as a whole remains an untaxed non-profit and then whether some of its activities can be taxed, even if the organization is a non-profit.
    • This matters, I think, for the question of charitable contributions by alumni to the sports program of their favorite team.  For example, if the school remains a non-profit, then donations will remain tax-deductible, EVEN IF the football program’s TV revenue were determined to be Unrelated Business Income subject to the UBIT. 
  • The NCAA as an organization is treated differently than its member schools.  The NCAA itself is covered by the special amateurism clause of 501(c)(3) but colleges and universities do not need to avail themselves of that section of the law, because they qualify as charitable educational institutions.  Indeed, the special NCAA clause was only added in 1976, whereas the exemption for educational institutions has been around much longer.[2] 
    • Right off the bat, it’s important to recognize that what this means is that the tax exempt status of every college and university sponsoring FBS football is utterly unrelated to whether it pays its athletes in the form of the current Grant-in-Aid, or moves to a more market-oriented form of compensation.  Colleges and Universities draw their tax-exempt status from their role as fostering education, which applies to the entire University, and even the most football-revenue-focused school out there (LSU) only derived 14% of its revenue from football.  That’s an astoundingly large number, but even still, 86% of its revenue is coming from other sources (and most of those are truly educational).  So it might be the case (though it isn’t) that football revenue is taxable, but the tax-exempt status of the University as a whole is not seriously in doubt.
  •  Colombo also adds that even though he disagrees with the finding, the Tenth Circuit has already ruled that for the purpose of UBIT applying to March Madness advertising revenue, the NCAA tournament is UBIT-exempt because it is not “regularly carried on”:

Though I would argue that the opinion is just flat-out wrong in its analysis, the Tenth Circuit essentially held in 1990 that the NCAA men’s basketball tournament was not “regularly carried on” for purposes of taxing the advertising revenue that resulted from the sales of advertising in the NCAA tournament commemorative programs.102 The court seemed to compare the NCAA’s sale of advertising for its tournament to the sales of advertising by sports magazines such as Sports Illustrated, which of course occur year-round, rather than seasonally.103

  • In other words, in the same way that baseball is not “commerce” (despite being a gignatic business) with respect to the antitrust laws (and thus immune from those laws, at least in some aspects), March Madness is not “regularly carried out” and thus not subject to the UBIT law.  Sometimes the law is stranger than fiction!
  • For the schools, the question of whether various sources of football and basketball revenue are unrelated business income hinge in part on whether the profits are used to further their educational mission.  Colombo explains in excellent detail how it is clear that many IRS precedents, there is an argument that because college football and basketball is distinct from the pure college element of college, it ought to be taxed via the UBIT now, independent of whether athlete pay is set by collusive fiat or an open market.[3] 

  • But then Colombo explains that the IRS has not treated college sports this way at all, and in fact these questions have been tested under the tax code repeatedly, and in every case, the answer has been that these are not subject to the UBIT tax.  Moreover, because the question for a college or university is whether it supports education rather than whether it supports amateur sports, that answer did not hinge on the amateur status of the athletes.
  • As Professor Colombo writes:

Perhaps the biggest impediment to applying the UBIT to Division I football and basketball revenues at this time, however, is the legal precedent involved. These precedents go back as far as the UBIT itself: the House Ways and Means Committee report on the UBIT legislation straightforwardly stated that a university “would not be taxable on income derived from a basketball tournament sponsored by it, even where the teams were composed of students of other schools”;118 later, the same report stated “income of an educational organization from charges for admissions to football games would not be deemed to be  income from an unrelated business, since its athletic activities are substantially related to its educational program.” Probably in part because of this legislative history, the IRS has ruled several times in many different contexts that college athletics are an “integral part” of the educational program of a university (and therefore clearly “substantially related” to a university’s educational program).  Although the IRS briefly considered attempting to tax the revenues from the sale of broadcast rights to college football bowl games in 1977, the Service quickly reversed itself, and ultimately issued two formal rulings that such revenues were not subject to the UBIT.

Since then, the IRS has basically given up on any attempts to tax revenues associated with college athletic programs, with the exception of revenues that the IRS considered nothing more than payments for advertising, such as “sponsorship” payments that are now regulated by statute. …   In 1991, the IRS issued two Technical Advice Memoranda that held that “sponsorship fees” paid by a business to a college, university or independent bowl association were taxable because they represented essentially nothing more than payments for advertising. … Congress responded to this initiative by amending the UBIT rules to eliminate “corporate sponsorship payments” from UBIT.

  • So, what matters from the IRS perspective is not whether the athletes’ compensation is capped at a GIA or allowed to be set via the market.  Rather, the IRS focuses on whether the activity is substantially related to its education program.  One could argue that all this means is that the athletes must remain students, or that the compensation must include a scholarship, but it seems hard to see how the question of whether the money NBC pays to Notre Dame for the right to broadcast their home football games is or is not an integral part of the educational program of the University of Notre Dame would change if those Notre Dame players each got $25,000 upon graduation for every year they were on the school roster, as just one example.

 

  • Maybe this is obvious, but what this means is that these questions aren’t hypothetical.  We actually know what the answer is because the cases have been litigated and in each case the answer was that as long as the college sports revenue is well-integrated into the educational mission of the school, it’s not subject to the UBIT.  Those decisions were not about amateurism, and so a change in the definition of amateurism, or even a complete abandonment of amateurism would not seem to matter, as long as the “College” part of College football or basketball remained in place.
  • Colombo also addresses the NCAA’s specific situation, which is distinct from that of its member schools.  From my reading of Colombo, he would acknowledge they may be more vulnerable to a change in the law, since they are not an educational institution, but rather they do get their tax-exempt status under the portion of 501(c)(3) focused on fostering “national or international amateur sports competition.” Colombo doesn’t specifically ask whether paying athletes would change this status, but I would suggest that the bulk of the NCAA’s activity, even if FBS football and D1 basketball were to adopt a free-market compensation system would remain the promotion of amateur sports.  So they might stay tax exempt, but clearly a case could be made that absent a change in the law, the NCAA would have its TV broadcast profits subject to the UBIT.

This is the final point, one which I have been making for a while on my own, that Professor Colombo explains so well.

  •  Even if schools or the NCAA itself were found to owe UBIT on the college football or college basketball earnings, the odds of any tax actually being owed are slim to none.  Here’s Professor Colombo’s view:

Moreover, even if the UBIT applies to big-time college athletics, it may well be a paper tiger: it is likely that when rigorous tax accounting methods are applied to the revenues and expenses involved, coupled with some perfectly-legal creative overhead allocations that data indicate almost certainly are used by charities to offset any income otherwise taxable under the UBIT, no profit will be left that would actually be subject to taxation.[4]

  • Colombo explains that this is true both for the NCAA and for schools themselves.  He writes:

With respect to the NCAA, it is unclear whether application of the UBIT would actually result in any tax impact. As noted above, the IRS has the ability under the UBIT to “fragment” revenues for UBIT purposes. Thus the IRS might attempt to apply the UBIT to, say, only the NCAA Men’s Basketball Tournament revenues or football licensing revenues. But the NCAA does not keep these revenues; instead, it distributes them to member schools after deducting its expenses. Under standard tax doctrine, the distribution of these revenues to member schools likely would be a deductible business expense (the “fee” that the NCAA must pay to member schools in exchange for the right to market their athletic “product” during the year, akin to a publisher agreeing to pay an author current royalties124). The result is that there likely would be little or no “profit” subject to tax under the UBIT even if it applied. …

One could safely assume that the vast bulk of this revenue, therefore, is generated by Division I football and basketball, probably mostly from the CBS Television contract for the Division I men’s basketball tournament. If the UBIT applied to this revenue, however, the NCAA would get to deduct all its regular business expenses directly attributable to the income and an appropriate portion of its overhead in order to determine its taxable income. … Thus the likelihood that the NCAA would actually pay any tax under the UBIT is remote; minimal tax planning could easily insure that the NCAA has no net business revenues to tax.[5]

  • Colombo then focuses on the many account tricks that would be available to colleges and universities if somehow their revenues became subject to UBIT (again, despite the fact that these issues have been settled by the IRS already for reasons unrelated to the amateur status of the athletes):

 

With respect to individual universities operating big-time athletic programs, the picture is similar. Although some schools report net positive revenues from football or basketball programs, these revenues are rarely subject to the kind of rigorous cost accounting used in the business world. …

 A recent story in the Chronicle of Philanthropy surveyed 91 large charities filing UBIT returns; the authors noted that 51% of the charities reported zero or negative taxable income and were able to reduce $419.1 million of gross income into a collective $3 million deficit after allocating deductions and overhead.133 The NCAA and universities conducting big-time college athletics hardly are less sophisticated, and have even greater opportunities for aggressive cost allocation given the large capital investments and overhead costs of running their athletic programs. Accordingly, it is highly likely that if the IRS applied the UBIT to individual football or basketball program revenues (either at the NCAA or university levels), it would find no net profit from these programs to tax after factoring in depreciation on athletic facilities and a reasonable apportionment of overhead. As  a result, I doubt that the general counsel of, say, the University of Michigan would cower much in the face of a threat by the IRS to apply the UBIT to Michigan’s football program.[6]

So, the bad news is that the paper I wanted to write has already been written.  But the good news is that if you care very deeply about the NCAA or your favorite college or university maintaining its tax exempt status, to the point that all other potential injustice pales in comparison with your dear old alma mater paying taxes on earnings from sports, you can rest easier tonight. 

Even if the antitrust laws are more vigorously enforced and schools and the NCAA are no longer able to collude on player compensation, good old Uncle Sam still has plenty of love for the colleges and universities that play major college sports, and the odds of schools, or even the NCAA, paying taxes are, and will remain, basically nil, even if schools forgo collusion and compete with respect to athlete compensation.

So, Hooray for Tax-free Football!

As an addendum, I should add Kristi Dosh is correct that in some cases, including Kristi’s alma mater of Florida,the athletic department has been constituted as a stand-alone non-profit.  I disagree with her that that is the norm, but it does happen.  To the extent that practice puts a school at a disadvantage, tax-wise, to other schools, I suspect we’d see that practice come to an end in a heartbeat.


[1]See Colombo pp.  4-9, where he contrast the two sets of requirements and explains (on p.7) that “Even if an organization is tax-exempt under Code Section 501(c), it may be required to pay the corporate income tax on net revenues from “unrelated” businesses.”

[2] See Colombo, pp. 9-10: “Prior to 1976, the question whether the NCAA as an entity was engaged in a charitable purpose (as opposed to universities conducting athletic programs) might have carried some doubt.…But in 1976, Congress made clear that promoting amateur athletics is, in fact, a prima-facie charitable purpose by passing an amendment to 501(c)(3) that specifically declares fostering “national or international amateur sports competition” as a charitable purpose.”

[3] Colombo, pp. 24-26.

[4] Colombo, p. 29.

[5] Colombo, pp. 38-39.

[6] Colombo, pp. 39-41.

Posted by
Andy Schwarz