Tax-Exempt Status and Intercollegiate Athletics

colombo 4.jpg“I certainly don’t have a problem with saying we’re going to grant a tax exemption to the football program and the basketball program in order to provide revenue to support women’s soccer or lacrosse. But I’m a lawyer, and we have an old saying in the law, ‘trust everyone, but get it in writing.'” – John Colombo, tax law professor, University of Illinois to the Knight Commission on Intercollegiate Athletics, May 12, 2009

The debate about the tax-exempt status of intercollegiate athletic programs came into focus at the May 12th meeting of the Knight Commission and the subsequent release of a Congressional Budget Office report.

At the Commission’s meeting, University of Illinois Professor John Colombo argued for greater financial disclosure requirements to ensure that revenues from football and basketball are being used to support other sports programs or for academic purposes.

“I certainly don’t have a problem with saying, ‘We’re going to grant a tax exemption to the football program and the basketball program in order to provide the revenue to support women’s soccer or lacrosse.’ But I’m a lawyer, and we have an old saying in the law, ‘trust everyone, but get it in writing,'” Colombo said. “I don’t think there’s any reason why Congress couldn’t mandate that a certain percentage of revenues from big time college athletics programs have to be spent to support non-revenue athletic opportunity.” Colombo said a “spill your guts” disclosure form for athletics operations could be created by the Internal Revenue Service to detail “where the money’s coming from and where it’s going.”

The finding of Colombo’s work and his presentation to the Knight Commission is particularly timely since the Congressional Budget Office (CBO) released its report on the tax-exempt status of college athletics programs on May 19th. The CBO’s report stated that the large portion of commercial revenues derived for high-profile athletics programs suggests that “sports programs may have crossed the line from educational to commercial endeavors.” However, the CBO concluded that modifying the tax-exempt status enjoyed by college sports programs would not significantly affect the athletic operation or produce additional tax revenues since schools could “shift revenue, costs, or both between their taxed and untaxed sectors.”

Republican Senator Chuck Grassley of Iowa, who requested this report in April 2007, criticized the availability of quality data to produce the report. “The fact that congressional analysts had to rely on information collected by a major newspaper for source data highlights how little information is available about how these programs work,” he said. “Given all the tax benefits involved, tight state budgets, and rising tuition despite the recession, it’s pretty clear that Congress needs to engage and policymakers need to know more in order to act as responsible stewards of the tax policy that drives this fundraising and commercial activity.” Unlike Colombo, the CBO does not call for increased transparency or disclosure standards as a mechanism for maintaining tax-exempt status for athletic programs.

The CBO’s report also studied the effects of athletics success on improving student quality and donations to the school. The report notes that studies have reached conflicting conclusions on these questions but that “even in the studies that find successful athletics programs have a positive impact on the school overall, the measured impacts are generally quite small. In addition, studies that demonstrate a positive impact for a single school or a subset of schools do not address whether success in intercollegiate athletics increases donations or student quality at all schools – or simply shifts them between schools.” These conclusions echo the findings made to the Knight Commission in a 2004 report by Dr. Robert Frank of Cornell University.