Why the NCAA Should Be Taxed - Essay Example

Introduction

Why the NCAA should be taxed

The National Collegiate Athletic Association (NCAA) of the United States stands as an unincorporated association that consists of more than 880 educational organizations, athletic conferences, universities, colleges and other associations as the major governing organization of college athletics since 1906 (National Collegiate Athletic Association, 1990). The role of NCAA as the governing body of the amateurs in sports the United States provided the association with the tax exemption advantage as other charitable or non-profit organizations that are protected under section 501 (c) (3) which exempts non-profit organizations from federal income tax. The primary purpose of NCAA based on its constitutional obligations serves to ensure the supervision of the conduct of the regional and the national college and amateur athletic events under the support of the association.

Under its constitutional obligation and purpose, the NCAA promotes and controls the sponsorship of over sixty-eight collegiate athletic championships in over twenty-one different sports events for both men and women annually (Jensen, 1987). Two of the most prominent and highest revenue generator for NCAA includes the Division I Basketball Championship for men and the Division I National Football League for men. These events take place in various places across the United States and raise revenue from a huge fan base all over the country. For example, the Men's Division I Basketball Championship of 1982 took place in several places across the United States with the Final 4 tournament held at the Louisiana Superdome in New Orleans (National Collegiate Athletic Association, 1990). Therefore, the NCAA engages in many promotional activities to encourage more fans to the events and raise as much revenue as possible to support the college athletics championships. Furthermore, the NCAA outsources most of its activities to other organizations especially through advertisements to generate more income for the organization for supporting the sponsorships. These activities and engagement of the NCAA with other organizations have raised multiple questions on its tax exemption status and called for a review of the status. Therefore, the paper will focus on the reasons based on evidence on the need to impose an income tax on the National Collegiate Athletic Association.

The Internal Revenue Code of section 501 under the Internal Revenue Service's provides a list of the entities that qualify for tax exemption from paying the corporate income tax that is imposed on the corporate enterprises. Under such provisions, the NCAA and the private universities involved in the College Athletics benefit from the tax exemption status as charitable organizations consisting of the religious and educational organizations (Colombo, 2010). Therefore, the United States federal law permits the NCAA as part of the charitable organizations in the United States and the Internal Revenues Service provisions under section 170 of the Internal Revenue Code to receive tax-deductible contributions based on organizational tests and operational test. The organizational test requires that NCAA must entirely be organized as a charitable organization through observing strictly specific organizational technicalities. These organizational technicalities include being organized as the state-low nonprofit organization, limitation of its activities to an only charitable organization and provide an organized documentation that its assets must be transferred to the charity or the government should the organization run out of business (Sununu, 2014).

On the other hand, based on an operational test, an organization must qualify as charitable through engaging primarily in charitable activities especially in educational or religious activities, limitations to institutional lobbying coupled with limitations to participation in political campaigns and prohibits siphoning money and assets to the insiders. Most of the activities of the NCAA betrays these provisions and therefore qualifies them for corporate tax charges.

The concept of tax exemption status for organizations was entirely intended for those institutions that operate and are organized solely for charitable activities. Therefore, the provision of the nonprofits title does not convey the license for institutions such as NCAA to engage in unlimited commercial endeavors on a tax-free basis (Hurst & Pressly, 2000). Even though the core purpose of the development of the NCAA involved developing a charitable organization for talented students to afford the college education, its operational and organizational goals have changed to maximizing on profit generation and benefiting a few individuals in the organizations. As of 2015, the NCAA was a beneficiary of over eleven billion dollars for from the television contracts to sponsor the annual men's basketball tournament for fourteen years (Hobson, 2015). The lucrative deal became an eye opener for the public on the astonishing salaries gained by the NCAA and NFL executives which raise the decision for taking into consideration the removal of the tax-exemption status. For instance, in 2012, the NFL Commissioner, Roger Goodell gained a salary of forty-four million dollars putting into contexts the internal benefits gained by NCAA and NFL executives and redirecting its mission from serving educational charity. Furthermore, the NCAA pays a lot of salaries to college and university coaches which is even higher than the amount gained by the club based coaches of athletics in the United States. For instance, the Division I-A football coaches in the college league generate a huge amount of million dollars to four million dollars a year in non-taxable revenue, a benefit of the tax exemption (Sununu, 2014).

The average I-A football club in the United States earns a revenue of about fifteen million dollars while an average NFL club gains about one hundred and sixty million dollars in revenue. The figures for the payment of coaches through the NCAA are inconsistent with the revenue creation of the teams since college coaches cannot create as much value as NFL coaches. It is therefore very difficult to hide behind the tax exemption provisions when the highest paid employee in the universities is a coach. For instance, in 2014, at Alabama, the salary of Coach Nick Saban was 5 million at the end of the year which raised the question whether an organization paying such huge amount of money to its employees should operate tax-free.

Therefore, the employment of the coaches by the NCAA to the amateur sports in the colleges and universities uses the rules of the marketplace instead of focusing on the rules provided by the universities and colleges. The athletic departments in the universities and colleges involved in amateur sports championships through the NCAA cannot afford to gain in two ways: either they are academic, nonprofit institutions or professional enterprises that gain taxable income and should pay tax as other business institutions in the United States. The high pay rise among the executive members of NCAA and the coaches of the public universities, therefore, sends a strange message to the students involved in athletics and the student's bodies responsible for the student affairs (Loh, 2014). Such suspicion calls for action and the students refocus their attention from academics to focus on gaining from the huge amount of money revolving in the activities of NCAA. Furthermore, the executive members of NCAA and the coaches benefit from the value produced by student-athletes instead of the students gaining values from their achievements. The focus on monetary benefits, therefore, betrays the operational test of NCAA thereby making it seem like a business enterprise with shareholders seeking dividends or the increase in stock values to gain higher profits.

Additionally, on a yearly basis, the NCAA collects a lot of revenue through the athletics programs, and athletic leagues played across the United States by the public and private university and college teams. According to Bloomberg's analysis of the amateur sports in the United States, NCAA generates a nontaxable income of around fifteen billion dollars on a yearly basis from merchandising, television advertisements and fan tickets (Hobson, 2015). Most of the advertisements, television and merchandising activities are outsourced to various for-profit organizations that are affiliated in one way or another with the NCAA ((Zimbalist, 2007). For example, in 1981 and 1982, the NCAA contracted the Lexington Production, a for-profit within the division of Jim Host and Associates to engage in the hosting, publishing and printing programs for the Final Four games. According to the public relations department during the period, the program was significant for enhancing experiences and expanding the fan base for the games as well as providing the NCAA with the opportunity to promote sports in higher education and demonstrate that students can get engaged in games and achieve high performance. Therefore, the argument followed that making the profit was not the primary concern in outsourcing the program to Jim Host and Associates.

However, through the initiative, the NCAA managed to generate a profit of $18, 671, 874 and non of the profits were recorded as unrelated business taxable income in the federal income tax return for the fiscal year dated August 31, 1982. In a report provided by the Commissioner of the Internal Revenue Service's however, it was indicated that NCAA was liable for $10, 395.16 in taxes from the $55,926.71 advertising revenue generated from unrelated businesses. Despite the high income generated by NCAA, they petitioned the tax court to ensure a redetermination of the Commissioners position (National Collegiate Athletic Association, 1990). However, the findings of the court indicated that the NCAA was liable for the tax incurred from the unrelated business taxable income. The NCAA always tries at all costs to evade tax and help the affiliated corporations to the association to evade corporate tax through its status as a charitable organization.

However, through the federal tax laws and the Internal Revenue Code, Section 511 provides for the imposition of a tax on any unrelated business taxable income from the exempt organizations. The unrelated business taxable income definition from Section 512 (a) of the Internal Revenue Code provides that the unrelated business taxable income, which also serves as the gross income derived by the exempt organization from any, unrelated business or trade. Therefore, the exempt organization should be held accountable for the tax incurred based on conducting substantially unrelated business and trade that are not outlined in its exempt functions. Therefore, the use of unrelated businesses in the outsourcing process of the NCAA responsibilities provides the ability for the Internal Revenue Service to exercise taxation on the revenues gained by the exempt organizations from the unrelated businesses or trade (Zimbalist, 2007). The NCAA advertising, merchandising and television programs' revenues must, therefore, be considered without reasonable doubt as unrelated business taxable income since they consist of income from business and trade that is not substantially related NCAA's performance of its functions and mandate as the charitable organization.

Furthermore, the ruling on the former UCLA basketball player Ed O'Bannon class-action lawsuit against NCAA by the U.S District Court Judge, Claudia Wilken of Oakland, CA that invalidated NCAA rule. Such ensured student-athletes were prohibited from gaining compensation for the use of their names and images on video games and television broadcast improved the need to incorporate taxation clause on NCAA. Furthermore, the prohibition of the student's athlete to receive any other compensation other than the scholarships and school attendance cost led to the violation of the antitrust laws (Hurst & Pressly, 2000). Based on the ruling of the class action in 2014, the current student-athletes receive a compensation of not less than $5,000 for the use of their images, names, and likeness in an advertisement. The payment of the compensation as a stipend or royalty provides the qualification for taxation.

Based on the Internal Revenue Service Code 61, any amount of taxpayers gross income includes any compensation (stipend or royalty) the individual receives in a year, therefore, qualifies for payroll tax liability as well as the federal and state income tax liability. Furthermore, through the provisions of the Federal Insurance Contributions Act (FICA), all employees are entitled to 7.65% tax on their wages to fund the Medicare and social security entitlements (Hobson, 2015). Through the development of the benefits compensation provisions, the student-athletes qualify as employees of NCAA which in turn makes the association eligible for taxation based on FICA regulations.

Lastly, not all the sports program associations are members of the charitable nonprofit organizations in the United States. For example, the National Basketball Association, NASCAR and Major League Baseball changed their statutes to become a for-profit organization and underwent privatization. According to the Major League Baseball director after changing their nonprofit status in 2007 indicated that there are no business benefits associated with becoming nonprofit organization and exemption from taxation does not make nonprofit organizations worthwhile (Colombo, 2010). Furthermore, the move to change the status of MLB from the nonprofit to the for-profit organization was also driven by the strict regulations by the Internal Revenue Service to provide financial disclosure on the top executive members of the nonprofit organizations (Hurst & Pressly, 2000). Therefore, the fear of disclosing the payment forms by the NFL, NCAA and MLB organizations shows that a lot of nontaxable revenue is created by these organizations at the expense of being charitable organizations. For instance, after fighting and losing the fight on financial disclosure on employee payment by NFL, Joe Browns pay was $2.2 million as opposed to his disclosure on New York Times of $150,000. Therefore, the NCAA and other affiliated organizations also hide behind the charitable organizations status to help their employees evade taxation as being part of the exempt organization. The dishonesty in the business, therefore, calls for the need of changes and the development of a taxation format for NCAA can provide a viable solution to the problem at hand.

In conclusion, the National Collegiate Athletic Association (NCAA) in the United States stands as an unincorporated association that consists of more than 880 educational organizations, athletic conferences, universities, colleges and other associations as the major governing organization of college athletics since 1906. The role of NCAA as the governing body of the amateurs in sports the United States provided the association with the tax exemption advantage as other charitable or non-profit organizations that are protected under section 501 (c) (3) which exempt non-profit organizations from federal income tax. However, NCAA has used the tax exemption status to its advantage to help employees and affiliated organizations evade tax income liability at all cost. Therefore, NCAA has violated its organizational and operational test as charitable organizations. From high pay of coaches in the university and college leagues through violation of the unrelated business taxable income clause in Section 511 and 512 (a) if the Internal Revenues Services to the current compensation status of the student's athletes, NCAA should be included in the corporate taxation of its gross income. Furthermore, the organizations generate a lot of revenue through its unrelated businesses and trade as well as donations that deserve taxation at all cost. Therefore, the high revenue status of the NCAA deserves the need for regulation through the development of taxation and crowning it as a for-profit organization to ensure the students gain the value of their dedication and commitment to athletics.