Oct. 1

Taxing the Sports Factory

By John V. Lombardi

Since at least the early 20th century, it has been fashionable to attack college athletics as distorting the priorities of American colleges and universities, and there is often much evidence to support the attacks. The difficulty in taking these challenges seriously is that they are often unclear about the context within which college athletics functions and undervalue the significance of the constituencies that support this part of the American collegiate enterprise. The latest issue involves the question of whether the increasing amount of giving to college athletics represents a shift of donor interest from academic enterprise. While it is surely true that athletic giving is increasing it is not necessarily true that it comes at the expense of academic giving, which is also on the rise. To accept this premise, we would need to be sure that those who give to athletics would, in the absence of a tax break or an athletic program, give substantially to academic activities. While evidence on giving patterns is not always entirely conclusive, what we do have appears to indicate that athletic and academic donors are substantially different groups. That is, most of the big donors to athletics do not give much to academics and most of the big donors to academics do not give much to athletics.

This reflects the fact that donors can do what they want with their money. If they want to give it to a political candidate, a church, an international charity, a scholarship fund, and endowed chair, or a college football team, it is their choice and reflects their values. The notion that we, in the university or in the government, can dramatically shift these preferences is charming but not realistic as anyone who has spent time fundraising knows. The donor’s preferences are what matter. They surely like the tax break when it’s relevant and they like matching funds for academic gifts provided by many states, but a matching program for academic gifts does not make an athletic donor decide to give an endowed chair rather than an endow a football scholarship. It might persuade a donor to give an endowed chair to one of their alma maters that has a matching program rather than to another alma mater that does not.

The public benefit of the tax break for college athletics is more complicated than our belief in the value of sports in our universities. If we want to eliminate expensive competitive intercollegiate sports from our colleges and universities, the issue of a tax break won’t make much difference. It will just raise the cost of the enterprise, and since most college sports programs (with the exception of maybe the top ten BCS football schools) run a deficit, the increased cost will fall back on institutional budgets. We can say that money- losing intercollegiate sports programs are a bad thing, but our constituencies (whether at elite private colleges or mega football factories) love their sports.

At the same time, there are many items that big time sports programs do, paid for by their donors, that do not qualify for tax breaks. When donors give money to a sports program, they only get the tax break associated with the gift portion, not the portion that buys a ticket to the game or pays for a meal or provides a team jacket. The rules require that the institution deduct all the products and services that directly benefit the donor, recognizing that these things are commercial transactions, while the gift to the athletic program that sustains its expenses in support of student-athletes and the costs of the non-revenue sports, as well as the losses of football in most institutions, does help the academic enterprise and is deserving of a tax break. These rules may need to be improved, tightened, or otherwise changed to make giving to college sports more expensive to the donors. While this may well affect some donors, the truth is that the people who give in the many-million dollar category (athletic gifts that provoke the most outrage) almost always do not need and cannot use the tax break because they have already used up every imaginable tax dodge available to the rich and super rich. In talking with major donors and extolling the opportunity for a tax break as the result of a gift, many will tell me, “that’s nice, but I can’t use that tax break and I’ll just give the money because I want to help.”

Attempting to fix what’s believed to be wrong with college sports by manipulating tax policies is likely to produce many unintended consequences, harm the smallest and most vulnerable sports programs at colleges and universities, and have almost no impact at all on the mega sports programs that offend many observers. If these mega programs are a bad thing, we should take them on and fix them directly rather than try to sneak in a fix that won’t work via the tax code. Mega college athletics is indeed a remarkable American invention, it reflects the decisions of academic administrators and governing boards at almost all colleges and universities for over a century. It prospers because for the most part we (our faculty, our staff, our alumni, our legislators, our trustees, our students, and our many other constituencies) want it. We could easily change it, IF MOST OF US WANTED TO CHANGE IT. All protestations to the contrary, we, the colleges and universities of America and our friends and supporters, do not want to change it. What we really want is to imitate the best (often the most expensive) programs in America by winning games and championships.

Comments

Acadenic vs Sports giving

Dr. Lombardi raises an interesting issue here. Just last week, we were discussing this topic in my Leadership in Higher Ed graduate seminar at LSU. One of my students shared an article that discussed a recently released report by Moody’s Investors Service. The report, Intercollegiate Athletics Programs: A Winning or Losing Game? says that a successful athletic program can have a positive impact on the creditworthiness of their institutions. It also suggests that universities should do a feasibility study to determine if there is a risk that raising funds for athletics will negatively impact fund raising for academic purposes. This is a really interesting topic especially as LSU has recently assumed the number one position in the college football polls and is in the midst of a multi-year academic fund raiser called Forever LSU.

Todd Pourciau, Dr. at LSU, at 11:25 am EDT on October 2, 2007

Athletics

I believe that competition is the driving force behind these donations. Your larger athletic programs are what they are today because of the competitiveness to win and the need to associate with the best. This competitiveness has driven many people to focus their larger donations on athletics. In the United States, first place is the place to be. If giving money will get us there, then we will give. If a program has a winning history, it is assumed that they have received larger donations than the unsuccessful program, or if a program is currently on a winning run, they are probably receiving more donations during this time. The competitive attitude is fueled by national rankings. The national rankings are the measuring stick to physically determine where a program stands among its peers. The national rankings for academics have begun to appear more often in publications and discussions because I believe that, once again, people either want to win or be apart of the best. Just like athletics, I believe that these rankings can fuel a university’s effort to increase the amount of larger donations given to academics. If a university can tap into this competitive nature, it should drive the donors to increase giving. The driving force or reason to give will not change, the change can only occur in who receives the donations by using a different target while shooting with the same gun.

Daniel, Grad Student, Why we donate at LSU, at 2:15 pm EDT on October 4, 2007

On Taxing the Sports Factory

In his October 1, 2007, Inside Higher Ed article, “Taxing the Sports Factory” John V. Lombardi, President Louisiana State University System and former Chancellor at the University of Massachusetts Amherst, presents what is likely the first of many countermeasures in defense of the status quo in the federal tax code applicable to college athletics.[1] Put another way, Dr. Lombardi presents arguments in opposition to the Revised IRS Form 990, stimulated by Senator Grassley and the Senate Finance Committee, that can help force the NCAA and its member institutions to tell the truth about their sports entertainment business.[2]

Dr. Lombardi says: “Since at least the early 20th century, it has been fashionable to attack college athletics as distorting the priorities of American colleges and universities, and there is often much evidence to support the attacks. The difficulty in taking these challenges seriously is that they are often unclear about the context within which college athletics functions and undervalue the significance of the constituencies that support this part of the American collegiate enterprise.”

Nothing could be clearer than the context within which college athletics functions; and certainly, the challenges don’t undervalue the significance of the constituencies that support the athletics part of the American collegiate enterprise. Here’s why:

First, the context within which college athletics functions is compromised academic integrity that enables out-of-control commercialization with its distracting influence on school officials, on America’s youth, and on the nation’s diminishing prospects as a leader in the 21st century’s global economy. All too often, secrecy, deceit, and deception, are hallmarks of the business of college-sports entertainment where hypocrisy, intimidation, and retaliation are the tools of the trade. It is a business where ethics, civility, shame, and truth telling are not to be expected, and where telling the truth about the negative impact of college sports on higher education can have dire consequences.

Second, rather than undervaluing the significance of the constituencies that support the athletics part of the American collegiate enterprise, most (if not all) challenges recognize the power of these constituencies to exert a stranglehold on America’s institutions of higher education to the extent that the athletic tail wags the academic dog. Constituents consist of rabid fans, wealthy boosters (with some sitting on governing boards), legislators, and other participants in multiple levels of the college-sports entertainment business — including those in sports media that have a symbiotic relationship with other constituents. These are constituents with significant power – indeed, in the aggregate, capable of exerting almost absolute power over college athletics.

Dr. Lombardi states that: “Mega college athletics is indeed a remarkable American invention, it reflects the decisions of academic administrators and governing boards at almost all colleges and universities for over a century. It prospers because for the most part we (our faculty, our staff, our alumni, our legislators, our trustees, our students, and our many other constituencies) want it. We could easily change it, IF MOST OF US WANTED TO CHANGE IT. All protestations to the contrary, we, the colleges and universities of America and our friends and supporters, do not want to change it. What we really want is to imitate the best (often the most expensive) programs in America by winning games and championships.”

This statement brings to mind the opening line of a Selena Roberts’ column: “It is worth a take-home exam to discover how the brains behind higher education have lost their minds in the pursuit of football superiority"[3] and lines from Thomas Paine’s 1776, Common Sense: “Perhaps the sentiments contained in these pages are not yet sufficiently fashionable to procure them general favour; a long habit of not thinking a thing wrong, gives it a superficial appearance of being right, and raises at first a formidable outcry in defense of custom. But the tumult soon subsides. Time makes more converts than reason.” It is interesting to note that Dr. Lombardi prefaced his above remark by saying: “If these mega programs are a bad thing, we should take them on and fix them directly rather than try to sneak in a fix that won’t work via the tax code.” Nowhere does he describe the tax-code “fix that won’t work” — avoiding any discussion of the enhanced transparency and accountability aims of the IRS’ Revised Form 990.

It is ironic that current federal tax policy forces parents, students, and other American taxpayers to help foot the bill for multimillion-dollar salaries for coaches, ’stadium wars,’ tax breaks for wealthy boosters, NFL and NBA minor league teams, and other artifacts of the big-time college sports arms race. Meanwhile, the NCAA works to further its financial interests and thwart any and all serious reform efforts – especially those that could expose their ‘student-athlete’ ruse or possibly reduce their revenues.

Apparently, what may be the object of concern by the tax-exempt organizations in the big-time college-sports entertainment business are the following TDG recommendations submitted to the IRS:

1. Amend the revised Form 990 and schedules to provide a meaningful level of enhanced transparency – requesting the NCAA and its member institutions to disclose information that will provide evidence that their athletes: a) Are maintained as an integral part of the institution’s student body; b) Attend regular whole-period classes; c) Are on accredited degree tracks and are held to the same academic standards of performance as all other students; and d) Realize a 2.0 grade-point average, quarter-by-quarter or semester-by-semester to gain and maintain eligibility for participation in athletic events, with the grades and academic records certified by the school’s chief academic officer.

2. Advise the NCAA and its member institutions that: a) The need to vastly improve their transparency and reporting is a very serious matter and that their tax-exempt status will be conditioned on full disclosure; and b) Their operations will be subject to IRS and congressional oversight as well to severe penalties (in addition to the loss of their tax-exempt status) for noncompliance.

3. Eliminate what appear to be clear violations of fundamental tax principles such as the loopholes that were inserted in the tax laws to enable practices such as tax deductions for contingent fees on seat tickets and skybox lease payments.

4. Be more rigorous in assessing the UBIT status of the revenues received by organizations, such as the NCAA, whose sports entertainment business mission is largely tangential to the educational mission of colleges and universities.

5. Require the NCAA and their member institutions to employ a standard uniform system of accounting in their athletic departments that is subject to public financial audits.

The implementation of the above recommendations by the IRS – requiring enhanced transparency and reporting on the part of the NCAA and its member institutions – would not only increase tax revenues, but also help restore academic and financial integrity in colleges and universities supporting big-time sports programs, especially football and men’s basketball.

These restorations would go a long way toward reclaiming academic primacy in higher education – doing that which presidents, governing boards, faculty, the NCAA, the Knight Commission, and others have failed to do for a variety of reasons.

Notes:

1 www.insidehighered.com/views/blogs/reality_check/taxing_the_sports_factory

2 www.thedrakegroup.org/Splitt_Reclaiming_Academic_Primacy_IRS.pdf

3 Roberts, Selena, “An Awkward Coexistence on Campus,” The New York Times, Sports of the Times, Nov. 12, 2005.

Frank G. Splitt, Member at The Drake Group, at 4:35 pm EDT on October 9, 2007