Leading Tax Counsel For College Athletes Advise They May Not Realize How Good They Now Have It

by Ropes & Gray LLP

Ropes & Gray LLP

In this interview with the LEAD1 Association, tax partner Lorry Spitzer examines the tax implications of paying college athletes.

  • Benjamin Franklin once said that the only two things inevitable in life are death and taxes. If college athletes were to receive compensation, what would change about their tax status?
    • Will Rogers updated Ben Franklin's observation by adding "but at least death doesn't get worse every time Congress meets!" And so it could be with college athletes. Their status as employees would likely change everything, and attempts by Congress and the IRS to “help” would probably only make matters worse.
  • What is the legal status of recent efforts to compensate athletes for their names and likenesses or to unionize them?
    • Both the NCAA and the plaintiffs in the O’Bannon antitrust case have appealed the decision of the 9th Circuit Court of Appeals, which held that the NCAA amateurism rules are an unlawful restraint of trade but that part of the relief granted by the District Court, allowing schools to pay up the $5,000 per year in deferred compensation, was erroneous. Talk about pleasing no one! In October 2016, the Supreme Court denied a request to review the case, leaving the 9th Circuit's ruling in place. The National Labor Relations Board, meanwhile, recently ruled that certain student research assistants at Columbia University are employees eligible to unionize, overturning it prior decision involving Brown University. Notwithstanding the Columbia decision, with its encouragement of unionization, the NLRB is showing no movement towards revisiting its interesting decision from a year ago involving football players at Northwestern University. The NLRB held in that case that whether or not football players at Northwestern are employees, a question it declined to answer, it would not effectuate the policies of the National Labor Relations Act for the NLRB to assert jurisdiction. Translation: no union.
  • How are student-athletes currently taxed for sports scholarship benefits?  There was a good article in Forbes about how the value of a scholarship at a private university like Stanford is worth over $130,000 per year. What is the tax treatment, at present?
    • A scholarship covering tuition, academic fees, books and supplies is tax free, but only to the extent the scholarship is not a payment for services. The balance of the scholarship paid to or on behalf of the student, for room and board and other expenses, is taxable to the student. Nonetheless, a school is not required to send a tax form to the student reporting this taxable income, with the likely result that income tax compliance is probably quite low, especially if the scholarship doesn’t include extra cash for the payment of taxes (which they typically would not). The $130,000 annual figure you describe, in addition to the non-taxable amount for tuition, fees, etc., also includes a lot of benefits that would not be taxable whether or not the a student is an employee—such as for specialized skills training or coaching.
  • What happens if student-athletes are classified as employees?
    • The likely result would be that the entire scholarship would become taxable as bargained-for consideration for services.  Plus, if the student-athletes are employees, the schools would be required to give students a Form W-2 reporting the amount of wage income. Setting aside your $130,000 figure for the moment, let’s assume a student has a full cost of attendance scholarship worth $70,000. That student , if classified as an employee, could easily face a tax bill in excess of $25,000, while currently he or she may be paying nothing. The student-athlete would need to be compensated almost $45,000 in cash just to break even. So my message here is that student-athletes should be careful what they wish for!
  • Could we see a world where student athletes might incorporate in an effort to mitigate the tax blow?
    • Incorporation of athletes is to some extent a relic of an earlier era of tax planning. I would not expect to see wide-spread incorporation of student-athletes even if they are treated as employees.
  • Could you foresee a future where Congress and state legislatures go after student athletes in an effort to raise revenues?
    • Let me repeat my quote from Will Rogers! Congress and state legislators could certainly muck up the area in an effort to help, but I cannot envision trying to balance the budget on the backs of student athletes. So, in a word, no.
  • One of the great things about being a scholarship athlete is graduating without debt. So could there be a world where scholarship athletes will graduate with tax debt?
    • Yes, that would be a possibility, although unlike student loans, tax debts need to be paid immediately. Borrowing money to pay a tax debt may be impractical or impossible. Because such loans would not have the special treatment afforded student loans, lenders may be unwilling to lend.
  • Based on your considerable experience and established expertise as a tax attorney, is it the last thing in the world anyone should want is to get on the radar screen of the IRS?
    • Who wouldn’t want to be on the radar screen of a governmental agency whose mission is “service” to its “customers.”
  • Can you think of any previous examples where a change in status resulted in tax consequences that proved to be crippling to a party?
    • The Supreme Court has correctly pointed out that the power to tax involves the power to destroy.  The long-lasting debate as to whether a worker is an “employee” or an “independent contractor” is an example of a well-meaning IRS forcing “employee” characterization on certain workers, causing existing business models to fall apart. Also, the revelation that certain nominees for high-level governmental positions hadn’t paid employment taxes on their housekeepers, because they were treating them as independent contractors, certainly proved crippling to their nominations!
  • There are many benefits that student athletes receive about which many are unaware. One example is expert counseling in schoolwork, nutrition, physical fitness, and career counseling. Many times this extends for life as an athlete is always welcome back at school to use the fitness center, as just one example. What happens if tax authorities go after these untaxed benefits?
    • As we discussed, some benefits for training and the like are unlikely to be taxable even if the student-athletes are characterized as employees. But you are correct in pointing out that some kinds of deferred benefits, such as a lifetime “right of return” to earn a degree from the school, could become taxable immediately to the student-athletes if they are treated as employees, which would be a really terrible result not only for the athlete, but as a matter of good public policy. Schools have a responsibility to the student-athletes that fill the stadiums and arenas every weekend, and a change in the tax rules shouldn’t make that responsibility more difficult to fulfill.
  • What are student athletes missing about how good they have it now under their current tax status?
    • It bears remembering that the current tax system, by making scholarships for tuition and fees tax free, is favorable to the student-athletes. If student-athletes are characterized as employees, it would require a fairly large payment just to overcome the lost tax benefit.

The 129 member schools of LEAD1NATION! thank Mr. Spitzer for being so generous with his time in this interview and providing an invaluable service to all those in these programs!


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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