In recent years, congressional interest in big-time college sports has largely been consumed by the debate over what athletes can or should earn. But Rep. Bill Pascrell (D-N.J.), the ranking member of the House Ways and Means Subcommittee on Oversight who died at 87 last week, had a different financial interest in intercollegiate athletics: finding new ways to tax it.
“Americans should care about these excessive salaries to college coaches that our federal tax code is helping to fund,” Pascrell told Sportico in a statement late last year, which has not been previously reported. “Universities’ tax-exempt status is an important pillar of our cherished higher education system, but it is not a blank check to dole out huge coaching contracts with lavish benefits.”
Pascrell added that if Democrats retook the House of Representatives this coming election, one of his “priorities” as chair of the subcommittee would be to “explore” tax reforms that directly addressed college coaching compensation. Those included subjecting certain, big-dollar athletic departments to the unrelated business income tax (UBIT) and ensuring that the existing excise tax on millionaire non-profit officials extended to cover state universities.
The vociferous 14-term congressman’s death has left behind a long legislative legacy and his unrealized hope to curb the excesses of college sports through the House of Representatives’ oldest tax-writing body. A funeral for Pascrell is set for Tuesday in Patterson, N.J.
In December 2021, Pascrell, then serving as chair of the oversight subcommittee, sent letters of inquiry to the presidents of LSU and USC, asking them to justify their athletic departments’ tax-exempt status after signing opulent employment agreements with new head football coaches Brian Kelly and Lincoln Riley.
“It is unclear how such lucrative compensation contracts further LSU’s overall educational mission and benefit your student body as a whole,” Pascrell wrote. He demanded the schools turn over information and position statements about their millionaire employees, specifically in athletics, and whether this remuneration was being subjected to the excise tax under Section 4960 of the Internal Revenue Code.
Within a few months, Pascrell expanded his “college coaching contract probe” to include Stanford, Rutgers, Michigan State, Miami, Duke, Villanova and Auburn. In late 2022, he released a report from his yearlong investigation, which he said had left him with “significant concerns about whether these universities are operating in a manner consistent with, and in furtherance of, their tax-exempt purpose.”
However, Pascrell’s opportunity to take the next step in addressing this issue was upended by the 2022 election, which turned power of the House over to Republicans, who have held it since.
In the interim, the IRS has set its sights on a newer entrant to the college sports world: NIL collectives.
Last summer, after dozens of NIL collectives had applied for 501(c)(3) status—a number of which had been approved—the IRS Office of Chief Counsel issued a memo concluding that most shouldn’t qualify because their substantial purpose was to serve college athletes’ “private interests.” Though the memo was not precedent-setting, the IRS has subsequently denied applications on account of the same reasoning.
In light of this, collective operators have complained that they are being held to an unfair double standard as compared to the rest of the intercollegiate enterprise.
“This also furthers the educational interest of the schools,” opined Russell White, president of The Collective Association trade group. “If you get better athletes, wouldn’t this also fall under that same thing? The difference is athletes in our case are doing community good as well to earn this money.”
Since the introduction of the unrelated business income tax in 1950, Congress and the IRS have repeatedly backed the idea that athletics activities are “substantially related to [a university’s] educational function.”
In 1967, the IRS reaffirmed this position in determining that a certain non-profit organization seeking to subsidize training tables for a school’s players and coaches was exempt from federal income tax. In 1980, the IRS ruled this consideration even extended to the sale of college football broadcasting rights. Six years later, thanks to the lobbying efforts of Baton Rouge, La., lobbyist—and LSU Tigers fan—Ted Jones, Congress agreed to amend the tax code to permit deductions for donations tied to ticket purchasers at college sporting events.
A decade later, in 1991, the 10th Circuit Court of Appeals reversed a lower court’s ruling that the NCAA should have to pay $10,395.14 unrelated business income tax from $55,926.71 in advertisement sales for the 1982 men’s basketball tournament programs. The NCAA sued the IRS after the service mailed it a notice of deficiency and following its failed petition of a federal tax court for redetermination.
In the years since, as the revenues in college sports have ballooned into the billions, the IRS has made only a few feeble tugs at the reins. In 2008, the agency commenced a five-year project examining tax-exempt universities’ practices involving endowments, executive compensation and unrelated business activities. The project’s final report found that schools regularly underreported unrelated business taxable income (UBTI), often because they misclassified sports-related activities as exempt.
In 2010, Playoff PAC, a political action committee promoting a college football playoff, filed an IRS complaint against the Fiesta Bowl, Sugar Bowl and Orange Bowl, alleging they should be stripped of their tax-exempt status because of unreasonable compensation and perks paid to their leaders, among other things. Playoff PAC’s crusade was joined by four congressmen, including Jason Chaffetz of Utah–a former kicker for BYU–who sent a letter to the IRS commissioner calling for “thorough examination” of the bowl organizations’ financial practices.
The Fiesta Bowl, which was owned by four separate nonprofit entities, later fired its CEO, John Junker, following a scandal in which it was found to have paid tens of thousands of reimbursements to employees who made certain political contributions and lavished Junker and his family with an over-the-top birthday celebration.
In the ensuing years, the IRS increased its scrutiny of bowl organizations, auditing the Alamo, Gator and (now-defunct) Fight Hunger bowls in 2014, while largely ignoring the prime movers of college sports money—schools, conferences and the NCAA.
The 2017 Tax Act, signed into law by President Donald Trump, appeared at first to be a potential game-changer. It repealed the charitable deduction for athletic ticket purchases and imposed a 21% tax on “excessive compensation” above $1 million of tax-exempt 501(c)(3) organizations, including universities. However, the excise tax provision was written in such a way that it excluded state-based universities. Experts like tax law professor Ellen Aprill believe that this was an inadvertent fumble during a hasty drafting process.
“I hate to use the cliché of the even-playing field, but it is disturbing to see that public universities are subject to a different set of rules from private universities because of what appears to be a mistake,” Aprill said.
Pascrell had hoped to remedy it. Now, in his absence, it is unclear if any other member will pick up this ball and run with it.
“I can’t spin any kind of scenario in which the IRS internally decides it is a good idea to announce tomorrow that all the football athletic programs are subject to UBIT, because the IRS has already has enough political problems,” said John Colombo, a professor of law emeritus at the University of Illinois who sub-specializes in the relationship between the IRS and college sports.
The salient difference between athletic departments and NIL collectives, argues Colombo, is seven decades of precedence.
Philip Hackney, a law professor at Pitt who previously worked in the Office of the Chief Counsel of the IRS, believes that the post-NIL era has given Congress reason to reevaluate its position on the charitable purpose of Power 4 football.
“That said, the history of college athletics, Congress and tax is that we give those benefits to college athletics and continue to extend them,” Hackney said.
Colombo contends that college sports has grown too big and rich for taxation to curtain the negative consequences Pascrell wanted to address.
“I do believe there would be one behavioral change that would result from taxing big-time college athletics: non-revenue sports programs would get cut,” said Colombo. “Ohio State’s football team would soldier on, and Ryan Day wouldn’t get paid any less, but would they still have a tennis team?”
If Congress wants to use its tax-writing authorities to change the way higher education remunerates football coaches, Colombo suggests it will need to put entire universities’ 501(c)(3) status on the table.
“Pass a law that for any university paying a coach more than $500,000, the university would no longer be eligible for tax-exempt status or federal money related to education or research,” Colombo said. “Do that, and I guarantee you all the football coaches would be making less than $500,000.”
(This story has been updated in the 12th paragraph to correct the spelling of Russell White’s name.)
