David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: taxing student athletes? In June, the United States Supreme Court addressed an issue that the world of college sports has debated for years: the payment of collegiate athletes. The court’s decision in National Collegiate Athletic Association v. Alston upholds lower court rulings that the NCAA’s restrictions on compensation for athletes are in violation of antitrust laws. So, what kind of tax implications will this ruling have for college athletes? And how could this decision affect the tax community? Here to talk more about this is Tax Notes contributing editor Robert Goulder. Bob, welcome back to the podcast.
Robert Goulder: Hello, Dave. Thanks for having me.
David D. Stewart: All right. First, can we start off with what the current NCAA rules are on compensation for college athletes?
Robert Goulder: Sure. And a lot of people will be familiar with these because they've been very widely discussed in the popular media. The NCAA has had a longstanding rule that limits both the form and the amount of the economic consideration paid to collegiate athletes. And the gist of these rules is that the athletes are allowed to receive academic scholarships that cover their tuition, their room and their board, plus a very small stipend amount for things like textbooks and so forth, but nothing more. They certainly can't be paid.
David D. Stewart: All right. So, how about some background on this Supreme Court case? What does it mean for college athletics and consequently the tax world?
Robert Goulder: Well, I think it's going to be very consequential for all those groups. The nature of the case — it came about with some current and former athletes bringing a challenge against the NCAA based on an alleged violation of section 1 of the Sherman Act.
Now, I know tax folks probably don't spend a whole lot of time thinking about the Sherman Act, but this falls under the country's federal regulatory regime for antitrust and fair competitive practices. And an important part of that is when a group with monopoly power decides to suppress wages to below market levels. So, essentially what the plaintiffs in this litigation were saying is that the NCAA was unfairly using its stance as a monopoly power to suppress wages.
David D. Stewart: All right. Now, I also understand that some states have been passing laws that allow athletes to capitalize on the use of their likenesses. Can you tell me about those?
Robert Goulder: Oh, yes. There's a lot of activity going on in that area. This is what's known as the NIL issue. NIL stands for name, image, and likeness. And this basically has to do with athletes going out and monetizing their fame by receiving commercial endorsements.
Notice the nuance here is that when an athlete is compensated for their NIL rights, the payment is not coming from the university for which they play, or from the athletic department. It's coming from a completely separate third party. Some company with a marketing budget that basically wants to promote its name. And they figured that they will do that — promote their name or their brand — by getting some student athlete to be their pitch man. Now that used to be prohibited, but now just starting July 1, a number of states across the country have passed laws specifically authorizing this.
David D. Stewart: All right. So, you recently spoke to somebody about this. Can you tell me about your guest and what you talked about?
Robert Goulder: We have an excellent guest for this discussion. His name is Andrew Dana, and he is with the firm of Parker Poe Adams & Bernstein LLP. Andrew is the leader of the firm's Sports & Entertainment Industry Team, and he is very well-versed on all of these issues.
When you listen to our conversation, we're going to go into great detail about NCAA v. Alston. The issues that the defendant brought up to basically say, "Hey, look, our brand of amateurism is on trial here. Why can't we just have amateur sports and continue to have these rules? And yes, they happen to suppress wages, but that's because amateurism is at stake." So, it's a very nuanced conversation, but the issues are fascinating, not just to sports fans, but to tax folks generally.
David D. Stewart: All right. Let's go to that interview.
Robert Goulder: Andrew Dana, welcome to the podcast. Thank you so much for joining us. Let's get right to the first question. The Supreme Court decision in NCAA v. Alston. It came out in June. A monumental decision, I think at least. It invalidated certain NCAA limits on athlete compensation, but it seemed to let others stand. And I got the sense mostly that's because the plaintiffs here chose not to push things as far as they might have. Can you offer me just your general thoughts on the substance of this decision?
Andrew Dana: Yeah, absolutely. And you're exactly right. The plaintiffs didn't push, but after reading the decision, especially the concurrence, they probably wish they had. And so they came at the district court originally with the sort of full gamut of challenges to the NCAA restrictions on compensation.
And what the judge did there is really just identify as problematic the limitations on the provision of educational benefits to athletes. It was appealed to the Ninth Circuit affirmed. And then as you know, the Supreme Court addressed only the issue in front of it, which was whether — so the NCAA appealed the holding that the provision of educational benefits violated antitrust law. And while the Supreme Court limited itself to affirming that narrow passage, Kavanaugh's concurring opinion is rather scathing and goes well beyond that.
Robert Goulder: Yeah. What I thought was fascinating here is that the NCAA made this curious argument, which Justice Kavanaugh describes as a circular argument. They're basically saying that their brand, and by implication the consumer demand for the product that they offer, that it hinges on this quaint notion that the players aren't being paid a market wage. That's their version of amateurism. And that this is central to the uniqueness of their product. It distinguishes college football from the NFL. In sort of legalistic terms, they frame that issue that yes, they admit they're suppressing wages on the labor side of the market. But it's justified because there's this resulting benefit that accrues to consumers on the demand side of the market. How did that play out?
Andrew Dana: Yeah, not well. You know, and I feel and I sympathize for the NCAA here, but you're absolutely right. And Kavanaugh did an excellent job of sort of identifying like, "Hey, you can't defend against antitrust law because not paying your athletes is the definition of your product." It doesn't work that way. It's circular, like you described.
At the same time for those fans of NCAA athletics, like there are a number of people that would prefer to watch the NCAA basketball tournament than the NBA. Or you have lots of people out there that have a greater affinity for college football than the NFL. And the NCAA really struggled to identify what the definition of amateurism is. And the court held them to that and pointed out that there isn't a clear definition. What defines and distinguishes your sport from others?
And that's really the root of the issue here. And for sports fans out there, you can ask yourself if a college athlete received tuition to post-graduate school, would you be less interested in watching that sport on TV? And that's essentially what this ruling was targeting. But of course it implicates broader consequences to NCAA sports. So, that same question: would you be less likely to watch the NCAA basketball tournament if the athletes were receiving cash compensation? And really that's at the crux of what distinguishes the NCAA's product from a professional sports competition.
Robert Goulder: Yeah. Now, you've mentioned Justice Kavanaugh and his concurring opinion here. And it is scathing, as you said. I'm just curious if this is going to open the door to future litigation that challenges a broader range of NCAA restrictions. Where could this lead?
If we fast forward a few years, is somebody going to litigate pointing to the Kavanaugh concurrence and try to push this to the point where we're authorizing some kind of an employer-employee relationship? Could that possibly happen?
Andrew Dana: Yeah, absolutely. I mean, I'd even take it a step further. I think the strength of Kavanaugh's concurrence is probably a disincentive for the NCAA to even stand up against future legal challenges. Or put another way, I think we'll likely see more resolution and modifications outside of court than in the court process.
I mean, if you take Kavanaugh's decision as any sort of forecast of how these legal issues would be treated in the court moving forward, if I'm the NCAA, I'm not sure I really want to go to that competition again. I mean, he was clear. As was the opinion of Gorsuch that, "Look. Antitrust laws apply to the NCAA. Fair and simple."
Robert Goulder: Yeah. That's exactly where it's pointing. And I think you're right. So, maybe if there's future litigation, but it'll get settled out of court. Just given the likelihood that the NCAA could lose if they were to push it.
Now there's a separate thing I want to talk about completely separate from the Supreme Court. And this has to do with NIL rights. So, when I say that I'm referring to name, image, and likeness rights.
A number of state legislatures across the country have passed laws — some of them have already taken effect — where they're making it permissible for college athletes to essentially do commercial endorsements and get paid for it. Now, note in that scenario, the compensation being paid to the student athletes doesn't come from the university itself, but from some third party, some company that's seeking marketing exposure.
And we've had a real world example of this. Down in Florida there's a school that just inked an NIL deal where a local health club chain is paying the entire football team, all 90 players, about $6,000 a head for a collective team-wide endorsement of their health clubs. And collectively, that's over half a million dollars. Now, a couple of things occur to me. This used to be illegal and now it's not. And aren't those payments taxable income?
Andrew Dana: Yeah. So, there's a lot to unpack there. What's fascinating is the sort of confluence of this Supreme Court case, which as you pointed out really has a narrow holding for the provision of educational benefits from the school or conference. So, no benefit that's outside of education, and nothing paid from a payer outside of the school or conference.
Now shifting to NIL. You had a number of state legislatures working on NIL laws. And the legislative committees perceived the NCAA as a bit of a behemoth. And as a result, you see some conservatism in these NIL laws that were drafted before the Supreme Court case. The Supreme Court case came out and was such a decisive victory that the NCAA basically afterward capitulated. Mind you, the case itself doesn't deal with NIL.
But because of the shaky grounds the NCAA stands on, they essentially said, "We are, on an interim basis, suspending the application of any of our NIL laws." Now, what happened there is the states that drafted their legislation in advance of this holding have a more conservative statute than states like my own in North Carolina. We don't have a statute. Well, now the schools and conferences can basically use any law that they want to apply. And this sheds light on the need for a federal uniform statute on NIL.
But to your point, there's just an exciting boom of deals that are being announced. And a lot of creativity on the partnerships. There's going to be a disparity. So, in speaking with coaches in Division I, I think one of the things they're sympathetic to — you've got college athletes, and for those of you that have played college sports, it is a full-time job. For me, just the academic portion was a full-time job. So, add that on. And then to your point, they're now running a small business. Some of these deals are incredibly lucrative. And as a result, the question is, "Well, how do I, as a college athlete, structure my business affairs and deal with the tax consequences of those?"
Robert Goulder: Yeah. So, when I think about the tax consequences, as a policy guy, I like what we refer to as the matching principle. If you look at the tax code from 30,000 feet and you see one entity, the business that's seeking sponsorship here, or marketing exposure, the money that they pay into an NIL deal, presumably they're going to be taking that as a deductible business expense.
Andrew Dana: Oh, absolutely.
Robert Goulder: Yeah. It's just part of their normal marketing budget. So, if you have one tax-paying entity that's taking a deduction for this economic transaction, the matching principle suggests that you have to have the recipient of those funds claiming it as taxable income on the other hand. So I wonder if all these kids on this football team that are getting $6,000 a head for the health club endorsement, do they know that they're going to have to declare that?
Andrew Dana: I mean, you're absolutely right. And I think the schools are starting to distinguish themselves. There are some that are providing a lot of education to their players/business people. So the default, if you don't do anything and you're collecting revenue, is you're a sole proprietorship, and you're going to be reporting on your Schedule C.
The challenge there is the blurred lines between your expenses. What are personal? What are business expenses? And whether these individuals have an appreciation for what's an ordinary and necessary business expense in their business pursuit of monetizing their name, image, and likeness.
So, they need a quick education on do I set up an LLC under state law? If so, do I tax it as a partnership? Do I file an S election? Do I understand how passthrough taxation works? If, for instance, my plan is to take my revenue and reinvest it in my brand and my marketing, maybe I'd be interested in structuring a C corporation, which has the lowest initial tax. Right? But double taxation.
So, you're going to have a different strategy potentially for those athletes that say, "Hey, I want to take all of the money that I'm collecting and immediately put it in my pocket," versus those that say, "Hey, maybe I want to reinvest."
Other aspects that get really interesting, and again, this is just a reason why an education is probably appropriate to provide to these athletes. Are they going to be taking investors? Will there be joint ventures? Are they negotiating their rights correctly in these legal documents? If it's a partnership, did they understand phantom taxes? Are there going to be tax distributions? Are there going to be special allocations? Do they have representation in all of these negotiations? And did they have a savvy accountant to make sure that they are clearly separating their business deductions and expenses from those that are personal and not deductible?
So, I think we're going to see a difference between those athletes who have the benefit of a robust advisory team and those that kind of get ahead of themselves. And there may be some interesting conversations next April.
Robert Goulder: Wow. That is so much to think about. Because I remember when I was in law school and taking a partnership class and trying to deal with the passthrough treatment and the basis adjustments. And, oh my goodness. I mean, it just makes your head spin. There's so much there. I have to think that they would need professional assistance, a CPA or a tax accountant. Or I don't know, is there a role for the universities to step in and handle that for them?
Which raises another question. Is there a simplifying procedure here where perhaps the NIL payments are funneled through the university or through the athletic department? And then you could have the athletic department or the university deal with any withholding or reporting.
Because in a normal commercial situation, you're going to have like a Form 1099 for interest or dividends or whatever. Is there going to be that type of paperwork here? And what about withholding? Do you think athletic departments should be withholding agents?
Andrew Dana: Yeah, so, it's a fantastic question and you'd be a great participant in the discussion. Because at the end of the day, at the end of today, it remains the wild wild west. At the end of tomorrow, hopefully there's more clarity on exactly how this will operate. And you highlight each university is able to administer different rules and different policies. And indeed they do. The same with states. And this goes all the way to kind of the structure of the NIL deals.
But to answer your question on how these — can these students sort of delegate the administration? And are they a worker of sorts? I think what comes to light is the heart of what's earning the revenue. And it's this intangible property of the athlete. But it raises a number of really challenging questions. Can the athlete or should the athlete contribute their intellectual property and their identity, if not to the university, should they contribute it or consider contributing it to an entity that has a more robust advisory team and be an employee of that entity?
It also potentially allows some separation between compensation and the appreciation and value of a brand, of an identity. And we're in the process right now, and athletes are, of trying to understand how this all gets sliced up.
I'll give you one that's fascinating. And as if it were not complicated enough, you raised an example earlier, and there are a number of really interesting examples that we can talk about. But one in particular is out of Oregon, where a player partnered with Phil Knight of Nike fame and created an NFT, a non-fungible token, which is a piece of electronic artwork that can be acquired for crypto.
Now, try unpacking all of that from a tax perspective, and you get a sense for how the IRS, who is already sort of challenged to navigate the world of crypto and NFTs. And you put this into the mix of the NIL world, and you've got a really interesting tax challenge.
Robert Goulder: Well, there is no lack of creativity among the people who were engaged in this. Yeah. Cryptocurrencies and all that. Wow. So much going on.
Andrew Dana: Yeah, absolutely. I think you're going to see a tremendous amount of innovation because remember all of the business participants here are really young adults that have a fresh perspective on economic markets. And I think you're going to see the use of social media. We already have the economic world of influencers.
But I'll give you another example. The Cavinder twins, who are basketball players at Fresno State, have 3.3 million Tik Tok followers. I mean, that's a huge social media following. And they've already signed a deal with Boost Mobile. But it'll be interesting to see how these young athletes are utilizing social media presence and a fresh, young, innovative approach.
And it's important to note, it's not all just for profit. You've got one of the early feel-good stories. There's an FSU lineman, Dillon Gibbons, who, immediately after the ability to use your NIL, started a GoFundMe page for his friend with a nerve disease and used his name, image, and likeness to raise money for his friend.
So, I think you're going to see a lot of uses by athletes of their name, image, and likeness, both for profit, but also for some social initiative or charitable use. And so I think it's going to be fun to see how they deploy their new ability to really leverage something that is, at the end of the day, their property.
Robert Goulder: Let me deviate, just for one moment here, away from the pure tax angle and ask a question about Title IX. If we ever get to the point where NCAA, the Power Five conferences, if they start paying their football players, who all happen to be male, and they're not paying their female athletes — the women's volleyball team or the women's softball team — just on the face of it. I don't want to go down a rabbit hole here, but just on the face of it, doesn't that sort of hint at a Title IX implication?
Andrew Dana: Oh, it more than hints. I mean, and this is where you're going to see some disparities. So, what's interesting on the NIL side, because it's so entrenched in social media, you really have a lot of parity between female and male athletes. For instance, there's a gymnast at LSU, Olivia Dunne, who has 3.9 million Tik Tok followers. Huge, huge social media following, over 1 million on Instagram. One rule of thumb: your revenue can be as high as 80 cents per follower per year. So, you can imagine the economics that this female gymnast has at her disposal.
Now, shifting gears to compensation for the actual playing on the field. So, separate and apart from name, image, and likeness. The moneymaker in college sports without a doubt is broadcast revenue. And when you get into the world of broadcast revenue, what are people watching? Live sports. And without question, you've got men's NCAA basketball — in fact, the NCAA tournament probably generates more revenue for the NCAA than anything else — and men's college football.
So, when you're looking at divvying up the revenue from the broadcast, you don't have that parity across male and female sports, let alone across all sports. Right? There's not much broadcast revenue in fencing, for instance. So, how are we going to comply with Title IX? And how should we allocate this revenue among the different athletes in college sports?
Robert Goulder: Yeah, a lot there to think about. We're running out of time here, but I wanted to get one more question in, Andrew, and it's an important one. It has to do with state governments. Right? When I think about professional athletes, it seems that a disproportional number of them have a tax residence in the state of Florida. Regardless of where they play. Maybe they play on the other side of the country in some sport.
But, for tax purposes, they're a Florida resident. And that's because Florida doesn't tax income. Now, separate and apart from federal income tax consequences, if there's taxable income, states are presumably going to want a piece of it. Why wouldn't they? If it's taxable income for the federal government, it would probably be taxable income at the state level, assuming they have an income tax system. Do you think that this could affect recruiting decisions?
If you're some blue chip basketball player at one of these academies where like all the big-time programs are looking at you — Kentucky and Duke and UNC and UCLA. They're all trying to get this five-star kid out of high school. And he has to choose between going to a college in California or Massachusetts, which are high tax states, or go to college in the state of Florida — Florida or Florida State, whatever — where he doesn't have to worry about state level taxes. Are we going to approach a point where these athletes coming out of high school, they're going to have to think about the tax consequences of the college decisions they make?
Andrew Dana: Without question. I mean, you hit the nail on the head. And that's something that the student athletes absolutely have control over. So, I'll give you a great example based on your fact pattern. If I'm a recruit and my family lives in Florida, and I'm being recruited by the University of Florida and UCLA. Well, through nexus and apportionment, I know where I earn my revenue, the state has jurisdiction to tax me.
And let's assume for the moment that most of my revenue will be earned where my school is. Well, I have a significant incentive to go to University of Florida, where none of my income would be taxed at the state level, versus UCLA. So, it absolutely creates a disparity in recruiting. Undoubtedly.
In addition, think about with sympathy, the reporting burdens of these student athletes to the extent that different states determine that they are earning income as they travel in their competition, much akin to how professional athletes are taxed. When they have a game in a different city that state — and state and local taxes apply at the specific jurisdiction. But when they're competing in a different state, that state has authority to tax them.
So, you may have college athletes who may never have even filed a tax return, who are now filing state income tax returns across the country. So, state taxes are absolutely going to affect recruiting at the different schools. In addition to how those schools themselves opt to apply the NIL laws. But from a tax perspective, you couldn't be more spot on.
Robert Goulder: Absolutely fascinating. Andrew Dana, thank you for joining us on the podcast. I hope we get the chance to talk again. Perhaps we'll come back and revisit this theme in a few months. Because as we mentioned, this is an area where things are evolving rapidly and there's a lot of dynamic change. And there's just a lot for a number of different stakeholders to try to keep abreast of. But thank very much for coming on the podcast.
Andrew Dana: Thank you for having me.
David D. Stewart: Now coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will you have for us?
Paige Jones: Thanks, Dave. In Tax Notes Federal, four practitioners examine the questions that arise in identifying disguised sales of partnership interests. Jasper Cummings, Jr., argues that taxpayers have the most discretion to form opinions about what the tax law is and practitioners have the least. In Tax Notes State, four SALT practitioners review state budget numbers as the coronavirus pandemic winds down. Jonathan Williams and Thomas Savidge analyze the latest in a series of ALEC annual publications examining growing state financial liabilities. In Tax Notes International, Wei Cui examines how China might respond to global efforts to reach consensus on international tax reform. Oliver Treidler and Tom-Eric Kunz evaluate the European Commission’s new proposal for an EU common consolidated corporate tax base. And finally, in Featured Analysis, Marie Sapirie argues that the IRS should make clear to any outside service provider that is collecting information from taxpayers on behalf of the agency that it should use that information only for the purpose of providing the service that it’s being asked to provide.
David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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