Taxing College Athletes After NCAA v. Alston

NEW BRUNSWICK, NJ – OCTOBER 29: Shawne Alston #20 of the West Virginia Mountaineers celebrates with … [+] a teammate after scoring a touchdown against the Rutgers Scarlet Knights at High Point Solutions Stadium on October 29, 2011 in New Brunswick, New Jersey. (Photo by Patrick McDermott/Getty Images)
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Andrew Dana, a partner with Parker Poe Adams & Bernstein LLP, discusses the Supreme Court case NCAA v. Alston; name, image, and likeness rights; and how both could affect taxation of college athletes.

This transcript has been edited for length and clarity.

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 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.

What kind of tax implications will this ruling have for college athletes? 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: Let’s start off with what the current NCAA rules are on compensation for college athletes.

Robert Goulder: Sure. 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 long-standing rule that limits both the form and the amount of the economic consideration paid to collegiate athletes. The gist of these rules is that the athletes are allowed to receive academic scholarships that cover their tuition and room and board, plus a very small stipend for things like textbooks and so forth, but nothing more. They certainly can’t be paid.

David D. Stewart: How about some background on this Supreme Court case? What does it mean for college athletics and consequently the tax world?

Robert Goulder: I think it’s going to be very consequential for all those groups. The case 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.

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. An important part of that is when a group with monopoly power decides to suppress wages to below market levels.

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: Now, I also understand that some states have been passing laws that allow athletes to capitalize on the use of their likenesses. Can you talk about those?

Robert Goulder: 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. 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 or athletic department for which they play. It’s coming from a completely separate third party. It’s some company with a marketing budget that figured they will promote their name or their brand by getting some student athlete to be their pitch man.

That used to be prohibited, but starting July 1, a number of states across the country have passed laws specifically authorizing this.

David D. Stewart: 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. This includes 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.”

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 came out in June. It was a monumental decision. It invalidated certain NCAA limits on athlete compensation, but it seemed to let others stand. 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 your general thoughts on the substance of this decision?

The front of the US Supreme Court building in Washington, DC.
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Andrew Dana: You’re exactly right. The plaintiffs didn’t push, but after reading the decision, especially the concurrence, they probably wish they had. They came at the district court originally with the full gamut of challenges to the NCAA restrictions on compensation.

What the judge did there is identify as problematic the limitations on the provision of educational benefits to athletes. It was appealed to the Ninth Circuit affirmed. The NCAA appealed the holding that the provision of educational benefits violated antitrust law.

Then, as you know, the Supreme Court addressed only the issue in front of it. While the Supreme Court limited itself to affirming that narrow passage, Associate Justice Brett Kavanaugh’s concurring opinion is rather scathing and goes well beyond that.

Robert Goulder: What I thought was fascinating here is that the NCAA made this curious argument, which 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, hinges on this quaint notion that the players aren’t being paid a market wage. That’s their version of amateurism. 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 as 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: Not well. I feel and sympathize for the NCAA here, but you’re absolutely right.

Kavanaugh did an excellent job 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, 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. The NCAA really struggled to identify what the definition of amateurism is. The court held them to that and pointed out that there isn’t a clear definition. What defines and distinguishes your sport from others?

That’s really the root of the issue here. 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? 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? That’s at the crux of what distinguishes the NCAA’s product from a professional sports competition.

Robert Goulder: You’ve mentioned Kavanaugh and his concurring opinion here. It is scathing, as you said. I’m 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: Absolutely. 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.

WASHINGTON, DC – MAY 09: U.S. Supreme Court Justice Brett Kavanaugh listens to a discussion between … [+] Economic Club President David Rubenstein and NBA Commissioner Adam Silver about the state of the NBA and professional sports during and event hosted by the Economic Club of Washington, D.C. at the Capitol Hilton on May 9, 2019 in Washington, DC. (Photo by Zach Gibson/Getty Images)
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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. He was clear. As was the opinion of Associate Justice Neil Gorsuch that said, “Look. Antitrust laws apply to the NCAA. Fair and simple.”

Robert Goulder: That’s exactly where it’s pointing. I think you’re right. Maybe if there’s future litigation, it’ll get settled out of court just given the likelihood that the NCAA could lose if they were to push it.

There’s something I want to talk about completely separate from the Supreme Court. This has to do with NIL rights, which referr to name, image, and likeness rights.

A number of state legislatures across the country have passed laws where they’re making it permissible for college athletes to essentially do commercial endorsements and get paid for it. Some of them have already taken effect. 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 or company that’s seeking marketing exposure.

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 teamwide endorsement of their health clubs. Collectively, that’s over half a million dollars.

This used to be illegal and now it’s not. Aren’t those payments taxable income?

Andrew Dana: 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. No benefit that’s outside of education, and nothing paid from a payer outside of the school or conference.

Shifting to NIL, you had a number of state legislatures working on NIL laws. The legislative committees perceived the NCAA as a bit of a behemoth. 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.” 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. This sheds light on the need for a federal uniform statute on NIL.

But to your point, there’s an exciting boom of deals that are being announced. A lot of creativity on the partnerships. There’s going to be a disparity.

In speaking with coaches in Division I, I think one of the things they’re sympathetic to is that for many college athletes, it is a full-time job. For me, just the academic portion was a full-time job.

To your point, they’re now running a small business. Some of these deals are incredibly lucrative. 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?”

Letterman jacket with a dollar symbol. Symbolizing the high cost of high school and college sports … [+] and athletics.
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Robert Goulder: 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. It’s just part of their normal marketing budget.

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. 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: You’re absolutely right. I think the schools are starting to distinguish themselves. There are some that are providing a lot of education to their players/business people. The default is, if you don’t do anything and you’re collecting revenue, 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? Do 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?

They need a quick education on do I set up [a limited liability company] 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 but double taxation.

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 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? 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?

I think we’re going to see a difference between those athletes who have the benefit of a robust advisory team and those that get ahead of themselves. There may be some interesting conversations next April.

Robert Goulder: Wow. That is so much to think about.

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. It just makes your head spin. There’s so much there.

I have to think that they would need professional assistance like a CPA or a tax accountant. Or, is there a role for the universities to step in and handle that for them?

That raises another question. Is there a simplifying procedure here where perhaps the NIL payments are funneled through the university or through the athletic department? 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? What about withholding? Do you think athletic departments should be withholding agents?

Andrew Dana: Yeah, 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.

Student girl holding books and smartphone while walking in school campus background, education, back … [+] to school concept
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You highlight each university is able to administer different rules and different policies. Indeed they do. The same with states. This goes all the way to kind of the structure of the NIL deals.

But to answer your question on can these students sort of delegate the administration? Are they a worker of sorts? I think what comes to light is the heart of what’s earning the revenue. It’s this intangible property of the athlete.

But it raises a number of really challenging questions. Can or should the athlete contribute their intellectual property and their identity to the university, 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 and identity. 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. As if it were not complicated enough, one example 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. 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.

Andrew Dana: Yeah, absolutely. I think you’re going to see a tremendous amount of innovation.

Remember, all of the business participants here are really young adults that have a fresh perspective on economic markets. I think you’re going to see the use of social media. We already have the economic world of influencers.

I’ll give you another example. The Cavinder twins, who are basketball players at Fresno State, have 3.3 million TikTok followers. That’s a huge social media following. They’ve already signed a deal with Boost Mobile. It’ll be interesting to see how these young athletes are utilizing social media presence as a fresh, young, innovative approach.

It’s important to note, it’s not all just for profit. One of the early feel-good stories is Florida State University 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.

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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. 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 from the pure tax angle and ask a question about Title IX. If we ever get to the point where NCAA and the Power Five conferences 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 — on the face of it, doesn’t that sort of hint at a Title IX implication?

Andrew Dana: It more than hints. This is where you’re going to see some disparities.

What’s interesting on the NIL side is 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 Louisiana State University Olivia Dunne, who has 3.9 million TikTok followers. That’s a huge social media following. She has over 1 million followers on Instagram. One rule of thumb is your revenue can be as high as 80 cents per follower per year. You can imagine the economics that this female gymnast has at her disposal.

HARTFORD, CT – JUNE 04: Olivia Dunne competes on the balance beam during the Jr. Women’s 2016 … [+] Secret US Classic at the XL Center on June 4, 2016 in Hartford, Connecticut. (Photo by Maddie Meyer/Getty Images)
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Now, shifting gears to compensation for the actual playing on the field. The moneymaker in college sports without a doubt is broadcast revenue. When you get into the world of broadcast revenue, what are people watching? Live sports. Without question, you’ve got men’s NCAA basketball and men’s college football. In fact, the NCAA tournament probably generates more revenue for the NCAA than anything else.

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. There’s not much broadcast revenue in fencing, for instance.

How are we going to comply with Title IX? 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.

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. But, for tax purposes, they’re a Florida resident.

That’s because Florida doesn’t tax income. 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?

For example, if you’re some blue chip basketball player at one of these academies where all the big-time programs — Duke University, the University of North Carolina, and the University of California, Los Angeles — are looking at you. They’re all trying to get this five-star kid out of high school. 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 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: You hit the nail on the head. That’s something that the student athletes absolutely have control over.

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.

Let’s assume for the moment that most of my revenue will be earned where my school is. 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. 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. 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.

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. 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, thank you for joining us on the podcast.

Andrew Dana: Thank you for having me.

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