In late 2006, Congress challenged the NCAA’s tax-exempt status, questioning the organization’s lucrative commercial contracts and alleged lack of emphasis on higher education.  Some point out that Division I football and basketball are looking more like minor leagues for the pros that benefit only a tiny portion of a university’s student body and may actually be more “detrimental to the overall education of the athlete given the amount of time they consume, and so forth.” Smith College economist Andrew Zimbalist claims that “college sports has grown into a standard commercial enterprise — with only a tip of the hat to the academic environment they exist in.” This article will first provide background to clarify the manner in which tax rules are applied to organizations such as the NCAA, an analysis on whether the NCAA is actually fulfilling its tax-exempt status, and some possible solutions for tax-exempt compliance.
The National Collegiate Athletic Association (“NCAA”) is an unincorporated organization that governs more than 1200 colleges, universities, athletic conferences, and sports organizations, while managing 360,000 student-athletes and eighty-eight championship events in three divisions. The NCAA institutes a “principle of amateurism” in that student-athletes are amateurs and their participation should be primarily motivated by participation in their intercollegiate sport. It further vows to protect student-athletes from professional and commercial enterprises, and look after the best interests, education, and athletic participation of student-athletes.
Because the NCAA avails itself to these principles, the Internal Revenue Code (“IRC”) recognizes it as a tax-exempt organization. The NCAA and private universities rely on an exempt status under “§501(c)(3), which provides exemption for charitable organizations such as religious and educational institutions.” In 1976, Congress passed an amendment to this section to make perfectly clear that “national or international amateur sports competition” serve a charitable purpose under the IRC. However, the statute is not without limitations.
Treasury Regulations, Internal Revenue Service (“IRS”) interpretations and judicial opinions all attempt to define situations in which charitable organizations may lose their tax-exempt status. For example, the IRS takes the position that a charitable organization loses its exempt status if it confers an “excessive benefit” upon parties outside its charitable class. The “charitable class” in the NCAA’s case would refer to student-athletes. Furthermore, when a charitable organization bases its actions on “substantial” commercial activities, in order to keep its tax-exempt status, Treasury Regulations require the organization to be “in furtherance of” an exempt purpose. In theory, it can be argued that Division I football and basketball programs are providing ‘excessive private benefit’ to television networks and professional sports leagues in relationship to the educational benefits provided to the charitable class.
Critics point out that the NCAA is not acting “in furtherance of” its exempt purpose of advancing amateurism, education, and the best interests of student-athletes when it is conducting itself like “minor leagues for the pros, organized to produce maximum entertainment revenues.” Today, NCAA licensing deals alone are estimated at more than $4 billion  – a figure that has increased by forty percent since the early 1980s.  Furthermore, in 1999, the NCAA contracted with Columbia Broadcasting System (“CBS”), giving the company the exclusive right to broadcast March Madness for eleven years at roughly $ 6.2 billion or $ 560 million per year.  Broadcast and marketing contracts have accounted for nearly 90% of the NCAA’s overall budgeted revenues from 2008-09,  and business partner, Thought Equity Motion, self-described as the world’s largest provider of online motion content, declares that the NCAA’s video content archive is “one of the most unique and valuable content collections in the world.”
In addition, there is transparency in the way in which “professional football and basketball benefit from avoiding the costs that would be associated with “minor league” development programs such as those funded by Major League Baseball.” With escalating coach salaries and state-of-the-art facilities,  universities end up churning out prime candidates for the big leagues. This in turn confers a “secondary benefit” for professional leagues that save on the high costs of sending players to the minor leagues.  Perhaps a flaw in this argument is that only about 1.8% of student-athletes who play college football under the National Collegiate Athletic Association (“NCAA”) actually make it to the professional level, with reports of even lower percentages among men’s college basketball.  Therefore, this benefit may not be as “excessive” when compared to the benefits conferred to private enterprises like CBS. However, this does bring up a secondary issue in that while a select few receive an astronomical benefit from the NCAA, the greater portion of student-athletes may face an overall detriment.
Student-athletes seem to be harmed by the way in which the NCAA focuses its efforts in maximizing private businesses instead of acting “in furtherance of” for example, academic pursuits. Student-athletes miss classes and precious study time when they are forced to juggle rigorous travel and training schedules.  A 2004 report on graduation rates revealed that nearly twenty percent of Division 1 men’s basketball teams had graduation rates under fifty percent.  A more recent 2009 survey taken by the NCAA indicated that the University of Texas was facing the same reality among its football team with a graduation rate of less than fifty percent as well.  While there is evidence that the NCAA has threatened member universities with attempts to take away scholarships and postseason eligibility,  this arguably only increases pressure upon professors and athletic faculty to inflate the scholastic progress of athletes, causing some student-athletes to lose out on a basic education.  To determine whether the NCAA is really focusing its efforts on benefiting student-athletes, it is important to analyze how much funding actually reaches student-athletes on a more individual level.
The NCAA claims to benefit student-athletes by using billions of its revenue and profits towards funding scholarship aid and expanding opportunities for students in nonrevenue sports.  This claim would arguably confirm the NCAA’s tax-exempt title even though no bright line rule exists concerning how much money the NCAA must allocate towards student-athletes. However, the NCAA financial disclosure requirements are vague and allow an aggregate reporting of revenue expenditures.  Therefore, it is difficult to determine exactly how much student-athletes are benefiting (at least financially) through the NCAA’s funding.
The NCAA needs to refocus its efforts on protecting student-athletes from commercial enterprises  and make sure it is looking after the best interests of its athletes, predominately their future and education.  It is important that “watchdog” groups such as the Coalition of Intercollegiate Athletics and the Drake Group continue to push for a more complete breakdown of NCAA financial data to determine where funding is really being allocated.  Congress should mandate not only detailed financial disclosures on NCAA expenditures, but also reports and studies indicating how much student-athletes are benefiting academically and so forth. 
Reform groups suggest that the NCAA should be required to report on academic matters affecting student-athletes, including student-athletes’ academic majors, their advisors, required courses in their majors, their grade point average (GPA), SAT and ACT scores, independent studies, grade changes by professors, and missed classes because of extracurricular demands. The University of Michigan has even taken it upon itself to create a committee to monitor whether or not student-athletes are unjustly being given higher grades and accepted in easier classes in order to maintain eligibility. While these reform groups and committees provide a starting point, Congress ultimately needs to step in to ensure that the NCAA is acting in compliance with its tax-exempt status and specifically benefiting its charitable class of student-athletes.
 Steve Wieberg, NCAA’s Tax-Exempt Status Questioned, USA Today, Oct. 5, 2006, available at http://www.usatoday.com/sports/college/2006-10-04-ncaa-tax-status_x.htm.
 See John D. Colombo, The NCAA, Tax-Exemption and College Athletics, 2010 U. Ill. L. Rev. (forthcoming Jan. 2010) (manuscript at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=13367 27) (looking at the tax-exempt status of the NCAA and other big-time college sports programs).
 Wieberg, supra note 1.
 Christian Dennie, An Antitrust Action the NCAA Cannot Afford to Lose, 7 Va. Sports & Ent. L.J. 97, 125 (2007).
 Nat’l Collegiate Athletic Ass’n, 2006-2007 NCAA Division I Manual: Operating Bylaws Art. 2.9 (2007) [hereinafter NCAA Manual].
 NCAA, About the NCAA, http://www.ncaa.org/wps/portal/ncaahome?WCM_GLOBAL_CONTEXT=/ncaa/ncaa/about+the+ncaa (last visited Feb. 8, 2010).
 Colombo, supra note 2, at 113.
 Id. at 118.
 Id. at 122.
 Id. at 125.
 Id. at 127.
 Id. at 125.
 Id. at 138.
 Pete Thamel, N.C.A.A. Fails to Stop Licensing Lawsuit, NY Times, Feb. 8, 2010, available at http://www.nytimes.com/2010/02/09/sports/ncaabasketball/09ncaa.html.
 Nathan Crabbe, Profiting Off the Gators: A Fine Line Between What’s OK and Not, Gainsville.com, Sept. 26, 2009, http://www.gainesville.com/article/20090926/articles/909259893.
 Dennie, supra note 4, at 100. Jennifer A. Mueller, Student-Athlete Amateurism Should Not Become a Fantasy, 2009 U. Ill. J.L. Tech. & Pol’y 527, 560 (2009).
 Thought Equity Motion, About Us, http://www.thoughtequity.com/video/shell/txp/about.do?title=About+Us (last visited Feb. 8, 2010).
 Colombo, supra note 2, at 125.
 Id. at 111.
 Id. at 125.
 Percentage of Going Pro, http://www.athleteconnections.org/Articles.aspx?id=20&title=News%20and%20Media (last visited Feb. 8, 2010).
 Melissa Kelly: Teaching the Star Athletes, http://712educators.about.com/cs/characteredu/a/starathletes.htm (last visited Feb. 8, 2010).
 Derrick Z. Jackson, Calling Athletes on Poor Grades Stops Foul Play in Universities, Tri City Herald, Mar. 3, 2005, available at http://news.google.com/newspapers?nid=1951&dat=20050303&id=LTsiAAAAIBAJ&sjid=EasFAAAAIBAJ&pg=4178,387627
 Shabab Siddiqui, NCAA Survey Reveals UT Football Players Have Low Graduation Rates, The Daily Texan, Nov. 20, 2009, available at http://www.dailytexanonline.com/top-stories/ncaa-survey-reveals-ut-football-players-have-low-graduation-rates-1.2093044.
 Jackson, supra note 27.
 Kelly, supra note 26.
 Colombo, supra note 2, at 133.
 Id. at 159.
 NCAA Manual, supra note 5.
 NCAA, supra note 7.
 Colombo, supra note 2, at 159.
 Id. at 163.
 Id. at 160.
 Caitlin Schneider, Committee to Investigate Academics for Student-Athletes, The Mich. Daily, Sept. 16, 2008, http://michigandaily.com/content/committee-investigate-academics-student-athletes