Wall Street Journal: College Football Programs Have a Tax Problem, by Erik Jensen (Case Western):

William McGurn is right that big-time collegiate sports relies on the “myth” of the student athlete (“The College Sports Crisis,” Main Street Nov. 25). The players, especially in football and basketball, are hired hands who earn more than “scholarships.” But that raises a tax problem for the colleges.

One point Mr. McGurn doesn’t explicitly make is that if Alabama’s football team, say, is largely made up of folks who aren’t real students, it should be treated as an “unrelated trade or business” for tax purposes—unrelated to the educational purposes for which the university is tax-exempt. The historical justification for not taxing the income of college teams was that the players were students. Jettison that pretense, and the net income should be taxed. The university as a whole may be tax-exempt, but why should its profit-making football program be? Even if net football revenue is used to support educational programs, hardly the norm, Uncle Sam can and should tax unrelated business income.

The taxable sum would be reduced by program expenses, including compensation for coaches and athletes, but these programs still make money. Think about broadcast revenue. The tax liability wouldn’t be trivial.

Another concern: Suppose someone makes a “contribution” to a university to support a revenue-generating sports team. An alum recently donated $50 million to Stanford football, and T. Boone Pickens gave huge amounts to Oklahoma State. A check might be made out to a generally tax-exempt educational institution, but if a “donation” is directly supporting an unrelated trade or business, what’s the justification for a deductible charitable contribution?

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