The College Sports Tax Dodge

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New York University does not have much of an athletic program. But 70 years ago, it ran a profitable macaroni company, leading indirectly to a decision by Congress that college sports — if not a college-owned noodle business — should be exempt from taxation.

Today, as the hugely lucrative football bowl season wraps up, colleges fear that the new tax law signed by President Trump could derail their gravy train — two provisions target coaches’ high salaries and booster donations tied to ticket purchases. But they need not worry much.

There are no plans to start taxing television revenue and corporate sponsorships, two of the biggest income streams, which together transformed intercollegiate athletics into a multibillion-dollar business. Even with the legislative changes, collegiate sports remain largely tax exempt, the beneficiary of a public subsidy that is increasingly difficult to defend.

The corrosive culture of money in big-time college sports — more than $8 billion a year among the National Collegiate Athletic Association’s Division I sports programs — was painfully obvious recently with the indictments of college coaches and an Adidas executive charged with paying bribes to recruit basketball players and steer them to agents.

It was left to federal prosecutors to issue a statement condemning the “criminal influence of money on coaches and student-athletes.”

The tax-exempt nature of college sports is not the cause of these problems. Rather, it is rocket fuel for an engine that has escaped the gravitational pull of common sense and decency.

To understand how this is possible, consider the balance sheet of the Atlantic Coast Conference, home of the 2017 national champions in football, Clemson, and men’s basketball, North Carolina. Its corporate sponsors include Toyota, Gatorade and Geico. When the conference filed its annual tax return for 2015, it reported about a quarter-billion dollars from broadcasting games for its member universities, as well as $147 million in other sports-related revenue. Its commissioner earned $2.9 million. The A.C.C. was a huge commercial success with income that would normally generate a huge tax bill.

But no taxes were owed. As the conference explained in its filing with the Internal Revenue Service, the Atlantic Coast and its member schools are nonprofit charitable organizations that place an emphasis on “academic excellence.”

“The Atlantic Coast Conference,” it said, “seeks to maximize the educational and athletic opportunities of its student-athletes, while enriching their quality of life.”

The magic word here is “educational.” Student-athletes have always been considered unpaid amateurs engaging in extracurricular activities rather than profitable professions. So college sports is deemed part of the educational mission of schools and exempt from income taxes.

There are specific and contentious interpretations of law that prop up this assumption in the modern era. But they have weakened as big-time college sports has taken on the trappings of a profit-driven business far removed from the cloistered groves of academe. It is only through decades of aggressive lobbying and legal battles that universities have managed to avoid income taxes on billions of dollars from broadcast rights, sponsorships and donations from boosters.

The seminal moment came in response to an attempt by N.Y.U. to extend its tax-exempt status to profits generated by C. F. Mueller Company, a pasta maker that had been donated to its law school in 1947. Congress took notice and eventually enacted the unrelated business income tax to capture revenue considered ancillary to a nonprofit organization’s mission. Sensing the threat, the N.C.A.A. pressed lawmakers to make sure that the new tax would not apply to money from school sports programs. Accordingly, congressional committee reports declared that “athletic activities of schools are substantially related to their educational functions,” even citing the supposed educational benefits of football and basketball.

So an escape hatch was opened for college sports. Over the years, the I.R.S. has periodically tried to close it. In the late 1970s, the agency looked at the relatively new stream of television revenue from college games and considered treating it as taxable unrelated business income. This ignited a spirited lobbying campaign by colleges and the N.C.A.A. until the I.R.S. retreated, declaring that selling tickets to fans who go to the school stadium was not all that different from broadcasting games to a television audience.

Clearly the I.R.S. did not foresee the commercialized powerhouse that college sports would become, driven by national television viewership. For example, in the Big East Conference’s first year of operation in 1979, it earned $305,000 for the right to broadcast all of its games; three decades later, ESPN would offer more than $100 million for those rights.

Other attempts to tax college sports profits have been mostly rejected by lawmakers. In the 1990s, Congress did an end run around the I.R.S. and decreed that corporate sponsorships did not amount to advertising, which could be subject to the unrelated business income tax. It was not until the recently approved Republican tax plan that lawmakers reversed course, eliminating a partial deduction for booster donations tied to the sale of game tickets and imposing an excise tax on college employee salaries exceeding $1 million. Over all, however, most athletics revenue continues to flow tax-free.

That means the college sports machine keeps cranking out expensive entertainment, and the scandals that go with it, while sheltered by the scholastic equivalent of a Cayman Islands tax dodge. If President Trump wants to repatriate and tax corporate profits stashed offshore, he might also consider the untaxed billions hiding in plain sight on campuses right here at home.