College athlete deals risk tax-free scholarships - Albuquerque Journal

College athlete deals risk tax-free scholarships

The college football bowl season is over.

Next up is March Madness. Many colleges have found that a strong football or basketball program helps recruit students.

Without men’s basketball, how many people outside of the mid-Atlantic region would know where (or what) is Villanova. How many outside of the Pacific Northwest would know Gonzaga?

Many universities have sought to follow the “Notre Dame” model, whereby the football program led the university to national prominence.

My uncle and his 1940s parochial school friends listened on the radio as Notre Dame football rose to prominence. Even before visiting South Bend, he and his friends chanted that their favorite team would “shake down the thunder from the sky!”

There is a history of collegiate athletics and the institutional academic mission operating hand in hand. In 1939, the powerful University of Chicago football program disbanded because football was taking over academics.

I had a client who was a track athlete at Oklahoma in the 1950s. He competed in the Olympics and is in the Oklahoma Sports Hall of Fame.

He told me his greatest worry was missing a class. The athletic director, Bud Wilkinson, would call in any athlete who missed a class. Wilkinson was feared.

Wait a minute, I said, Wilkinson was the football coach. He won 47 games in a row. My client informed me he was also the athletic director. Two part-time jobs?

The world has changed since people listened to football primarily on the radio. The powerful Southeastern Conference now has seven football coaches making $5 million or more each year. No second job needed.

The changes we have seen the last decade or so cause many to argue that the Chicago model of 1939 may need a renewal. Won’t happen. So let’s discuss two tax issues.

First, players may now be paid for their name, image or likeness. Many states have passed laws to regulate NIL payments beyond what the NCAA might do.

Only a fraction of collegiate athletes will receive payments for NIL. Nevertheless, some of those payments will be substantial. They will be taxable.

Taxable means income tax and self-employment tax. It also means state income tax. State taxes may take some time to figure out when players live in state A, attend school in state B, and compete in states C, D and so on.

College NIL athletes will need lawyers, accountants and financial advisers. Expect some heartbreaking stories of advisers taking advantage of athletes.

The bigger collegiate sports becomes, the farther we stray from 1977 IRS guidance on the taxability of athletic scholarships.

Section 117 of the tax law excludes the value of scholarships from taxable income. This is limited to amounts received for tuition, books and fees for attendance.

A scholarship must be awarded for the primary purpose of furtherance of education and training. No services can be required.

In Revenue Ruling 77-263 IRS considered how Section 117 applies to athletic scholarships. IRS said they are not taxable. The logic was a bit shaky then and is now a full-blown Veg-O-Matic.

IRS said the athletic scholarships were awarded by the same “agency of the university” responsible for academic scholarships. That once awarded for an academic year, it could not be taken away even if the athlete decided not to participate in the sport.

Perhaps the ruling was issued to an Ivy League or D-III school. It doesn’t sound like SEC football. What if the facts were more current?

What if the scholarship was awarded by the athletic department and not the “agency” that awards regular scholarships? What if the scholarship was conditioned on participating in workouts, practices and games, provided the athlete was physically capable?

Egad, what if the primary purpose of the scholarship was something other than education and training? I don’t think “training” means athletic training.

Coach Shane Beamer of the South Carolina Gamecocks made a paltry $2.75 million in 2021. He signed the contract of shame for the SEC.

I suspect that the stated facts of the 1977 scholarship ruling don’t even describe what happens at the University of South Carolina. Maybe we need a ruling for the 2022 world of college football. That might be heartbreaking for the athletes.

James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at

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