A leading congressional tax writer spoke out against the practice of universities, especially Division I National Collegiate Athletic Association (NCAA) programs, enticing top athletic coach candidates with multi-million-dollar contracts after conducting a year-long investigation. (REPORT ON UNIVERSITIES’ RESPONSES TO THE COMPENSATION OF ATHLETIC COACHES INQUIRY (12/1/2022))
In December 2021, House of Representatives Ways and Means Oversight Committee Chair Bill Pascrell, a New Jersey Democrat, sent letters to the presidents of Louisiana State University (LSU) and the University of Southern California (USC) requesting information detailing how they arrive at the figures in its compensation packages offered to recent head coaching hires and how that aligns with their educational missions as tax-exempt entities.
Similar letters were also sent to seven other universities that compete in the NCAA’s top division: Auburn University, Duke University, Michigan State University, Rutgers University, Stanford University, University of Miami, and Villanova University.
All nine schools responded to Pascrell’s inquiry with varying degrees of insight on their budget process, athletic department revenues and expenses, and the interplay of sports—particularly football and basketball—and collegiate pride. Upon the release of the committee’s December 1, 2022, report with its findings and breakdown of the schools’ responses, Pascrell remains unconvinced that paying coaches millions each year is in good faith with the tax code.
“Americans should care deeply about these excessive salaries that our federal tax code is helping to fund,” said Pascrell in an accompanying press release. “These schools and others across our nation are giving hundreds of millions of dollars to coaches while taking federal tax exemption. The answers from the schools lay out, clearly, that universities from coast to coast are not always behaving in the best interests of their students or the American taxpayers.”
Pascrell recommended reforming the Code Sec. 4960 tax on compensation to a tax-exempt organization’s covered employees’ compensation in excess of $1 million. Created by the Tax Cuts and Jobs Act of 2017 (TCJA; PL 115-97), the tax is equal to the corporate income tax rate of 21% and applies to tax years beginning after December 31, 2016. According to Pascrell, the Ways and Means Committee should consider applying the tax to “all colleges and universities.”
“This would close a loophole that may enable some state universities to avoid the tax,” he explained. “It is also worth exploring whether profitable, multimillion dollar college athletics programs should be subject to the Unrelated Business Income Tax.”
As illustrated by the Congressional Research Service’s October 17 response to Pascrell’s request for more information on how Code Sec. 4960 currently applies to colleges and universities, the tax is imposed on applicable tax-exempt organizations (ATEOs) only if they either had applied and received a determination letter approving tax-exempt status (in this context under Code Sec. 501(c)(3)) or excluded income over the course of the year under Code Sec. 115.
The CRS wrote to Pascrell that “this is not the entire universe of state colleges and universities as they may also qualify for exemption from federal taxation under the doctrine of implied statutory immunity.” For example, LSU reported that it is not subject to paying tax on excess compensation because it is a political subdivision of Louisiana. The CRS continued that under interim IRS guidance (Notice 2019-09), “a state college or university or other entity solely exempt as a governmental unit is not an ATEO, although it may be liable for the Section 4960 tax if it is related to an ATEO” (emphasis in original).
Auburn did not provide a response on Section 4960 payments, but the remaining seven schools confirmed that it pays the tax, which is reported on Form 990, Return of Organization Exempt From Income Tax. As Pascrell implied, a way to avoid confusion as to which entities must pay the tax, would be to apply it much more broadly.
At the onset of the investigation, Pascrell also took issue with the extent of the compensation packages that were reportedly awarded to LSU and USC’s new coaches. According to the committee report, additional bells and whistles that can be attached to coaches’ contracts besides base salaries can include “insurance (health, life, and disability), retirement benefits, travel and transportation benefits, use of or loans for a personal residence, tuition reimbursement, membership at a local country club or social club, a clothing allowance, and severance/termination payments.” Also, some coaches receive travel stipends, signing bonuses, and performance incentives, such as leading a team to the post-season, the report found.
The profitability of college sports has become a hot-button issue for lawmakers, as the rapid popularity player name, image, and likeness deals have sounded alarm bells for those hawkish about big-name NCAA institutions potentially abusing their tax-exempt status.
“We must consider whether tax-exempt educational activities and lucrative athletics programs should be treated differently,” said Pascrell. “Certainly we can see that American students and American taxpayers deserve better.”
Get all the latest tax, accounting, audit, and corporate finance news with Checkpoint Edge. Sign up for a free 7-day trial today.
