Will College Athletes Have to Start Paying Income Tax Soon?

Traditionally, College Athletes have been exempt from paying Federal Income Tax on their athletic scholarships. In 1977, the IRS issued an internal ruling that it would not tax scholarships as gross income where (1) the university expects but does not require the student to participate in a particular sport; (2) the university requires no particular activity in lieu of participation; and (3)  the university cannot terminate the scholarship if the student can’t participate (e.g. injured). The IRS reasoned “athletic scholarship awarded by the University is primarily to aid the recipients in pursuing their studies and, therefore, is excludable … ” That ruling, however, is now in flux due to the rapidly changing rules governing compensation for college athletes.

What’s different now?

On January 17th 2015, the five power conferences (SEC, BIG 10, ACC, BIG 12, PAC 12), autonomously from the NCAA, voted to allow “full cost of attendance” to be paid to college athletes. The revolutionary vote allows schools from the power five conferences to pay an additional stipend between 2,000 – 4,000 dollars per athlete. Those payments would  cover “cost of attendance” that is not currently covered by a player’s athletic scholarship.

According to the IRS’s website relating to taxable and non-taxable scholarships, “A stipend is defined as a fixed sum of money paid periodically for services or to defray expenses . . . The income from stipends is reportable.” From that reading, it would be hard to see how any stipend paid to college athletes would not be taxable. The provision specifically states that these payments fall “outside” the amount allotted for a college athlete’s scholarship. Moreover, those payments are being made specifically to defray the college athlete’s expenses.

Universities and college athletes, however, will likely argue that because the stipends are being made to cover the true “cost of attendance”, the payments of stipends are made with the same intent or “spirit” of the scholarship. Thus, the stipend payments should be treated like the athletic scholarship and not count against gross income. Only time will tell whether the IRS chooses to favor the form or substance of the payments.

Will there be larger repercussions because of this?

The ultimate taxation of student athlete’s stipends, however, is not a significant issue in reference to the college athlete. Schools (like employers) will be able to withhold whatever portion of the stipend that is taxable and provide those payments on behalf of the college athlete.

Such payments are significant in relation to the school’s tax-exempt status because they further degrade the notion of the “student-athlete”. The IRS provision relating to stipends goes on to state “The fact that remuneration is termed a “fee” or “stipend” rather than salary or wages is immaterial. Wages are generally subject to employment taxes and should be reported on Form W-2,” If stipend payments increased too much, it is foreseeable that the relationship between a college athlete and the university could lose its “student” status under the tax code and be transformed into an employer–employee relationship. If that happened, then those universities would also likely lose their tax-exempt statuses because “The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.” (emphasis added)

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