The Internal Revenue Service has ruled that college athletic income derived from television and radio is no longer tax-exempt, a decision that could cost schools across the country $150 million in back taxes.
"If this decision hold up, it could lead to the destruction of intercollegiate athletics as we know it," said J. Neils Thompson, president of the National collegiate Athletic Association.
At present, the IRS ruling applies only to radio and television income realized by Texas Christian University, Southern Methodist University, the University of Kansas and the Cotton Bowl Association. But NCAA officials have been told that the ruling eventually will be applied to all schools that have sports television and radio income.
The IRS decision, which was initiated by its Dallas regional office, has been appealed by the Cotton Bowl. The IRS has agreed to review the ruling in a June 30 hearing at its main offices in Washington, D.C. If that appeal is rejected, then the NCAA says it will take the case to court or ask Congress for legislation to make the revenue tax exempt.
Until now, the IRS has treated sports broadcast income as part of a school's overall tax-exempt monies. But his new IRS ruling says that such broadcast income is not related to a university's primary function as an educational institution and thus is taxable.
Television money has developed into a major source of income for many college football powers. The current NCAA football contract with ABC-TV, for example, is worth $18 million. A new two-year contract is now being negotiated and could bring as much as $35 million to NCAA schools.
Also affected by the ruling would be the NCCA's $5 million national basketball contract with NBC and TVS, various football bowl arrangements worth $12 to $15 million annually and individual conference agreements to televise basketball games.
If the IRS ruling is upheld, it would have a two-fold effect. First, schools would be required to pay three years of back taxes on all television and radio income. Then they would have to pay as much as 48 per cent of future TV and radio income to the federal government.
A school like Maryland could owe the IRS as much as $200.000 in back taxes on revenue collected for regional football appearances, TV bowl games and from local TV and radio contracts.
Thompson estimated that schools like Texas, Notre Dame and Penn State, all of which make frequent appearances in nationally televised football games, would owe between $2 and $3 million each in back taxes.
"Take Texas for example," Thompson said. "It has an annual budgeted income of about $3 million. Something like $500,000 of that would be taxable from now on.
"That would be a sizable bit einto what they can do with their program. And this is coming at a time when most colleges are struggling to either break even or are losing money.
"This could kill a lot of progarms. It also will have a great effect on women's programs, which are just getting off the ground. If this goes through, Title 9 goes down the drain."
The IRS office in Dallas first began looking into Cotton Bowl income 3 1/2 years ago and then widened the investigation to include SMU, TCU and Kansas, all of whom fall under that office's jurisdiction.
Thompson said the IRS ruling has aroused the attention of some congressmen who feel "the IRS has over-stepped their bounds in this instance.
"Here we've been functioning under one ruling for the 30 years we've had formal television contracts and now all of a sudden they've thrown a new ruling at us.
"There is a feeling among some members of Congress that this is too much of a change for the IRS to make. If it's going to be made, it should be made by Congress."
The NCAA is optimistic the appeal will not be turned down, since Thompson says influential members of "Treasury, the IRS and Congress are interested in what happened. For a time, we were going to be able to appeal it."
Chuck Neinas, commisioner of the Big Eight Conference, estimates that the ruling would cost each of his league's members at least $100,000 a year plus back taxes. Thompson estimated that the cost to Southwest Conference members would be about $150,000 each.
Colleges officials also are afraid that the IRS eventually could rule that gate receipts and concession income also is taxable.
"I personally think this is a preposterous assumption on their part that being able to run a successful pro-Walker. "It's certainly related to our any of this is unrelated income." said gram."
The IRS ruling also could affect the progress of the television contract negotiations, although Bo Coppedge, Navy athletic director and chairman-elect of the NCAA Television committee, said that "discussions about the IRS has not entered into the contract talks yet. We're all waiting to see what happens."
The IRS controversy also comes at a time when the NCAA is still figuring out a method by which it can reorganize in order to give the football schools more power.
Central to those schools' power is the television income from the NCAA sources predicted yesterday that the more forceful in their desire to be allowed to shape their own futures instead of being hamstrung by smaller schools.
"There could be a lot of turmoil ahead," Thompson predicted.