The Committee on Ways and Means of the U.S. House of Representatives has asked NCAA officials to answer a number of detailed questions about whether the Association and its member institutions meet their stated core educational purpose that merits a tax-exempt status.

A letter from Ways and Means member Bill Thomas (R-California) to NCAA President Myles Brand challenges several Association principles, including the amateur status of student-athletes, the validity of the Division I academic-performance program (including the Academic Progress Rate) and the educational purpose of intercollegiate athletics.

Thomas particularly questioned corporate sponsorships and the Association’s rights agreement with CBS for coverage of the Division I Men’s Basketball Championship. He asked how the Association and its member institutions spend those dollars and how much influence the networks have on NCAA decisions as a result of the contract. The letter also challenged the operation of athletics departments on individual campuses — particularly expenditures for football and men’s basketball — and not simply the daily operation of the NCAA national office.

Thomas also questioned the "educational purpose" of athletics in general, and football and men’s basketball in particular.

"Officials from the NCAA, athletics conferences and universities have explained that college football and basketball should be tax-exempt because some universities generate a profit from these sports that is used for other university-sponsored sports," Thomas wrote. "To be tax-exempt, however, the activity itself must contribute to the accomplishment of the university’s educational purpose (other than through the production of income)."

Trent Stamp, executive director of Charity Navigator — an online database that rates more than 5,000 charitable organizations — said that income derived from men’s basketball, and all NCAA sports, is perfectly acceptable for the Association.

"If I run an animal shelter, and have a big party and get everyone in town to come and there’s entertainment involved, and the local band plays and we raffle off tickets, that’s legitimate nonprofit income and I don’t have to tax it," Stamp said. "I don’t think that’s any different than when Duke and North Carolina have their basketball games."

The NCAA, and all other nonprofit entities such as churches and disaster-relief organizations, must earn income related to their mission to fulfill their tax-exempt status. If the income is a result of something not related to that core mission, it’s defined as unrelated business taxable income, and the organization is responsible. Income earned from television broadcasts and trademark licensing isn’t taxable for nonprofits.

According to the IRS, the term "educational" means the "instruction or training of individuals for the purpose of improving or developing their capabilities, or the instruction of the public on subjects useful to individuals and beneficial to the community."

Jeff Frank, senior manager for Deloitte Tax LLP, said the IRS considers the NCAA and member institutions to be charitable organizations.

"As a practical matter, educational organizations like the NCAA and its member schools are entitled to income tax exemption as charitable organizations, just like hospitals or churches," Frank said. "Education is considered to be a public benefit, and therefore a charitable purpose in the eyes of the IRS."

Revenue distribution

Jim Isch, the NCAA’s chief financial officer who earlier this year met with Ways and Means representatives, asserted that intercollegiate athletics is an important part of American culture and that participation in college sports enhances the educational experience on college campuses. The NCAA contributes to the public benefit through its educational mission, Isch said.

"The NCAA is an organization that integrates athletics into the overall fabric of the educational institution," he said. "The dollars that come in allow institutions to do the sorts of activities that help them achieve their educational goals and enhance the student-athlete experience."

The NCAA’s policies are such that almost 95 cents of every dollar the Association generates is returned to the more than 1,000 member institutions through revenue distribution, services or championships. According to the NCAA’s 2005 Membership Report, the Association returns 59 percent of its revenue to Division I institutions. Another 9 percent is allocated specifically for Division I championships, roughly 4 percent supports Division II and 3 percent goes to Division III. About 19 percent supports Association-wide services, such as insurance programs, postgraduate scholarships and leadership conferences for student-athletes. Administrative costs and operating expenses, including national office staff salaries, take up the remaining 5 percent.

Although Charity Navigator doesn’t rate the NCAA because the Association doesn’t solicit donations, it does rate several member institutions, including Harvard University and the University of Notre Dame, on three criteria: program, administration and fund-raising expenses. Charity Navigator defines program expenses as the costs of fulfilling the organizational mission. Administrative expenses include clerical duties and accounting and legal fees, while fund-raising expenses include money spent to raise other money.

According to Stamp and Charity Navigator, Harvard allocates 92.7 percent of its financial resources for program expenses and spends 4.9 percent on administration expenses. Notre Dame spends 82 percent of its money on program expenses and 16.6 percent on administrative costs.

Charity Navigator gave both institutions its highest rating (four stars). Stamp says that the Association would rate highly as well if it were subject to the same ratings system as its member institutions.

"If the NCAA gives 95 percent of its revenue to its member institutions, that would be its program expense. I would argue that 95 percent is a very responsible number," Stamp said. "It appears that the NCAA is doing what it’s chartered to do."

The NCAA’s program expenditures are high when compared to some of the nonprofit organizations on the Charity Navigator list entitled "10 of the Best Charities Everyone’s Heard Of." For example, the Boys and Girls Club of America devotes 89.1 percent of its income to programs, and the American Red Cross spends 91.5 percent of its revenues on programs, both according to www.charitynavigator.org.

Potential impact of change

As Thomas and the Congressional committee continue to examine the tax-exempt status of educational organizations, stakeholders are taking a hard look at what the world of higher education would look like if the IRS were to change that classification.

In the NCAA’s case, taxes on its revenues would mean significantly less money would go to its member institutions in the form of dollars, benefits and services.

"If we had fewer dollars coming in, we’d distribute fewer dollars and that would likely mean that schools would reduce their programs. How do you reduce athletics program costs? You cut the number of participants and sports," Isch said.

In the case of individual institutions, the implications are even more far-reaching. Deloitte’s Frank said a change in status would have a tremendous impact on education.

"How many people leave money to their alma maters in their will?" Frank asked. "If the school becomes subject to income tax, donations would likely decrease or even stop altogether. It would change higher education as we know it. Losing the federal income tax exemption could result in a corresponding loss of state tax exemptions as well. In a lot of cases, state sales tax and property tax would cost the school as much or more than the income tax."

While Congress has taken an interest in reviewing nonprofit organizations, as long as the IRS continues to consider educational organizations as charitable, those income dollars will not be taxed.

The NCAA, Isch says, is aware of the tax laws and is diligent in fulfilling the core purpose that makes it a tax-exempt organization.

"We continually monitor the law for any changes and keep up to speed with the human resources side," Isch said. "In the last three months, we’ve conducted a review of procedures to ensure that we are adhering to the purpose of our tax-exempt status. We’re doing everything in accordance with the law."