Author: Matt Huffman, Associate Member, University of Cincinnati Law Review
The National Collegiate Athletic Association (NCAA) and its member schools collect hundreds of millions of dollars each year from the Football Bowl Subdivision (FBS) and Division I Basketball broadcasts and video games. The schools make a substantial amount of money from licensing players’ names, likenesses, and images to television and video game companies. However, players do not receive any of this money. They agree to give up the use of their names, likenesses, and images when they accept an athletic scholarship, and in return, their schools may provide tuition, room and board, and book expenses. But players may soon receive a part of television and video game revenue if the recent decision in O’Bannon v. National Collegiate Association is upheld. While student-athletes have long sought to receive a portion of the huge sums of broadcasting and video game revenue they help generate, the proposed payments in O’Bannon could not be treated as athletic scholarships under § 117 of the Internal Revenue Code (§ 117) and would not comply with Title IX. In fact, paid student-athletes under the O’Bannon settlement framework would likely be considered employees of the school and would be required to include the payments in their gross income, resulting in significant tax liabilities for both players and universities.
The Current Landscape of College Award Packages
NCAA rules prohibit student-athletes from receiving any compensation from their schools or third parties for the use of their names, likenesses, or images in live game telecasts, video games, re-broadcasts, or advertisements. Nor may student-athletes receive any financial aid based on athletic ability that exceeds the value of a full “grant-in-aid.” Any student-athlete who receives financial aid based on his athletic ability in excess of this amount forfeits his athletic eligibility. The NCAA further prohibits any student-athlete from receiving financial aid unrelated to athletic ability in excess of his “cost of attendance” or from receiving compensation from outside sources based on athletic ability.
The O’Bannon Decision
In O’Bannon v. Nat’l Collegiate Athletic Ass’n, a group of current and former men’s college football and basketball players brought an antitrust class action lawsuit against the NCAA, alleging restraint-of-trade Sherman Act violations in relation to players’ names, likenesses, and images. The court found that the NCAA’s restraints on Division I basketball players and FBS players receiving “image and likeness” revenue violated antitrust laws regarding anti-competitive activity under the Sherman Act. In turn, the plaintiffs proposed three modifications to the NCAA’s challenged rules: (1) allow the schools to award stipends, derived from specified sources of licensing revenue, to student-athletes, provided that the stipend amount does not exceed the cost of attendance at the school; (2) allow schools to deposit a share of licensing revenue into a trust fund for student-athletes which could be paid after the student-athletes graduate or leave school; or (3) permit student-athletes to receive limited compensation for third-party endorsements approved by their schools. The court agreed that the plaintiffs’ first two proposals were legitimate alternatives to the NCAA’s current restraints. Accordingly, the Court enjoined the NCAA from enforcing any rules that prohibit FBS football or Division I male basketball players from receiving a share of the revenues generated from the use of their names, likenesses, and images in addition to full grants-in-aid. However, the Court authorized the NCAA to cap payments and enact rules ensuring that no school could offer a recruit a greater share of licensing revenue than it offers any other recruit in the same recruiting class on the same team. While neither proposal has been adopted by the NCAA at this time, if student-athletes were to receive a stipend (option 1) or if the revenue were to be held in trust (option 2), the payments would likely be imputed to the student-athlete as income, thus subjecting the payments to the federal income tax and potentially reclassifying the student-athletes as “employees” of the university.
Tax Implications for Players
Under § 61 of the Internal Revenue Code, a person’s “gross income” refers to all of a person’s income from any source, unless excluded by law. Section 117 of the Internal Revenue Code excludes from gross income certain qualified scholarships, including athletic scholarships, for individuals seeking a degree at an educational institution. However, the proposed payments in O’Bannon would not be considered athletic scholarships under § 117 and could not be excluded from gross income. Furthermore, the payments’ non-compliance with Title IX would mean the payments would likely be categorized as income rather than as athletic scholarships. Because the payments would thus be included in the student-athlete’s gross income, a court would likely find that the payments were made in exchange for the athlete’s services. In turn, the players receiving the payments would be considered “employees” of their respective schools and face a large tax burden.
1. Stipend Payments and IRC § 117
A stipend or trust fund payment under the O’Bannon proposals would only be available to FBS football players and Division I basketball players. Unlike irrevocable athletic scholarships, if a student-athlete were unwilling to allow a school to license his name, likeness, and image, the student-athlete would not receive the stipend or trust payment. Whether students receive the money as additional grants-in-aid or in any other form is inconsequential, as the payment would be made in exchange for the use of players’ names, likenesses, and images. Under § 117, amounts “received which represent payment for . . . other services by the student required as a condition for receiving the qualified scholarship” are included in gross income. Therefore, the proposed payment to student-athletes would likely be considered a conditional payment for “other services” under § 117, and would be included in gross income.
2. Title IX Violation
The proposed stipend or trust fund payments would only be provided to male athletes participating in FBS Football or Division I basketball, but if these payments were characterized as “athletic scholarships,” they would not comply with Title IX. Under Title IX, the total amount of assistance awarded to men and women must be substantially proportionate to their participation rates in athletic programs. A school would not meet this requirement if it were to provide additional athletic scholarship money to all FBS football players and Division I basketball players. Additionally, scholarships would not comply with Title IX if male athletes were eligible for larger athletic scholarships than female athletes. Because O’Bannon payments would not comply with Title IX if provided in the form of athletic scholarships, the additional money would likely need to be classified as payment for services, thus subjecting the payments to federal income tax.
Due to the limitations of § 117 and Title IX, the money provided to student-athletes under O’Bannon would likely be classified as “payment for services,” rather than “athletic scholarships.” Under common law, anyone who performs services for payment for another is generally considered an employee of that person if the employer has the right to control what the person will do and how he will do it. The substance of the relationship governs the worker’s status. In the case of a student-athlete who receives a stipend from a school in exchange for services, the school (or athletic department) would have significant behavioral and financial control over the student-athlete, and thus the student-athlete would likely be considered an employee of the school. Classifying student-athletes as “employees” of their schools would likely have significant negative tax implications for both the athletes and schools. For example, if student-athletes were considered employees, athletic scholarships would be distinguishable from academic scholarships for tax purposes. In that scenario, the athletic scholarship itself would likely be included in taxable income under § 61, requiring players to pay significantly more income tax on their higher income.
Tax Implications for Universities
A court’s determination that student-athletes paid under O’Bannon are employees of the university would require schools to pay Social Security, Medicare, and federal and state unemployment taxes, as well as purchase worker’s compensation insurance. Given the number of student-athletes that would be considered “employees” of the school, this would be a huge sum of money, especially if the taxes were levied on the entire athletic scholarship, rather than just the stipend or trust fund payment.
In addition to the cost of these employment taxes, athletic departments would also likely lose their tax exempt status under § 501(c)(3) of the Internal Revenue Code. Currently, athletic departments are exempt from taxation under § 501(c)(3) because they exist to “foster amateur sports competition.” If players were considered employees, they would no longer be considered “amateurs,” and athletic departments would lose this tax exempt status. Not only would athletic departments be required to pay taxes on their revenue if they lost their 501(c)(3) status, they would also likely receive significantly fewer donations from boosters, because donations would no longer be considered tax-deductible charitable contributions.
While collegiate student-athletes have long sought to be paid for their efforts, receiving payment for the use of their names, likenesses, and images would likely subject them to increased tax liability. Additional money received for FBS and Division I basketball players’ performance likely could not be classified like athletic scholarships because it would not comply with Title IX. Further, because the payments would be provided in exchange for the student’s agreement to license his name, likeness, and image, the payment would likely be considered “for other services” under § 117, and so would be included in the student’s gross income. As such, players would likely be considered “employees” of the school or athletic department due to the school’s behavioral and financial control over the student-athletes. This would open both the players and the schools to huge tax consequences.
FBS and Division I basketball players have won a piece of the revenue pie they help generate with the use of their name, likeness, and image. However, given the tax liabilities that are sure to follow, these players would be better off sharing that revenue with other student-athletes at their respective schools in the form of additional scholarships in order to avoid onerous new tax burdens.
 O’Bannon v. National Collegiate Association, C 09-3329 CW, 2014 WL 3899815 (N.D. Cal. Aug. 8, 2014), appeal docketed, No. 14-16601 (9th Cir. Sept. 24, 2014).
 Id. at *7.
 2013-2014 NCAA Division I Manual § 18.104.22.168(b). Section 15.02.5 defines a full “grant-in-aid” as financial aid that consists of tuition and fees, room and board, and required course-related books.
 2013-2014 NCAA Division I Manual § 15.1
 2013-2014 NCAA Division I Manual § 15.01.6. Section 15.02.2 defines “Cost of attendance” as an amount calculated by each school’s financial aid department that includes the total cost of tuition and fees, room and board, books and supplies, transportation, and other expenses related to attendance at that school.
 2013-2014 NCAA Division I Manual §22.214.171.124. Under § 15.2.7, student-athletes may earn money from employment unrelated to their athletic abilities, but may not receive remuneration for the value that the student-athlete may contribute because of the “publicity, reputation, fame or personal following that [they] have obtained because of athletic ability.”
 15 U.S.C.A. § 1. Section 1 of the Sherman Act makes it illegal to form any “contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States.” A restraint is unreasonable if the restraint’s harm to competition outweighs its procompetitive effects. The plaintiff bears the initial burden of showing that the restraint produces “significant anticompetitive effects” within a “relevant market.” If the plaintiff satisfies this initial burden, the defendant must come forward with evidence of the restraint’s procompetitive effects. Finally, if the defendant meets this burden, the plaintiff must show that any legitimate objectives can be achieved in a substantially less restrictive manner.
 O’Bannon, 2014 WL 3899815, at *1
 Id. at *36
 O’Bannon, 2014 WL 3899815, at *37. Consistent with the less restrictive alternatives proposed by the plaintiffs, the Court enjoined the NCAA from enforcing any rules that would prohibit schools from offering their FBS football or Division I male basketball recruits a limited share of the revenues generated from the use of their name, likeness, and image in addition to a full grant-in-aid. However, the injunction does not preclude the NCAA from implementing rules that cap the amount of compensation that may be paid to a particular student-athlete. While the court did not require that the NCAA adopt either of the proposed modifications, it authorized both proposals as legitimate alternatives to current NCAA rules that would achieve the procompetitive objectives in a less restrictive manner.
 I.R.C. § 61. I.R.C. Section 61(a) states that gross income includes income realized in any form, whether in money, property, or services. Under this section, income may be realized in the form of services, meals, accommodations, stock, or other property, as well as in cash.
 26 U.S.C.A. § 117. Under this section, certain qualified scholarships are excluded from gross income provided the amount received does not represent payment for “other services” required as a condition for receiving the qualified scholarship. In Rev. Rul. 77-263, 1977-2 C.B. 47, the IRS ruled that athletic scholarships are not payments for “other services,” and are excludible from gross income.
 Rev. Rul. 77-263, 1977-2 C.B. 47 at *1. An athletic scholarship is irrevocable even if a student-athlete decides not to participate in the sport
 26 U.S.C.A. § 117(c)(1).
 U.S. Department of Education, Requirements Under Title IX of the Education Amendments of 1972, 2005, http://www2.ed.gov/about/offices/list/ocr/docs/interath.html; 34 C.F.R. § 106.41.
 Title IX is effectuated by 34 C.F.R. §106.41(a). 34 C.F.R. § 106.41(a) states “no person shall, on the basis of sex, be excluded from participation in, be denied the benefits of, be treated differently from another person or otherwise be discriminated against in any interscholastic, intercollegiate, club or intramural athletics offered by a recipient, and no recipient shall provide any such athletics separately on such basis.”
 Internal Revenue Service, IRS Publication 15(A), Employers’ Supplemental Tax Guide 5 (2014).
 The school a student-athlete attends would have behavioral control over a student athlete by dictating when and where a student-athlete performs his work and would provide the equipment used. Additionally, the school would exercise financial control over the student-athlete, as the student-athlete would not be able to make his services available to any other schools or companies willing to pay him for his name, likeness, and image. This behavioral and financial control would likely be substantial enough to create an employer-employee relationship. However, even if it was determined that the control was not substantial enough to create an employer-employee relationship, the student-athlete would still be considered an “independent contractor,” which would result in similar tax consequences for the student-athlete. IRS Publication 15(A), Employers’ Supplemental Tax Guide 7, 2014.
 26 U.S.C.A. § 501(c)(3).