From Student-Athletes to Employee-Athletes: Why a Pay for Play Model of College Sports Would Not Necessarily Make Educational Scholarships Taxable

In recent years, numerous commentators have called for the National Collegiate Athletic Association (“NCAA”) to relax its rules prohibiting athlete pay. This movement to allow athletes to share in the revenues of college sports arises from the belief that college athletes sacrifice too much time, personal autonomy, and physical health to justify their lack of pay. It further criticizes the NCAA’s “no pay” rules for keeping the revenues derived from college sports “in the hands of a select few administrators, athletic directors, and coaches.” Nevertheless, opponents of “pay for play” contend that several problems will emerge from lifting the NCAA’s “no pay” rules. One problem, opponents argue, is that granting college athletes the legal status of “employees” would convert the athletes’ tax-exempt scholarships into taxable income—a result that may offset any economic benefits of “pay for play.” Their argument, however, is not necessarily accurate. This article discusses the economic and legal landscape of big-time college sports, and introduces the fallacious legal argument that “pay for play” would saddle college athletes with substantial tax liability related to their educational scholarships. This article then provides a brief primer on the U.S. tax code—exploring sections of the code that may allow for paid college athletes to enjoy a tax-free education. Finally, this article explains that proper tax planning may allow colleges to pay their athletes without requiring the athletes to pay taxes on their educational scholarships