845
ARTICLES
TAXING SPORTS
JOHN T. HOLDEN
*
& KATHRYN KISSKA-SCHULZE
**
Sports are no longer mere games. In today’s money-driven culture, they have
cultivated into a lucrative business enterprise where everyone—whether
professional or amateur; owner or player; coach or spectator—stands to make
significant money. Modern sports have also morphed into a landscape
encompassing both the traditional athletic events and the more novel esports and
daily fantasy sports (DFS) arenas. Across all these physical, digital, and
biological spheres, sports revenues are being measured in terms of billions. It thus
stands to reason why taxes have become a progressively critical discussion point
within U.S. professional and collegiate sports, the video gaming world, and the
newly legalized sports gambling industry. This Article is the first to provide a
holistic and modern analysis of the impact of U.S. tax law across the
contemporary business of sports and explore a more universal approach to the
varying tax issues affecting numerous relevant stakeholders, including
franchises, business ventures, universities, athletes, individuals, and federal
and state taxing jurisdictions.
TABLE OF CONTENTS
Introduction ................................................................................ 846
I. Taxing U.S. Sports: A Historical Exploration ................ 855
A. Notable Tax Issues in Professional Sports ................ 857
1. The preferential tax treatment of
franchise owners and stadiums ............................ 858
2. The jock tax .......................................................... 862
3. Tax exemptions .................................................... 864
* Assistant Professor, Spears School of Business, Oklahoma State University.
** Associate Professor, Wilbur O. and Ann Powers College of Business, Clemson University.
846 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
B. The Historic Relationship Between
Taxes and College Sports .......................................... 866
1. The NCAA and member institutions’
tax-exempt status .................................................. 867
2. The unrelated business income tax .................... 868
3. Student-athletes’ grants-in-aid ............................. 869
4. Charitable donation deductions ......................... 870
II. Taxing Professional Sports: A Modern Update ............ 872
A. Financing Public Stadiums ........................................ 872
B. The TCJA’s Impact on Professional Sports .............. 874
III. Taxing College Sports .................................................. 877
A. The TCJA’s Impact on College Sports ...................... 883
1. Eliminating 80/20 ................................................ 883
2. Taxing executive compensation .......................... 884
3. Taxing private endowments ................................ 885
4. Disincentivizing charitable giving ....................... 885
B. Taxing NIL Income ................................................... 887
IV. Taxing the Evolving U.S. Sports Industry .................... 890
A. Taxing Legalized Sports Gambling ........................... 892
1. Federal taxation of sports gambling ................... 893
2. State taxation of sports gambling ........................ 896
B. Taxing Daily Fantasy Sports ....................................... 900
C. Taxing Esports ........................................................... 902
V. Recommendations for the Evolving
Business of Sports ............................................................. 905
Conclusion ................................................................................... 909
INTRODUCTION
It’s not just a game. To many, such sentiment embodies the acuteness
of current modern sport in the United States.
1
In recent decades,
1
. See, e.g., The Power and Politics of Sports: Why Games Aren’t Just Games Anymore, U. OF CHI.
INST. OF POL., https://web.archive.org/web/20210630124430/https://politics.uchicago
.edu/pages/juliet-macur-seminar-series (last visited Jan. 29, 2022); Luke Mason, The Economic
Impact of COVID-19 on US Sports, EMSI (May 28, 2020), https://usmain.wpengine.com/2020/
05/28/the-economic-impact-of-covid-19-on-us-sports-up-to-92-6k-lost-every-minute [https://
perma.cc/S2WB-76DE]; Hunter Amadeus Bayliss, Note, Not Just a Game: The Employment Status
and Collective Bargaining Rights of Professional ESports Players, 22 WASH. & LEE J. CIVIL RTS. & SOC.
JUST. 359, 360–61 (2016); Maureen A. Weston, COVID-19’s Lasting Impact on the Sports Industry:
Financial, Legal, and Innovation, 61 SANTA CLARA L. REV. 121, 157 (2020) (offering that “[s]port
is not ‘just a game’”); Henry M. Abromson, Comment, The Copyrightability of Sports Celebration
Moves: Dance Fever or Just Plain Sick?, 14 MARQ. SPORTS L. REV. 571, 574 (2004) (“Sport is not
2022] TAXING SPORTS 847
professional and amateur sports have transcended the boundaries of
American politics,
2
economics,
3
community values,
4
and mass media.
5
just a game it is a big business.”); Eric I. Long, The 1994 Baseball Strike Revisited: A Better Impasse
Analysis, 22 S. ILL. U. L.J. 117, 117 (1997) (opining that Major League Baseball is not a mere
game anymore, but a hugely profitable industry); see also Valrie Chambers & Michael E. Bitter,
Potential Tax Implications of NCAA Family Travel Allowances, 27 J. LEGAL ASPECTS SPORT 187, 192
(2017) (providing that college sports have morphed into a business); Marsha Durr, The
Tipping Point: Mayhem in College Sports Requires Congress to Finally Intervene in NCAA Governance,
8 ARIZ. ST. SPORTS & ENT. L.J. 26, 27 (2018) (opining that college sports have evolved from a
“niche pastime to a multi-billion-dollar industry”); David Ray Papke, Athletes in Trouble with the
Law: Journalistic Accounts for the Resentful Fan, 12 MARQ. SPORTS L. REV. 449, 449 (2001) (noting
that American sports have transitioned from being mere games to extremely lucrative
commercial enterprises).
2
. See, e.g., Sports, Politics & Social Movements, 25 JEFFREY S. MOORAD SPORTS L.J. 147, 147
(2018) (discussing the heightened awareness of political expression in modern professional
sports); Meredith McCleary, Politics and Sports: A Long and Complicated Relationship, NE. UNIV.
POL. REV. (Feb. 26, 2019), https://www.nupoliticalreview.com/2019/02/26/politics-and-
sports-a-long-and-complicated-relationship [https://perma.cc/N9WK-BTTR] (discussing
players’ recent use of their platforms to communicate their views on civil rights issues); Chris
Sheridan, Sports and Politics Are Mixed Forever; Get Used to It, FORBES (Aug. 29, 2020, 8:08 AM),
https://www.forbes.com/sites/chrissheridan/2020/08/29/sports-and-politics-are-mixed-
forever-get-used-to-it/?sh=1f7e0d636a54 (listing several historical moments where athletes
took publicized political stances).
3
. See, e.g., WLADIMIR ANDREFF & STEFAN SZYMANSKI, HANDBOOK ON THE ECONOMICS
OF SPORT (2006) (examining the myriad components of the international sports
economy and governance); Daniel A. Rascher et al., The Unique Economic Aspects of
Sports, 6 J. GLOB. SPORT MGMT. 1, 1–13 (July 29, 2019) (observing that “what makes the
economics of sports different from virtually any other product is that the product itself
is unique”); Walter C. Neale, The Peculiar Economics of Professional Sports, 78 Q.J.
ECONOMICS 1, 4 (1964) (describing professional sports as natural monopolies).
4
. See, e.g., Emily Sparvero & Laurence Chalip, Professional Teams as Leverageable Assets:
Strategic Creation of Community Value, 10 SPORT MGMT. REV. 1, 3–4 (2007) (discussing the
spike in public funding funneled into sports entertainment programs as a result of a neo-
liberal model of profit-driven governance); Laura Depta, 12 Ways Sports Make a Positive
Impact, BLEACHERREPORT (Feb. 2, 2015), https://bleacherreport.com/articles/2347988-12-
ways-sports-make-a-positiveimpact [https://perma.cc/6LH2-KZQ7] (listing the many
public benefits derived from sports, including job production, health, and community
enjoyment); Noelle Nikpour, Impact of Sports Is Huge in Society, SUN SENTINEL (Oct. 2, 2011),
https://www.sun-sentinel.com/news/fl-xpm-2011-10-02-fl-nncol-sports-oped1002-201110
02-story.html [https://perma.cc/KQ7L-5LWX] (regaling the sociocultural benefit of New
Orleans Superbowl win in the wake of Hurricane Katrina).
5
. See, e.g., Aafid Gulam, Role of Mass Media in Sports Communication, 1 INT’L J.
ADVANCED EDUC. RES. 5, 51–53 (2016) (evaluating the effects of sports across media
platforms and detailing the benefit to historically underrepresented communities in
sports); Cory Tadlock, Comment, Copyright Misuses, Fair Use, and Abuse: How Sports and
Media Companies Are Overreaching Their Copyright Protections, 7 J. MARSHALL REV. INTELL.
PROP. L. 621, 621 (2008) (evaluating how sports and media companies copyright
848 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
One need look no further than the social justice movements led by
high-profile athletes like Colin Kaepernick and Trevor Lawrence
who—among many others—established mobilized platforms to spur
collective action.
6
Author Michael Lewis’s bestseller, Moneyball: The Art
of Winning an Unfair Game, brought to light the impact of game theory
on strategizing sports and economics.
7
Society’s longing for increased
sports-related virtues like honesty, respect, teamwork, and dedication
extends beyond chalk-lined fields into classrooms, workspaces, and
communities.
8
Certainly, Hollywood, the video game industry, television
broadcasters, sports media companies, and leagues have capitalized on
warnings often exceed their legal authority); Arthur Miller Dialogue on “Sports, Media and
Race: The Impact on America”, 12 TEX. REV. ENT. & SPORTS L. 251, 256–57 (2011)
(describing the prevalence of white men over Black people and women in the sports
media industry); Frank Ryan & Matt Ganas, Rights of Publicity in Sports-Media, 67
SYRACUSE L. REV. 421, 421–24 (2017) (describing how the NLRB is changing students-
athletes’ rights in private universities).
6
. See Adam Epstein & Kathryn Kisska-Schulze, Northwestern University, The
University of Missouri, and the “Student-Athlete”: Mobilization Efforts and the Future, 26 J.
LEGAL ASPECTS SPORT 71, 89 (2016) (examining the impact of student-athlete
mobilization efforts on U.S. collegiate athletic reform); Roger M. Groves, Memorandum
from Student-Athletes to Schools: My Social Media Posts Regarding My Coaches or My Causes
Are Protected Speech—How the NLRB Is Restructuring Rights of Student-Athletes in Private
Institutions, 78 LA. L. REV. 69 (2017) (analyzing the relationship between student-
athlete activism and the institutions they play for); Adam Epstein, The Ambush at Rio,
16 J. MARSHALL REV. INTELL. PROP. L. 350, 373 (2017) (offering that professional and
amateur athletes embrace social media outlets to voice their opinions on select
injustices); Nicholas C. Daly, Note, Amateur Hour Is over: Time for College Athletes to Clock
in Under the FLSA, 37 GA. ST. U. L. REV. 471, 481–82 (2021) (noting that the NCAA’s
failure to issue COVID-19 directives to member institutions resulted in collective
groups of athletes advocating for health and safety protocols so they could play).
7
. See MICHAEL LEWIS, MONEYBALL: THE ART OF WINNING AN UNFAIR GAME (2004);
see also Panelists: Jeffrey S. Moorad, Billy Beane, Omar Minaya, & Phil Griffin,
Symposium, “Moneyball’s” Impact on Business and Sports, 19 VILL. SPORTS & ENT. L.J. 425,
450–51 (2012); Lara Grow & Nathaniel Grow, Protecting Big Data in the Big Leagues:
Trade Secrets in Professional Sports, 74 WASH & LEE L. REV. 1567, 1575 (2017) (offering
that “Moneyball” launched sabermetric principles into the sports arena, effectuating a
new way of thinking about sports).
8
. See DISCOVERY EDUC., WHAT SPORT MEANS IN AMERICA: A STUDY OF SPORT’S
ROLE IN SOCIETY 3 (2011), http://www.truesport.org/library/documents/about/
what_sport_means_in_america/what_sport_means_in_america.pdf
[https://perma.cc/PUN5-85H6] (detailing the role sport has in the moral
development of young students).
2022] TAXING SPORTS 849
the premise that sport—no matter its form—is not just a game, but a
lucrative enterprise from which to financially capitalize on.
9
Long gone are the days when athletes competed purely for spectator
adoration.
10
Today, sports are a big business where players, coaches,
owners, leagues, associations, commercial enterprises, fans, sponsors, the
media, and anyone in between stand to make (or lose) considerable
money.
11
U.S. sports have evolved into a multi-billion dollar industry,
12
encompassing both traditional athletic events and the more novel esports
and daily fantasy sports (DFS) arenas.
13
PricewaterhouseCoopers forecasts
the North American sports market value will reach $83.1 billion by 2023.
14
The National Football League (NFL) currently tops U.S. league market
revenues at $13 billion with Major League Baseball (MLB) sitting second
at $9.5 billion.
15
In fiscal year 2019, Division I college athletics boasted
9
. See, e.g., Chris Morgan, Football and Hollywood: A Retrospective, YARDBARKER (Aug.
28, 2021), https://www.yardbarker.com/entertainment/articles/football_and_
hollywood_a_retrospective/s1__31243898#slide_1 [https://perma.cc/DK9M-C6VC]
(listing a myriad of football stories depicted in Hollywood movies); STEPHEN F. ROSS &
STEFAN SZYMANSKI, FANS OF THE WORLD UNITE! A (CAPITALIST) MANIFESTO FOR SPORTS
CONSUMERS 22 (2008) (offering that avid fans enjoy sports, regardless of their
exploitation); Shafin Diamond Tejani, The Future of Sports Looks a Lot like Video Games,
MARKER (May 12, 2020), https://marker.medium.com/the-future-of-sports-looks-a-lot-
like-video-games-591e55e8eb40 (noting that video games are a “natural pivot” from
live sports).
10
. Wm. Tucker Griffith, Note, Beyond the Perfect Score: Protecting Routine-Oriented
Athletic Performance with Copyright Law, 30 CONN. L. REV. 675, 676 (1998) (noting that
Grecian Olympiads completed in athletic events to win spectator affection).
11
. See Kara Fratto, The Taxation of Professional U.S. Athletes in Both the United States
and Canada, 14 SPORTS LAWS. J. 29, 29 (2007) (opining that increased athlete salaries,
ticket prices, franchise costs, and contemporary sporting facilities have propelled
professional sports into a big business); see also Kathryn Kisska-Schulze, This Is Our
House!—The Tax Man Comes to College Sports, 29 MARQ. SPORTS L. REV. 347, 351–55
(2019) (discussing the lucrative business of college sports).
12
. See PRICEWATERHOUSECOOPERS, PWC 2021 SPORTS OUTLOOK (2021), https://www.p
wc.com/us/en/industries/tmt/assets/pwc-2021-tmt-sports-outlook.pdf
[https://perma.cc/96WZ-WCYM] [hereinafter PWC 2021] (analyzing the compound
annual growth rate of North American Sports).
13
. See John T. Holden et al., A Short Treatise on Esports and the Law: How America
Regulates Its Next National Pastime, 2020 U. ILL. L. REV. 509, 511 (2020) (offering that
esports is a billion-dollar industry); see also Daniel J. Larson, Note, Can Daily Fantasy
Sports Overcome the Odds?, 17 J. HIGH TECH. L. 451, 451 (2017) (documenting that DFS
is a multi-billion dollar industry).
14
. See PWC 2021, supra note 12, at 2.
15
. Devon Anderson, Ranking Professional Sports Leagues by Revenue, ULTIMATE CORP.
LEAGUE (Apr. 10, 2019), https://ultimatecorporateleague.com/ranking-professional-
sports-leagues-by-revenue [https://perma.cc/46P5-2BDW].
850 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
revenues of $15.8 billion.
16
Although historically a mere “subset of sports
culture,” esports have since matured into an industry all to its own, with a
2022 market value forecast of $1.8 billion.
17
In 2018, the U.S. DFS industry
generated $2.9 billion.
18
The recently expanded legalized sports betting
industry is funneling millions of dollars into select state coffers monthly,
19
while in 2018, U.S. sports media rights revenue reached $21.88 billion.
20
Even youth sports have blossomed into a billion-dollar industry.
21
Although staggering, these numbers fail to reflect the engorged salaries
of coaching staff and professional athletes.
22
Measuring figures in terms of “billions” naturally gratifies the
paradigm that sport is not just a game anymore. Across the globe, the
sports industry is valued between $480 and $620 billion,
23
eclipsing
national gross domestic product (GDP) rates in most countries.
24
Notably, the U.S. leads the global sports industry with 32.5% of the
16
. NCAA RSCH., 15-YEAR TRENDS IN DIVISION I ATHLETICS FINANCES (2020), https://
ncaaorg.s3.amazonaws.com/research/Finances/2020RES_D1-RevExp_Report.pdf
[https://perma.cc/KX4G-T4S2].
17
. Esports Ecosystem Report 2021: The Key Industry Companies and Trends Growing the
Esports Market, BUS. INSIDER (Aug. 3, 2021), https://www.businessinsider.com/esports-
ecosystem-market-report [https://perma.cc/4JU3-N2N9].
18
. MORDOR INTEL., NORTH AMERICAN FANTASY SPORTS MARKET—GROWTH,
TRENDS, COVID-19 IMPACT, AND FORECASTS (2021–2026),
https://www.mordorintelligence.com/industry-reports/north-america-fantasy-sports-market
[https://perma.cc/4CUM-KNEU].
19
. US Sports Betting Revenue 2020, LINES, https://www.thelines.com/betting/
revenue [ https://perma.cc/PGG2-MUWF].
20
. Christina Gough, Sports Media Rights Total Revenue in the U.S. 2021, STATISTA
(Feb. 26, 2021), https://www.statista.com/statistics/1024089/sports-media-rights-
revenue-usa [https://perma.cc/RU2R-W4K2].
21
. Sean Gregory, How Kids’ Sports Became a $15 Billion Industry, TIME (Aug. 24, 2017,
6:45 AM), https://time.com/4913687/how-kids-sports-became-15-billion-industry.
22
. See Kathryn Kisska-Schulze & Adam Epstein, “Show Me the Money!”—Analyzing
the Potential State Tax Implications of Paying Student-Athletes, 14 VA. SPORTS & ENT. L.J. 13,
29 (2014) (opining that escalating professional athlete salaries have prompted
increased scrutiny from state taxing jurisdictions); Lora Wuerdeman, Comment,
Sidelining Big Business in Intercollegiate Athletics, How the NCAA Can De-Escalate the Arms
Race by Implementing a Budgetary Allocation for Athletic Departments, 39 N.C. CENT. L. REV.
85, 89 (2017) (noting that collegiate coaching salaries have risen 500% since 1985);
Fratto, supra note 11, at 29 (opining that professional athletes’ salaries have escalated).
23
. Sports Industry Highlights, MEDIUM (Oct. 17, 2019), https://medium.com/qara/
sports-industry-report-3244bd253b8 [https://perma.cc/5GG5-YG3F].
24
. The Sports Market, KEARNEY, https://www.nl.kearney.com/communications-
media-technology/article?/a/the-sports-market [https://perma.cc/78WM-53MA].
2022] TAXING SPORTS 851
market share.
25
Thus, it stands to reason why taxation has become a
progressively critical discussion point within U.S. professional and
amateur sports arenas, the video gaming world, and legalized sports
gambling industry. U.S. taxing jurisdictions continue to pursue
opportunities to usurp larger portions of this revenue-sharing
market.
26
Such efforts are not surprising, given that the U.S. economy
has weathered two recessions since September 11, 2001, and a global
pandemic.
27
Due in large part to these national economic crises,
individual states are foraging for alternative revenue sources to
counterbalance evaporating federal subsidies, with particular interest
paid to the emergent legalized sports betting market.
28
In addition,
Congress has shown increased interest in garnering a larger
percentage of professional athletes’ salaries and sports franchise
operation revenue,
29
while making it more difficult for colleges and
25
. D.Tighe, Share of the Global Sports Market 2018, by Country, STATISTA (Nov. 27.
2020), https://www.statista.com/statistics/1087429/global-sports-market-share-by-
country (calculating that China holds a distant second spot at 12.7% of the market
share).
26
. See, e.g., Kathryn Kisska-Schulze & John T. Holden, Betting on Education, 81
OHIO ST. L.J. 465, 509–10 (2020) (providing that over 100 bills have been introduced
in the U.S. to legalize sports betting in an effort to support states’ future budgets);
Kisska-Schulze & Epstein, supra note 22, at 29 (noting that escalating professional
athletes’ salaries have led states to more closely scrutinize them for tax purposes); Ross
Dellenger, New Congressional NIL Bill Targets Expansive Change to Athlete Compensation,
Video Game Licensing, SPORTS ILLUSTRATED (Feb. 4, 2021), https://www.si.com/college/
2021/02/04/ncaa-nil-video-game-rights-congress-bill [https://perma.cc/R987-
LUB8] (detailing the Congressional bill granting college athletes the right to strike
collective bargaining agreements).
27
. See Rebecca N. Morrow, Accelerating Depreciation in Recession, 19 FLA. TAX REV.
465, 471 (2016) (noting that there have been two recent recessions, one in 2001 and
the second in 2007); see also Rodney P. Mock & Kathryn Kisska-Schulze, Saving the
Nonessential with Radical Tax Policy, 90 U. CIN. L. REV. 197, 199 (2021) (offering that the
onset of the COVID-19 pandemic resulted in the United States suffering rapid
economic decline).
28
. See Kisska-Schulze & Holden, supra note 26, at 480–81; see also Andrew
Osterland, State Tax Departments Set Their Sights on Pro-Athletes’ Earnings, CNBC (Jan. 11,
2021, 8:30 AM), https://www.cnbc.com/2021/01/11/state-tax-departments-set-their-
sights-on-pro-athletes-earnings-.html [https://perma.cc/LED8-RTMK].
29
. See Mark Goldstick, How Trump’s New Tax Bill Will Impact Star Athletes, SPORTS
ILLUSTRATED (Apr. 17, 2018), https://www.si.com/more-sports/2018/04/17/donald-
trump-new-tax-bill-athletes-salaries-states [https://perma.cc/V4YW-GDUH] (describing
how former President Trump’s tax plan would eliminate athletes’ deductions for many
items, including training expenses, union dues, and agent commission); see also Kari
Smoker et al., Pandora’s Box Enters the Batter’s Box: How the Tax Cuts and Jobs Act’s Unintended
Consequences Places MLB, and All North American Leagues, in Tax Chaos, 26 JEFFREY S.
852 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
universities to acquire necessary funding for their athletic programs.
30
Taxes are definitely complicating sports.
31
Over the last five decades, sports betting has eclipsed the separate
industries that drove its development. In 2008, scholars Robert Holo
and Jonathan Talansky published a formative article addressing the tax
implications surrounding the “business of sports,” or perhaps more
appropriately branded, the “business of American professional
franchises.”
32
In particular, their work detailed the Internal Revenue
Service’s (IRS) varied attempts to keep pace with the rapidly growing
professional sports industry amidst then-recent legislative and
regulatory actions. Holo and Talansky focused primarily on taxing
sponsorship and broadcasting revenue,
33
ticket sales and seat
licensing,
34
franchise player contracts,
35
intangibles,
36
individual player
contracts,
37
and catching the home run ball.
38
While these issues
remain germane to professional franchises, thirteen years later the
“business of sports” has expanded considerably.
39
DFS took off in 2009,
after Nigel Eccles launched FanDuel, one of the two largest U.S.
MOORAD SPORTS L.J. 291–93 (2019) (evaluating the TCJA’s impact on professional sports
trades and noting that “[f]or the first time in over fifty years, the gains realized on
professional sports trades are no longer tax-exempt”).
30
. Kisska-Schulze, supra note 11, at 347–48 (examining the impact of the TCJA
on college sports programs).
31
. See, e.g., Taxes in Sports Make Game Day Complicated, NE. U. D’AMORE-MCKIM SCH.
BUSINESS, https://onlinebusiness.northeastern.edu/blog/taxes-in-sports-make-game-day-c
omplicated [https://perma.cc/NZT2-EVTV] (explaining how discrepancies in the top tax
brackets across the states are magnified by salary caps); K. Sean Packard, Income Taxes for
Pro Athletes Are Reminder of How Complicated U.S. Tax Code Is, FORBES (Apr. 18, 2021, 9:20 AM),
https://www.forbes.com/sites/kurtbadenhausen/2017/04/18/income-taxes-for-pro-
athletes-are-reminder-of-how-complicated-u-s-tax-code/?sh=7a4c60b3411e [https://perm
a.cc/4XJZ-YDQU] (describing how many people struggle to understand which tax forms
to use to report income and which items to deduct); The Esports Tax Reckoning: What Players
and Teams Need to Know, GORDON L. (Feb. 24, 2020), https://gordonlawltd.com/esports-
tax-reckoning [https://perma.cc/84VB-YUC8] (noting that some states have initiated
programs to help athletes understand their tax obligations).
32
. Robert Holo & Jonathan Talansky, Taxing the Business of Sports, 9 FLA. TAX REV.
161, 162, 163 (2008).
33
. Id. at 163–77.
34
. Id. at 177–85.
35
. Id. at 184–85.
36
. Id. at 184–206.
37
. Id. at 205–08.
38
. Id. at 208–14.
39
. See PWC 2021, supra note 12.
2022] TAXING SPORTS 853
fantasy sports sites.
40
Although video games have been integral to U.S.
culture since Space Invaders entered homes in the 1970s,
41
modern
esports exploded after 2010, when the livestreaming gaming platform
Twitch turned video games into a spectator sport.
42
In 2017, then-
President Donald Trump signed into law the Tax Cuts and Jobs Act
43
(TCJA), impacting both professional and collegiate athletics.
44
Subsequently, in 2018, the U.S. Supreme Court held that the federal
prohibition on sports wagering unconstitutionally commandeered
state legislatures, thus opening the door for all states to capitalize on
sports-betting revenue.
45
Just one year later, California became the first
of many states to legislatively allow student-athletes to capitalize on the
commercialized use of their name, image, and likeness (NIL).
46
Later,
in 2021, the U.S. Supreme Court unanimously struck down the
National Collegiate Athletic Association’s (NCAA) rules restricting
unlimited, in-kind benefits provided to Division-I basketball and bowl
subdivision football student-athletes.
47
The time is ripe to reexamine the impact of tax across the entire
“business of sports” amidst a more contemporary setting. Certainly,
there has always existed a connection between sports and taxation.
48
Indeed, the effect of tax law on the U.S. sports industry has cultivated
into a rich platform of academic discourse.
49
However, there exists a
40
. See Joshua Shancer, Legislative Update: Daily Fantasy Sports and the Clash of Internet
Gambling Regulation, 27 DEPAUL J. ART TECH. & INTELL. PROP. L. 295, 307 (2017).
41
. See Space Invaders, ENCYC. BRITANNICA (Apr. 8, 2015), https://www.britannica.c
om/topic/Space-Invaders [https://perma.cc/XB7Q-4S2J].
42
. Ben Popper, Field of Streams: How Twitch Made Video Games a Spectator Sport,
VERGE (Sept. 30, 2013, 9:00 AM), https://www.theverge.com/2013/9/30/4719766/
twitch-raises-20-million-esports-market-booming [https://perma.cc/H5JH-YCPU].
43
. Pub. L. No. 115-97, 131 Stat. 2054 (codified at 26 U.S.C. §§ 274, 512).
44
. See H.R. 1, 115th Cong. § 13704 (2018); see also Kisska-Schulze, supra note 11,
at 347–48 (examining the TCJA’s impact on college sports); Smoker et al., supra note
29 (evaluating impact of the TCJA on professional sports trades).
45
. See Murphy v. Nat’l Collegiate Athletic Ass’n, 138 S. Ct. 1461, 1478 (2018); see
also Kisska-Schulze & Holden, supra note 26, at 509–10 (analyzing the intersection
between sports gambling, education, and taxation).
46
. See Fair Pay to Play Act, CAL. EDUC. CODE § 67456(a)(1), (3), (e)(1) (2021); see
also Kathryn Kisska-Schulze & Adam Epstein, Changing the Face of College Sports One Tax
Return at a Time, 73 OKLA. L. REV. 3, 457–59 (2021) (examining the federal and state
tax implications of student-athletes once they capitalize on NIL earnings).
47
. See Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 2141 (2021).
48
. See infra Part I.
49
. See, e.g., Richard Schmalbeck & Lawrence Zelenak, The NCAA and the IRS: Life
at the Intersection of College Sports and the Federal Income Tax, 92 S. CAL. L. REV. 1087, 1087–
854 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
lacuna in the current literature in providing a holistic picture of the
influence of tax across all facets of U.S. sport as it exists today. The
purpose of this Article is to fill that void.
This Article adds to present scholarly literature by updating and
extending Holo and Talansky’s formative work, providing both historic
and modernized analyses of the effect of U.S. tax law across the newly
expanded “business of sports.”
50
While Holo, Talansky, and others have
focused their analyses on nuanced tax issues affecting professional and
amateur sports, video gaming, DFS, and sports gambling,
51
this Article
is the first to bring these discussions together to offer a more universal
representation of the impact of U.S. taxes across multiple relevant
players, including franchises, business ventures, universities, athletes,
individuals, and federal and state taxing jurisdictions. This Article then
proposes select tax recommendations for the future, in light of this
rapidly expanding arena.
To appreciate the evolving tax landscape amidst a revolutionized
U.S. sports industry, this Article proceeds as follows. Part I examines
the historic connection between U.S. sports and taxation. Part II
assesses the impact of tax legislation on the U.S. professional sports
89 (2019) (scrutinizing the convergence of federal tax law and college athletics);
Nathaniel Grow, Regulating Professional Sports Leagues, 72 WASH. & LEE L. REV. 573, 599–
600 (2015) (opining on tax subsidy opportunities for new sports leagues); Addison
Fontein, Comment, The Home Team Advantage: Why Lawmakers and the Judiciary Should
Bench the Jock Tax, 7 ARIZ. ST. SPORTS & ENT. L.J. 327, 328 (2018) (disagreeing with the
constitutionality of the jock tax); Alan Pogroszewski, When Is a CPA as Important as Your
ERA? A Comprehensive Evaluation and Examination of State Tax Issues on Professional
Athletes, 19 MARQ. SPORTS L. REV. 395, 395, 402 (2009) (discussing the application of
state tax laws to professional athletes).
50
. To the extent possible, the purpose of this Article is to examine major tax
issues impacting professional and collegiate sports, as well as the legalized gambling,
DFS, and esports industries. However, the Authors acknowledge that this analysis is
not complete across all facets of sport. For example, there exist tax issues within select
areas of sport, including the Olympics (see, e.g., United States Appreciation for
Olympians and Paralympians Act of 2016, H.R. 5946, 114th Cong. (2016)) and horse
racing (see, e.g., Horseracing Integrity and Safety Act of 2020, H.R. 1754, 116th Cong.
(2020)), which are not touched on in this Article. Further, this Article does not
purport to opine on every conceivable tax issue that may arise among relevant sports
industry stakeholders.
51
. See Holo & Talansky, supra note 32, at 162; see also John T. Holden & Thomas
A. Baker III, The Econtractor? Defining the Esports Employment Relationship, 56 AM. BUS. L.J.
391, 418 (2019) (noting that taxes play a role in esports competitions); Matthew H.
Hambrick, Comment, Is the Recent Trend of States Legalizing Daily Fantasy Sports in an
Effort to Raise Revenue a “Safe Play” to Make Money or Simply a “Hail Mary”?, 48 CUMB. L.
REV. 243, 274–82 (2017) (exploring state efforts to tax DFS revenue).
2022] TAXING SPORTS 855
arena. Part III identifies the various tax exposures facing the college
sports arena, both at the institutional and student-athlete levels. Part
IV explores the tax implications surrounding the legalized sports
gambling industry, DFS, and esports. Part V provides select tax
recommendations surrounding the expanding U.S. sports arena.
Finally, this Article concludes that taxes play an integral role in the
continuously evolving sports industry, with both Congress and the
states progressively targeting it.
I. TAXING U.S. SPORTS: A HISTORICAL EXPLORATION
In 2017, Bloomberg published an article headlined, “Buy a Sports
Team, Get a Tax Break.”
52
Facially, such a recommendation may sound
absurd to the casual reader; however, following the implementation of
the American Jobs Creation Act of 2004,
53
sports franchise owners can
deduct large portions of their team’s purchase price against their
taxable income.
54
Such benefits allowed Los Angeles Clippers owner
Steve Ballmer to pay just 12% in taxes on his 2018, $656 million
earnings.
55
Professional sports team owners have long used their franchises to
entertain broad tax benefits, with few (if any) being more creative than
businessman Bill Veeck.
56
After purchasing the Cleveland Indians
(soon to be Guardians) baseball team in 1946, Veeck launched a
successful lobbying effort to allow team owners to deduct player
contracts as depreciable assets, thus codifying the Roster Depreciation
Allowance (RDA).
57
The RDA allows professional sports team owners
to amortize the purchase price of their franchise over a fifteen-year
52
. Justin Fox, Buy a Sports Team, Get a Tax Break, BLOOMBERG (Sept. 8, 2017, 1:55
PM), https://www.bloomberg.com/opinion/articles/2017-09-08/buy-a-sports-team-get-
a-tax-break.
53
. Pub. L. 108-307 357, 118 Stat. 1418 (2004) (codified at 26 U.S.C. § 1).
54
. See I.R.C. § 197 (establishing that the deductible amount is amortized over a
fifteen-year period); Treas. Reg. § 1.197-2 (b)(10); see also Fox, supra note 52.
55
. Robert Faturechi et al., The Billionaire Playbook: How Sports Owners Use Their
Teams to Avoid Millions in Taxes, PROPUBLICA (July 8, 2021, 5:00 AM), https://www.pro
publica.org/article/the-billionaire-playbook-how-sports-owners-use-their-teams-to-av
oid-millions-in-taxes?utm_source=sailthru&utm_medium=email&utm_campaign=IRS
&utm_content=feature [https://perma.cc/29KL-S5J2].
56
. Stephen R. Keeney, The Roster Depreciation Allowance: How Major League Baseball
Teams Turn Profits into Losses, BASEBALL RSCH. J., Spring 2016, https://sabr.org/
journal/article/the-roster-depreciation-allowance-how-major-league-baseball-teams-
turn-profits-into-losses [https://perma.cc/T82K-PEEZ].
57
. Id.; 26 U.S.C. § 197.
856 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
period.
58
Some argue that the RDA allows team owners to misrepresent
the true value of their ownership stake through “gymnastic bookkeeping
techniques.”
59
Although Congress has periodically revised the tax laws
that impact the RDA, it has never sought to end the exemption
directly.
60
Even before Veeck’s successful RDA campaign, MLB team owners
sued the IRS over the ability to deduct the entirety of player contracts.
61
During that same period, MLB franchise owners were not solely unique
in seeking preferential IRS tax treatment. Between 1942 and 2015, the
NFL
62
—which morphed from a million into a billion-dollar enterprise
thanks in large part to broadcasting rights revenue—was recognized by
the IRS as a not-for-profit tax-exempt entity.
63
As professional sports
matured, and athletes and coaches were induced by more lucrative
contract agreements, state jurisdictions launched individual efforts to
gain a piece of the “business of sports” pie.
64
58
. 26 U.S.C. § 197; Keeney, supra note 56.
59
. Keeney, supra note 56. The RDA is not wholly unique. Numerous businesses
depreciate the costs of tangible and intangible assets. See, e.g., Elizabeth V. Zanet & Stanley C.
Ruchelman, Tax Basics of Intellectual Property, LANDSLIDE, July/August 2018, at 39, 40,
http://publications.ruchelaw.com/pdfs/2018/tax-basics-intellectual-property.pdf [https://
perma.cc/HRT2-W6V3] (discussing depreciating costs in the intellectual property space
where amortizable assets include intangible assets such as patents, copyrights, formulas,
processes, and designs). However, the RDA is distinctive because it applies to sports franchises.
Keeney, supra note 56. Unlike most assets, which become valueless after a period, sports
franchise values continue to increase. Id. The normal depreciation allowance generally
permits businesses to count losses as a cost of operation; however, the RDA permits companies
to count losses on assets with increasing values. Id.
60
. Id.
61
. Id. (citing Chi. Nat’l League Ball Club v. Comm’r, No. 57620, 1933 WL 4911
(B.T.A. Apr. 17, 1933), aff’d, Comm’r v. Chi. Nat’l League Ball Club, 74 F.2d 1010 (7th
Cir. 1935)); see also Comm’r v. Pittsburgh Athletic Co., 72 F.2d 883, 884 (3d Cir. 1934)
(affirming the Board of Tax Appeals decision that the cost of a player’s contract is a
business expense in the year it was paid including a contract with an option to renew).
62
. See Rohan Nadkarni, NFL Teams Made Record $7.24 Billion in National Revenue Last
Season, SPORTS ILLUSTRATED (July 20, 2015), https://www.si.com/nfl/2015/07/20/nfl-
national-revenue-money-sharing-billions [https://perma.cc/X8C9-C97F] (noting that
in 2015, the NFL generated $7.24 billion in revenue, with each team receiving $226.4
million in revenue sharing from the league).
63
. Jared Dubin, NFL Ends Tax Exempt Status After 73 Years: 3 Things to Know, CBS
SPORTS (Apr. 28, 2015, 1:36 PM), https://www.cbssports.com/nfl/news/nfl-ends-tax-
exempt-status-after-73-years-3-things-to-know [https://perma.cc/73BV-N8EQ]; see also
John Vrooman, The Economic Structure of the NFL, in THE ECONOMIC STRUCTURE OF THE
NATIONAL FOOTBALL LEAGUE: THE STATE OF THE ART, 7 (Kevin G. Quinn ed., 2012)
(noting the impact of broadcast media on the NFL’s economics).
64
. See infra Section I.A.2.
2022] TAXING SPORTS 857
Across a separate playing sphere, the college sports arena enjoyed
vast preferential tax treatment until the implementation of the TCJA.
65
Unlike professional athletes, student-athletes enjoy a wide berth of
favorable tax treatment based on their amateur status.
66
Similarly, the
college sports industry as a whole has enjoyed relatively amicable tax
treatment due to universities, athletic departments, and the NCAA
qualifying for tax-exempt status.
67
Some of this geniality, however, is
now shifting.
68
To appreciate the current status of taxation across the broader sports
arena, it is beneficial to first appraise a sampling of historic tax issues
impacting the greater U.S. sports sphere. As such, Section A examines
notable tax issues that have impacted professional sports. Section B
explores the historic impact of taxes on college sports.
A. Notable Tax Issues in Professional Sports
In 1789, Benjamin Franklin penned the famous quote: “in this world
nothing can be certain, except death and taxes.”
69
No one likes paying
taxes; but once revenue or income is generated, it is virtually
guaranteed that the tax man cometh.
70
Amidst the billion-dollar
professional sports industry, taxes play a critical role. In fact, significant
academic literature is dedicated to examining the impact of taxation
on both owners and athletes.
71
Across these varied discussions, three
65
. Schmalbeck & Zelenak, supra note 49, at 1089.
66
. Kisska-Schulze & Epstein, supra note 46, at 479.
67
. Kathryn Kisska-Schulze & Adam Epstein, The Claim Game: Analyzing the Tax
Implications of Student-Athlete Insurance Policy Payouts, 25 JEFFREY S. MOORAD SPORTS L.J.
231, 250 (2018).
68
. Kisska-Schulze & Epstein, supra note 46, at 480.
69
. See Madsen Pirie, Death and Taxes, ADAM SMITH INST. (Nov. 13, 2019),
https://www.adamsmith.org/blog/death-and-taxes [https://perma.cc/QUB4-59H4].
70
. See Ryan Cochran, Comment, “Failure to File” Syndrome; Lawyers, Accountants and
Specific Intent, 30 CUMB. L. REV. 507, 507 (2000).
71
. See, e.g., Scott A. Jensen, Comment, Financing Professional Sports Facilities with
Federal Tax Subsidies: Is It Sound Tax Policy?, 10 MARQ. SPORTS L.J. 425, 460 (2000)
(proposing that the Internal Revenue Code be amended to restrict or eliminate
stadium tax-exempt financing); Matthew Akers, A Race to the Bottom? International
Income Tax Regimes’ Impact on the Movement of Athletic Talent, 17 U. DENV. SPORTS & ENT.
L.J. 11, 56–59 (2015) (providing tax recommendations to better attract international
athletic talent); William H. Baker, Taxation and Professional Sports—A Look Inside the
Huddle, 9 MARQ. SPORTS L.J. 287, 288 (1999) (examining the tax implications of
professional sports franchises, stadiums, and athletes’ income); Jeffrey L. Krasney, State
Income Taxation of Nonresident Professional Athletes, 2 SPORTS LAWS. J. 127, 132 (1995)
(examining state and local taxation on migratory nonresident professional athletes);
858 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
areas remain historically pronounced: (1) the preferential tax treatment
of franchise owners and stadiums, (2) the jock tax, and (3) professional
sports leagues’ tax-exempt status.
1. The preferential tax treatment of franchise owners and stadiums
Numerous scholars have explored the historic use of taxpayer
money and tax-exempt bonds to finance professional sports stadiums.
72
Following Veeck’s successful campaign in securing the RDA,
73
then-
MLB commissioner Ford Frick began working toward stadium
subsidies to likewise revolutionize the business of sports.
74
Frick
announced that cities seeking professional baseball teams would be
required to subsidize stadium construction.
75
Effectively, tax dollars
built professional sports facilities.
76
Prior to Frick’s declaration, many
Richard A. Kaplan, Note, The NBA Luxury Tax Model: A Misguided Regulatory Regime, 104
COLUM. L. REV. 1615, 1617 (2004) (exploring the NBA luxury tax model).
72
. See, e.g., Logan E. Gans, Take Me out to the Ball Game, but Should the Crowd’s Taxes
Pay for It?, 29 VA. TAX REV. 751, 754 (2010) (discussing the evolution of stadium
construction financing and the taxes local governments use to finance the federally
tax-exempt bonds used today); Steven D. Zavodnick, Jr., Note, If You (Pay to) Build It,
They Will Come: Rethinking Publicly-Financed Professional Sports Stadiums After the Atlanta
Braves Deal with Cobb County, 53 GA. L. REV. 407, 410 (2018) (using the Atlanta Braves’s
new stadium as a case study to examine the history of publicly funded stadiums, the
bargaining power teams have over municipalities, and the perverse incentives of
federal tax laws on local governments); Daniel McClurg, Comment, Leveling the Playing
Field: Publicly Financed Professional Sports Facilities, 53 WAKE FOREST L. REV. 233, 234–35
(2018) (providing an overview of the tax loophole that allowed the use of tax-exempt
bonds for stadium construction to become the norm and exploring challenges to
financing plans); Frank A. Mayer, III, Stadium Financing: Where We Are, How We Got Here,
and Where We Are Going, 12 VILL. SPORTS & ENT. L.J. 195, 196–97 (2005) (noting the
historic use of private and public funding for stadiums and comparing the benefits
and drawbacks of each type of financing); Courtney Gesualdi, Note, Sports Stadiums as
Public Works Projects: How to Stop Professional Teams from Exploiting Taxpayers, 13 VA.
SPORTS & ENT. L.J. 281, 283, 294 (2014) (examining how the tax code incentivizes local
government officials to build professional sports stadiums using public funds).
73
. See supra notes 56–60 and accompanying text.
74
. Don Bauder, San Diego’s Welfare Plan for Hotel Owners, SAN DIEGO READER (Apr.
27, 2016), https://www.sandiegoreader.com/news/2016/apr/27/city-lights-conventi
on-centers-lose-bundles-money [https://perma.cc/E2WT-MDXK].
75
. Id. Although demands for public financing of professional sports stadiums and
arenas originated with Commissioner Frick, public construction of stadiums dates to
the early 1800s when stadiums were constructed with a wide range of uses in mind. See
id.; Mayer, supra note 72, at 207.
76
. See Sarah Kunst, Tax Cuts for Stadiums, Tax Cuts for Owners, Tax Cuts for Those
Who Don’t Need It, FORBES (Nov. 28, 2017, 10:59 PM), https://www.forbes.com/sites/
sarahkunst/2017/11/28/tax-cuts-for-stadiums-tax-cuts-for-owners-tax-cuts-for-those-
2022] TAXING SPORTS 859
teams played in privately owned stadiums, often constructed and
operated by team owners.
77
While select locales extolled funds to
construct stadiums in the hopes of attracting international events like
the Olympics during the early part of the twentieth century, it was not
until the 1960s that cities began funding professional sports stadiums
en masse.
78
In fact, in the nearly forty years between Frick’s nascent
vision and the 1990s, more than 75% of professional sports teams’
stadiums were erected via public funding.
79
The prospect of acquiring a professional sports team prompted
cities to seek avenues for enticement. Milwaukee was the first to
construct a publicly funded stadium in the hopes of attracting the
Braves baseball team in 1953.
80
The Dodgers left Brooklyn, New York
for Los Angeles, California in 1958, due to the City of Angels’s new
publicly funded stadium, an event that launched a cascade of similarly
funded stadiums across the country.
81
By the end of the 1950s, MLB
team owners saw new stadiums constructed with nearly 100% public
financing.
82
Capitalizing on the demand for baseball, MLB expanded
the number of professional teams during the 1960s from sixteen to
twenty-four.
83
With the rise in supply, public funding for stadiums later
decreased to a low 60% range.
84
During the 1970s and 1980s, cities continued bidding on
professional sports teams with promises of new stadiums. During this
period, thirty-nine stadiums were constructed.
85
Those numbers,
who-dont-need-it/?sh=4bee428f3bf6 [https://perma.cc/2EEW-Z8HS] (noting that
over the last fifteen years federal taxpayers have spent close to $4 billion funding the
thirty-six stadiums build with tax-exempt bonds).
77
. NEIL DEMAUSE & JOANNA CAGAN, FIELD OF SCHEMES: HOW THE GREAT STADIUM
SWINDLE TURNS PUBLIC MONEY INTO PRIVATE PROFIT 28 (2008).
78
. Zavodnick, supra note 72, at 411–12.
79
. DEMAUSE & CAGAN, supra note 77, at 28.
80
. See Marc Edelman, Sports and the City: How to Curb Professional Sports Teams’
Demands for Free Public Stadiums, 6 RUTGERS J.L. & PUB. POL’Y 35, 39–40 (2008) (observing
that in the two years after the Braves moved from Boston to Milwaukee, two other teams
relocated for publicly funded stadiums as well: the St. Louis Browns, which became the
Baltimore Orioles, and the Philadelphia Athletics, which moved to Kansas City).
81
. Zavodnick, supra note 72, at 412.
82
. Edelman, supra note 80, at 41. Professor Edelman attributes the rise in public
financing to the MLB limiting the supply of new baseball teams. By limiting supply,
the price for acquiring a team rose, namely in the form of public funding for stadium
construction. Id.
83
. Id. at 42.
84
. Id.
85
. Id. at 44.
860 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
however, were dwarfed by the next two decades. Between 1990 and
1998, thirty-two stadiums were built with public money, with another
forty constructed between 1999 and 2008.
86
In addition, increased
demands for sports stadiums ensued across shorter intervals. In 2002,
for example, the San Antonio Spurs sought a replacement arena only
ten years after the construction of its then-current stadium.
87
In the
1990s, cities began constructing new stadiums that appealed to older
stylistics with modern amenities (referred to as the stadium
renaissance), originating with the construction of Oriole Park at
Camden Yards in Baltimore, Maryland.
88
Along with new construction
came corresponding promises of economic redevelopment in surrounding
areas; however, many such promises seemingly missed the mark.
89
Despite the shortage of fulfilled returns, stadium construction
projects endured with increasing frequency and significant taxpayer
money.
90
For example, in 2017, Georgia taxpayers paid $700 million
86
. Id.
87
. Id. at 45.
88
. Noah Trister, The Camden Effect: At 25, Ballpark’s Legacy Is Large in MLB,
ASSOCIATED PRESS (Mar. 31, 2017), https://apnews.com/article/ef16520aaacf4d10ad
1328e43e203e25?utm_campaign=socialflow&utm_source=twitter&utm_medium=ap_
sports (following the construction of Camden Yards, the city of Cleveland constructed
the similarly styled Jacobs Field, since re-named to Progressive Field).
89
. Bloomberg News, Orioles Stadium Yields No Baltimore Rebirth, FIN. & COM. (Nov. 30,
2013, 6:55 AM), https://finance-commerce.com/2013/11/orioles-stadium-yields-no-
baltimore-rebirth [https://perma.cc/7EHW-SW46]. But see Thomas Boswell, Nationals
Park Has Become an Urban Development Triumph. Who Knew?, WASH. POST (Sept. 14, 2016),
https://www.washingtonpost.com/sports/nationals/nationals-park-has-become-an-
urban-development-triumph-who-knew/2016/09/14/7cf60e3c-7a80-11e6-bd86-
b7bbd53d2b5d_story.html (remarking on the transformation of Southeast Washington,
D.C. fueled in large part by the investment of taxpayer dollars in the ballpark).
90
. See Andy McGeady, The Great American Stadium: High Cost, Short Lifespan, IRISH
TIMES (May 24, 2016, 6:56 PM), https://www.irishtimes.com/sport/the-great-america
n-stadium-high-cost-short-lifespan-1.2659341 [https://perma.cc/AR4Y-9TB7] (noting
how the lifespan of U.S. stadiums has shortened to twenty years or fewer). There are
few areas studied by academic economists that seem to generate as much consensus as
the proposition that public financing of sport stadiums fails to economically benefit
taxpayers. See Robert A. Baade & Richard F. Dye, Sports Stadiums and Area Development:
A Critical Review, 2 ECON. DEV. Q. 265, 274 (1988) (finding the economic development
rationale used to justify publicly funding stadiums is weak and unsupported by
evidence); John Siegfried & Andrew Zimbalist, A Note on the Local Economic Impact of
Sports Expenditures, 3 J. SPORTS ECON. 361, 362 (2002) (noting the economic
development argument for publicly funding stadiums has been persuasive despite
being incorrect); Dennis Coates & Brad R. Humphreys, Do Economists Reach a
Conclusion on Subsidies for Sports Franchises, Stadiums, and Mega-Events, 5 ECON J. WATCH
2022] TAXING SPORTS 861
for the Atlanta Falcons’s Mercedes-Benz Stadium.
91
Oriole Park cost
Maryland citizens $14 million per year.
92
In fact, since 1997, NFL teams
have received almost $7 billion in taxpayer money to fund new
stadiums.
93
Moreover, professional sports teams have benefited from
hundreds of millions of dollars in federal subsidies to finance stadiums
via tax-exempt municipal bonds following the passage of the Tax
Reform Act of 1986.
94
These subsidies have accounted for significant
construction funding, including $431 million for the new Yankee
Stadium in New York, $205 million for Soldier Field in Chicago, and
$164 million for Paul Brown Stadium in Cincinnati.
95
Although some
have tried to restrict the use of these tax benefits, tax-exempt bonds
(in conjunction with taxpayer funding) continue to serve as the
mainstay for funding professional sports facilities.
96
294, 310–11 (2008) (highlighting the widespread agreement among economists that
sports subsidies do not have a positive impact on the local economy).
91
. Nicole Vowell, Millions of Taxpayer Dollars Spent on Sports Stadiums—Who’s Benefiting?,
FOX4 (Oct. 22, 2018, 2:41 PM), https://www.fox4now.com/news/national/democracy-
2018/millions-of-taxpayer-dollars-spent-on-sports-stadiumswhos-benefiting.
92
. James Dator, Publicly Funding Stadiums for Billionaires Is a Scam, SBNATION (June
9, 2021, 11:11 AM), https://www.sbnation.com/2021/6/9/22525916/public-funding-
stadiums-nfl-panthers [https://perma.cc/ENQ8-4ZDQ].
93
. Michael David Smith, NFL Stadiums Have Received an Estimated $6.7 Billion from
Taxpayers, NBC SPORTS (Mar. 28, 2017, 9:23 AM), https://profootballtalk.nbcsports.c
om/2017/03/28/nfl-stadiums-have-received-an-estimated-6-7-billion-from-taxpayers
[https://perma.cc/D5GT-9GPJ].
94
. See Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085 (1986) (codified
in scattered sections of 26 U.S.C.); I.R.C. § 103(a); see also Jose Trejos, Senate Bill May End
Federal Tax Breaks for Stadiums, TAX FOUND. (June 19, 2017), https://taxfoundation.org/
senate-bill-may-end-federal-stadium-subsidies [https://perma.cc/24UA-RV2Q] (noting
the tax break for stadiums was an unintended consequence of the Tax Reform Act of
1986 which has resulted in over $3 billion in federal tax exemptions in the last two
decades).
95
. Wayne Anderman, Stadium Bonds: A Homerun or Strike out During the COVID-19
Pandemic?, MUNICIPALBONDS.COM (Sept. 2, 2020), https://www.municipalbonds.com/
education/stadium-bonds-homerun-or-strike-out-during-covid-19 [https://perma.cc/
DN8F-3TJ3].
96
. See Anoop K. Bhasin, Tax-Exempt Bond Financing of Sports Stadiums: Is the Price
Right?, 7 VILL. SPORTS & ENT. L.J. 181, 183–85 (2000) (noting that U.S. Senator
Moynihan opposed the use of tax-exempt bonds to fund professional stadiums);
Trejos, supra note 94 (documenting that Senators Cory Booker and James Lankford
sponsored a bipartisan bill in 2017 to end the practice of issuing tax-exempt bonds for
sports stadium construction).
862 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
2. The jock tax
Like stadium subsidies, much has been written on the so-called “jock
tax.”
97
Although cities, counties, and states willingly subsidize stadium
construction to the benefit of billionaire owners, many locales have not
afforded such gratuitous tax benefits to professional athletes.
98
Jock
taxes—which permit states to tax nonresident professional athletes’
income when engaging in sporting events hosted within their
jurisdictions
99
—originated in the 1960s, but became more widely
familiar in 1991 when California sought to collect taxes from Michael
Jordan and his Chicago Bulls teammates following their team’s defeat
of the Los Angeles Lakers in the National Basketball Association
(NBA) finals.
100
Illinois lawmakers responded in kind by passing
“Michael Jordan’s revenge,” which likewise taxed visiting teams playing
in their state.
101
Soon after, other states and cities, including Cleveland,
Kansas City, Philadelphia, and Detroit, passed similar taxes.
102
97
. See, e.g., Fontein, supra note 49, at 328–29 (arguing the jock tax is
unconstitutional because it allows a state to intentionally and systematically
discriminate and tax income extraterritorially); Alan Pogroszewski & Kari A. Smoker,
Is Tennessee’s Version of the “Jock Tax” Unconstitutional?, 23 MARQ. SPORTS L. REV. 415, 433
(2013) (examining Tennessee’s version of the jock tax and concluding that it is
unconstitutional); Nick Overbay, Comment, A Uniform Application of the Jock Tax: The
Need for Congressional Action, 27 MARQ. SPORTS L. REV. 217, 217–18 (2016) (arguing that
enacting a uniform allocation method for states to tax nonresident athletes would ease
administrative burdens and preempt constitutional challenges); Kirk Berger, Note,
Foul Play: Tennessee’s Unequal Application of Its Jock Tax Against Professional Athletes, 13
CARDOZO PUB. L. POL’Y & ETHICS J. 333, 337 (2014) (comparing jock taxes in the United
States and concluding that Tennessee’s jock tax is unconstitutional).
98
. See Mary Pilon, The Jock-Tax Man, NEW YORKER (Apr. 10, 2015), https://www.new
yorker.com/business/currency/the-jock-tax-man [https://perma.cc/K4WP-NYXK]
(describing special taxes levied against professional athletes when traveling to play in
other states).
99
. Fontein, supra note 49, at 327.
100
. Pilon, supra note 98.
101
. Id.; see also Jonathan Nehring, An Overview and History of the Jock Tax, TAXABALL
INCOME (Apr. 15, 2014), http://www.taxaball.com/blog/an-overview-and-history-of-
the-jock-tax [https://perma.cc/8K2A-9C3U] (documenting the origin of the jock tax
to 1968 when Dennis Partee of the San Diego Chargers challenged the California state
board of equalization over state taxes he owed).
102
. Jesse Barnhill, Michael Jordan Accidentally Created the ‘Jock Tax’ and Hurt the
Paychecks of Pro Athletes Forever, SPORTSCASTING (Nov. 13, 2020), https://www.sports
casting.com/michael-jordan-accidentally-created-the-jock-tax-and-hurt-the-paychecks-
of-pro-athletes-forever [https://perma.cc/28VQ-FWP6].
2022] TAXING SPORTS 863
The jock tax has certainly been lucrative for select jurisdictions, with
California recouping more than $200 million in annual revenue;
103
however, the tax is not imposed universally. While many jurisdictions
levy their established income tax rates on nonresident professional
athletes, others have been more creative.
104
For example, in 2009,
Tennessee imposed a privilege tax on NBA and National Hockey
League (NHL) athletes playing in the state.
105
The tax was assessed at
$2,500 per game, with a maximum annual tax burden of $7,500.
106
Following outcry from league unions, in 2014, Tennessee repealed the
tax, with the state ultimately refunding more than $8 million of the
approximately $18 million it acquired.
107
Similarly, Cleveland faced challenges from players over its jock tax.
108
Former Chicago Bears player Hunter Hillenmeyer sued, arguing that
Cleveland’s jock tax violated due process by imposing a tax calculation
formula based on games played.
109
Specifically, nonresident athletes
who competed in games in Cleveland were taxed as though their sole
job responsibility was to play games.
110
By competing in just one game
per year in Cleveland (out of a possible twenty), the city assessed a tax
on 5% of their salary.
111
Players objected, arguing that their wages were
tied to substantially more activities than mere gameplay, and claimed
the Cleveland tax burden was unconstitutionally high.
112
The Ohio
103
. Stefanie Loh, Fun Facts About the Jock Tax, SAN DIEGO UNION-TRIB. (Apr. 20,
2015, 6:30 AM), https://www.sandiegouniontribune.com/sports/nfl/sdut-jock-tax-
fun-facts-origins-super-bowl-money-2015apr20-story.html.
104
. See, e.g., Jason Feingertz & Jonathon Nhering, Tennessee’s Failed Attempt to Be a Tax
Titan, CPA J. (Jan. 2017), https://www.cpajournal.com/2017/01/22/tennessees-failed-
attempt-to-be-a-tax-titan [https://perma.cc/3PSJ-7YSH] (describing how Tennessee, a
state without an income tax, imposed a professional privilege tax on out-of-state
athletes).
105
. Id.
106
. Id.
107
. Id.
108
. Ameet Sachdev, Former Chicago Bear Wins Suit over Cleveland’s ‘Jock Tax,’ CHI.
TRIB. (Apr. 30, 2015, 5:15 PM), https://www.chicagotribune.com/business/ct-clevela
nd-jock-tax-0501-biz-20150430-story.html.
109
. Hillenmeyer v. Cleveland Bd. of Rev., 41 N.E.3d 1164, 1167–68 (Ohio 2015);
Ohio Supreme Court Rules Cleveland’s Tax on Nonresident Football Players Violates
Constitutional Due Process, WINSTON & STRAWN (June 2015), https://www.winston.com/
images/content/9/7/97939/SALT-JUN2015-05-Cleveland-Tax-Football-Players.html
[https://perma.cc/86XX-D228].
110
. Hillenmeyer, 41 N.E.3d at 1167–68.
111
. Id. at 1171.
112
. Id. at 1168.
864 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
Supreme Court agreed, holding that Cleveland’s calculation formula
violated constitutional due process.
113
While select jurisdictions
continue to impose jock taxes as a means of capturing a piece of the
lucrative business pie (despite legal attacks from players and unions
114
),
others afford a more generous approach, relieving nonresident
professional athletes from tax imposition on their earnings.
115
3. Tax exemptions
The third professional sports matter that historically garnered
academic (and congressional) discourse pertains to the NFL and other
leagues’ tax-exempt status.
116
The NFL long-enjoyed Internal Revenue
Code (I.R.C.) § 501(c)(6) tax-exempt status under the business league
exemption.
117
Although the NBA never established tax-exempt status,
the MLB enjoyed this preferential tax treatment until voluntarily
relinquishing it in 2007.
118
Eight years later, in an abrupt move, the
NFL surrendered its tax-exempt status in 2015, acknowledging that its
113
. Id. at 1174.
114
. See Bob Bauder, Pro Athletes, Players’ Unions Seek to Halt Pittsburgh ‘Jock Tax’,
TRIBLIVE (Nov. 7, 2019, 10:32 PM), https://triblive.com/local/pittsburgh-allegheny/
three-athletes-and-players-unions-seek-to-halt-pittsburgh-jock-tax [https://perma.cc/
5DAW-LZL7] (describing lawsuits filed over Pittsburgh’s jock tax).
115
. See Loh, supra note 103 (noting that Arizona does not tax the earnings of MLB
players who are in the state for spring training).
116
. See, e.g., Christian Schmied, Comment, Official Timeout on the Field: Critics Have
Thrown a Red Flag and Are Challenging the NFL’s Tax-Exempt Status, Calling for It to Be
Revoked, 21 JEFFREY S. MOORAD SPORTS L.J. 577, 580 (2014) (discussing how the IRS has
recently come under fire for targeting organizations that were applying for tax-exempt
status); Jami A. Maul, Comment, America’s Favorite “Nonprofits”: Taxation of the National
Football League and Sports Organizations, 80 UMKC L. REV. 199, 199–200 (2011)
(analyzing sports franchises that are classified as nonprofit organizations under I.R.C.
§ 501(c)(6) (2018)); Naomi Hatton, Note, Where Do Sports Leagues Stand After the NFL
Revokes Its Tax Exempt Status?, 15 AVE MARIA L. REV., 170, 170 (2017) (highlighting that
the NFL recently gave up its tax exemption status in 2017); Dylan P. Williams, Taking
a Knee: An Analysis of the NFL’s Decision to Relinquish Its § 501(c)(6) Federal Tax Exemption,
26 J. LEGAL ASPECTS SPORT 127, 127 (2016) (examining the NFL’s tax exempt status
under I.R.C. § 501(c)(6)); see also, Alec Fornwalt, Should Congress Reconsider the Tax
Exemption of Pro Sports Organizations?, TAX FOUND. (July 20, 2018), https://tax
foundation.org/congress-reconsider-tax-exemption-pro-sports-organizations
[https://perma.cc/8NJR-L4WH] (arguing that congress should reconsider the status
of tax exempted professional sports organizations).
117
. See I.R.C. § 501(c)(6); see also Hatton, supra note 116, at 170–71.
118
. Darren Rovell, NFL League Office Relinquishing Tax-Exempt Status, ESPN (Apr.
28. 2015), https://www.espn.com/nfl/story/_/id/12780874/nfl-league-office-gives-
tax-exempt-status [https://perma.cc/86RW-CHJ4].
2022] TAXING SPORTS 865
preferential tax treatment invited public distraction given the
organization’s multi-billion dollar annual revenues.
119
In 2018, Congress considered abolishing the tax-exempt status of
other professional leagues.
120
Specifically, on June 19, 2018, Iowa
Senator Joni Ernst introduced Senate Bill 3086 (S. 3086), or the PRO
Sports Act.
121
The bill’s singular purpose was to stop professional sports
leagues from qualifying for tax-exempt status.
122
The proposed
legislation identified the NHL, along with the Professional Golf
Association (PGA) Tour and Ladies Professional Golf Association
(LPGA) as organizations generating more than one billion dollars in
revenue, yet operating under the shield of I.R.C. § 501(c)(6).
123
While
this legislation specifically targeted the three named entities, if passed
the law would have stripped tax-exempt status from any organization
with gross receipts exceeding $10,000,000.
124
Variations of S. 3086 have been introduced repeatedly, but all have
failed to gain traction despite the significant revenues many of these
tax-exempt leagues enjoy.
125
Some note that the impetus to strip
professional leagues of their preferred tax status is largely
inconsequential.
126
As Professor and Economist Andrew Zimbalist
opines, while some leagues enjoy tax-exempt status, the teams
themselves (which serve as the profit-generating mechanisms of the
119
. Chris Isidore, NFL Gives Up Tax Exempt Status, CNN (Apr. 28, 2015, 4:48 PM),
https://money.cnn.com/2015/04/28/news/companies/nfl-tax-exempt-status/
index.html [https://perma.cc/L36R-FFQM].
120
. Fornwalt, supra note 116.
121
. PRO Sports Act, S. 3086, 115th Cong. (2018).
122
. Id.
123
. Id.
124
. Id.
125
. See, e.g., PRO Sports Act, H.R. 363, 117th Cong. (2021); see also PRO Sports Act,
S. 1524, 113th Cong. (2013).
126
. Andrew Zimbalist, The Nonprofit Status of Sports Leagues Is Irrelevant, N.Y. TIMES
(Sept. 4, 2014, 12:59 PM), https://www.nytimes.com/roomfordebate/2014/09/03/
should-pro-sport-leagues-get-tax-breaks/the-nonprofit-status-of-sports-leagues-is-
irrelevant [https://perma.cc/WX8H-V7WA] (“The tax exemption does not apply to
the individual teams, which must pay taxes on their profits . . . [but does] appl[y] to
the central league offices . . . .”); see also Press Release, Greg Steube, House of
Representatives, Steube Introduces Legislation to Close Loophole Allowing
Professional Sports Organizations to Claim Nonprofit Status and Tax Breaks (Aug. 7,
2020), https://steube.house.gov/media/press-releases/steube-introduces-legislation-
close-loophole-allowing-professional-sports [https://perma.cc/P9XZ-3QCL]
(proposing to strip tax-exempt status from sports leagues for allowing players and
coaches to kneel in protest during the national anthem).
866 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
leagues) remain taxable entities.
127
Of import, the debate over the tax-
exempt status of sports organizations is not germane to the
professional arena. As detailed in the following section, the NCAA’s
not-for-profit tax status has likewise been scrutinized.
128
B. The Historic Relationship Between Taxes and College Sports
In 1906, the NCAA declared that college sports were to be founded
on the principle of amateurism.
129
Over a century later, many argue
that the primordial student-athlete model is misguided, given the
expansive economic growth of contemporary collegiate athletics.
130
Certainly, as this amateur sports arena morphed into a billion-dollar
enterprise,
131
increased tax deliberations ensued. Still, prior to the
signing of the TCJA, the greater college sports arena enjoyed quite
generous tax treatment, even amidst broader debates.
132
As this Section
addresses, tax issues that have invited historic dialogue include: (1) the
tax-exempt status of the NCAA and its member institutions; (2) the
unrelated business income (UBI) tax; (3) taxing student-athletes’
scholarship funds; and (4) the deductibility of charitable donations.
127
. Zimbalist, supra note 126.
128
. See infra Section I.B.1.
129
. Kisska-Schulze, supra note 11, at 350.
130
. See Robert A. McCormick & Amy Christian McCormick, The Myth of the Student-
Athlete: The College Athlete as Employee, 81 WASH L. REV. 71, 74 (2006) [hereinafter
McCormick & McCormick, The Myth of the Student-Athlete] (opining that the student-
athlete characteristic is, in reality, a façade); Robert John Givens, Comment,
“Capitamateuralism”: An Examination of the Economic Exploitation of Student-Athletes by the
National Collegiate Athletic Association, 82 UMKC L. REV. 205, 205–07 (2013) (arguing to
reform the NCAA’s principal of amateurism amidst commercialized exploitation of
student-athletes); Thomas A. Baker III et al., Debunking the NCAA’s Myth that Amateurism
Conforms with Antitrust Law: A Legal and Statistical Analysis, 85 TENN. L. REV. 661, 665
(2018) (noting that college sports is no longer “amateur” in nature, no matter the
NCAA’s insistence that it is); Kelly Charles Crabb, The Amateurism Myth: A Case for a New
Tradition, 28 STAN. L. & POL’Y REV. 181, 183 (2017) (calling for the NCAA to abandon
its amateurism model to allow student-athletes the ability to exploit themselves in
commercialized fashion); Amy Christian McCormick & Robert A. McCormick, The
Emperor’s New Clothes: Lifting the NCAA’s Veil of Amateurism, 45 SAN DIEGO L. REV. 495,
496 (2008) (portraying the collegiate sports arena as anything but amateurism).
131
. Finances of Intercollegiate Athletics, NCAA, https://www.ncaa.org/about/
resources/research/finances-intercollegiate-athletics [https://perma.cc/DJ39-63RV]
(noting that in 2019 alone, NCAA athletic department revenues across all member
schools reached $18.9 billion).
132
. Kisska-Schulze, supra note 11, at 355.
2022] TAXING SPORTS 867
1. The NCAA and member institutions’ tax-exempt status
Akin to professional sports leagues as discussed earlier, the NCAA’s
tax-exempt status has been deliberated by many.
133
Along with
numerous of its member institutions, the NCAA relishes from I.R.C.
§ 501(c)(3) status, which offers tax exemptions to organizations that
advance “national or international amateur sports competition.”
134
Section 501(c)(3) found root in the Tax Reform Act of 1969, which
allowed qualifying non-profit entities to operate as private
foundations.
135
By 1976, Congress eased restrictions on non-profits to
the point that they were permitted to spend up to $1 million a year in
lobbying efforts.
136
The rationale for extending such benefits beyond
the NCAA and its member institutions, to include their affiliated
athletic departments, which are often run as separate entities, resides
in the conviction that college athletics compliment the overall
academic experience and thus serve an “educational purpose.”
137
Some argue that the NCAA and many of its member schools are not
promoting amateur sports per se, but are instead attempting to
133
. See, e.g., Andrew D. Appleby, for the Love of the Game: The Justification for Tax
Exemption in Intercollegiate Athletics, 44 J. MARSHALL L. REV. 179, 189 (2010)
(documenting that in 2006, the House Ways and Means Committee directed the
NCAA to substantiate its tax-exempt status); Brett T. Smith, The Tax-Exempt Status of the
NCAA: Has the IRS Fumbled the Ball?, 17 SPORTS LAWS. J. 117, 118 (2010) (proposing that
removal of the NCAA’s tax-exempt status would result in minimal economic benefits);
John D. Colombo, The NCAA, Tax Exemption, and College Athletics, 2010 U. ILL. L. REV.
109, 111–12 (2010) (examining the NCAA’s tax-exempt status, and recommending
alternatives to removing such beneficial tax treatment); Benjamin Kurrass, Comment,
The Swelling Tide of Commercialized Amateur Athletics: How Growing Revenues Have Called
Public Attention to the NCAA and Its Member Universities’ Tax-Exempt Status, 27 JEFFREY S.
MOORAD SPORTS L.J. 285, 291 (2020) (recommending the passage of the Student-
Equity Act to “close the gap” between the NCAA and member institutions’ tax-exempt
revenue and amateur student-athletes); see also Ronald Katz, Ending the NCAA’s Tax
Exemption Should Be a Slam Dunk, NATION (Mar. 27, 2019),
https://www.thenation.com/article/archive/march-madness-tax-exemption-
inequality.
134
. I.R.C. § 501(c)(3); see also Colombo, supra note 133, at 113.
135
. Hana Muslic, A Brief History of Nonprofit Organizations (and What We Can Learn),
NONPROFIT HUB (Oct. 27, 2017), https://nonprofithub.org/a-brief-history-of-
nonprofit-organizations [https://perma.cc/D28U-NDGX].
136
. Id.
137
. Lindsey Luebchow, Are Tax Deductions for College Athletics Worth the Price?, NEW AM.
(Oct. 8, 2007), https://www.newamerica.org/education-policy/higher-education/high
er-ed-watch/are-tax-deductions-for-college-athletics-worth-the-price [https://perma.cc/
AGA5-FFEX].
868 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
“maximize revenue.”
138
Even Congress challenged the NCAA’s status
in 2006, following the organization’s evolution into a billion-dollar
enterprise; however, such a move failed to gain traction.
139
More recent
and creative efforts to eradicate the Association’s tax-exempt status
include recommendations that the NCAA’s status be tethered to the
opportunities it provides, which would allow student-athletes to
monetize their publicity rights.
140
Still, despite the seemingly broad
support for reining in tax-exemptions for sports organizations,
Congress has thus far failed to act.
141
2. The unrelated business income tax
While most colleges and universities qualify as tax-exempt entities,
any UBI they earn is taxable.
142
Congress enacted the UBI rules in 1950
to help level the playing field between non-profit and for-profit entities
when both participate in similar activities.
143
In 2008, the IRS issued a
multi-page query to four hundred colleges and universities, requesting
detailed information on their governance practices and compliance,
to include soliciting data regarding institutions’ activities falling
outside the scope of their exempt purposes.
144
Institutions are permitted to engage in revenue-generating activities
outside of their educational missions, which might include running a
bookstore or campus ice cream shop, renting facilities, advertising,
and offering parking lot services.
145
However, such income is not
protected under the purview of I.R.C. § 501(c).
146
Still, the broad and
138
. Kisska-Schulze, supra note 11, at 365–66; see also Nat’l Collegiate Athletic Ass’n
v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85, 100–01 n.22 (1984) (finding that
the NCAA and its members are in fact profit seeking entities).
139
. Doyle Slifer, Is the NCAA Fulfilling Its Tax-Exempt Status?, ILL. BUS. L.J. (Feb. 21,
2010), https://publish.illinois.edu/illinoisblj/2010/02/21/is-the-ncaa-fulfilling-its-
tax-exempt-status [https://perma.cc/L8MN-RMY9].
140
. Kyle Jahner, NCAA Tax Status Tied to Athletes’ Image Rights Under New Bill,
BLOOMBERG L. (Mar. 14, 2019, 4:38 PM), https://news.bloomberglaw.com/ip-law/ncaa-
tax-status-tied-to-athletes-image-rights-under-new-bill [https://perma.cc/RGC2-EAZN].
141
. See Katz supra note 133 (noting the patent absurdity of the NCAA continuing
to maintain non-profit status).
142
. Kisska-Schulze, supra note 11, at 361. Unrelated business income refers to earned
income that is not substantially related to an institutions’ educational mission. Id.
143
. Id.; see also William A. Bailey, The Taxman on Campus: How Aggressive IRS
Initiatives Are Increasing Audit and Compliance Risk for Colleges & Universities, 2012 BYU
EDUC. & L.J. 215, 226 (2012).
144
. Bailey, supra note 143, at 215, 221.
145
. Kisska-Schulze, supra note 11, at 361–62.
146
. Id. at 362.
2022] TAXING SPORTS 869
historical tax shield given to college athletics includes protecting these
programs from the UBI tax, although such issue has periodically been
weighed and measured.
147
Thus, virtually all revenue generated by
college sports continues to be recognized as facilitating colleges’ and
universities’ greater educational missions and thus not deemed taxable
as UBI.
148
3. Student-athletes’ grants-in-aid
Currently, student-athletes’ scholarship funds (also referred to as
grants-in-aid) enjoy the benefits afforded by I.R.C. § 117, which
excludes from gross income monies received in the form of qualified
scholarships.
149
Such exclusion is limited to instances lacking any quid
pro quo arrangement.
150
To date the IRS has denied the existence of
quid pro quo relationships in college sports for purposes of student-
athletes’ grants-in-aid.
151
Specifically, in 1977, the IRS drafted Revenue
Ruling 77-263, which purports that athletic scholarships “aid the
recipients in pursuing their studies” and are thus excludable from
gross income.
152
Almost forty years later, in 2014, the IRS confirmed its
position that athletic scholarships remain protected from taxation
under the umbrella of I.R.C. § 117.
153
Following the NCAA’s 2019
announcement in support of student-athletes profiting from the use of
their NIL, North Carolina Senator Richard Burr and Congressman
Mark Walker proposed that those athletes who “cash in” should pay
147
. Id.; see also Rev. Rul. 80-295, 1980-2 C.B. 194 (ascertaining that revenue
generated by the sale of TV and broadcasting rights by a tax-exempt, national
governing body for amateur sports is not UBI); Rev. Rul. 80-296, 1980-2 C.B. 195
(holding that revenue generated by college athletic conference organizations from the
sale of broadcasting rights is not UBI); Prop. Treas. Reg. § 1.513-4(f) (Ex. 4) (1983)
(demonstrating that payments generated from sponsorships for a college football bowl
game do not constitute UBI); 58 Fed. Reg. 5690-91 (g) (Ex. 4) (Jan. 22, 1993)
(illustrating that income generated from sponsorships for a college football bowl game
is not UBI).
148
. Kisska-Schulze, supra note 11, at 362.
149
. See I.R.C. § 117; see also Kisska-Schulze, supra note 11, at 356.
150
. See I.R.C. § 117(c); see also Bingler v. Johnson, 394 U.S. 741, 753 (1969).
151
. Kisska-Schulze, supra note 11, at 356.
152
. Rev. Rul. 77-263, 1977-2 C.B. 47; see also Kisska-Schulze, supra note 11, at 357
(explaining that the quid pro quo standard excludes athletic scholarships).
153
. See Letter from John A. Koskinen, Internal Revenue Serv. Comm’r, U.S. Dep’t
of Treasury, to Richard Burr, N.C. Senator, U.S. Senate (Apr. 9, 2014),
https://www.collegeathletespa.org/IRS-Letter-on-NLRB-Ruling.pdf
[https://perma.cc/7FLU-AT7R].
870 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
taxes on their athletic scholarships.
154
Others have likewise criticized
the IRS’s interpretation of quid pro quo as it relates to student-athletes
and the institutions they play for.
155
Still, currently the IRS has shown
little interest in changing its stance on this issue.
156
4. Charitable donation deductions
The origins of U.S. athletic program donations pre-date modern
collegiate athletics, tracing back to 1869 when the YMCA accepted
donations to construct exercise class gymnasiums.
157
By the turn of the
twentieth century, industrialists like Cecil Rhodes and Andrew
Carnegie emphasized the importance of athletics, along with
academics, as an important factor in developing character.
158
Carnegie
made the first athletic donations, giving funds to Princeton University
for the construction of an artificial lake and boathouse, which opened
in 1906 as Lake Carnegie.
159
The University of Chicago was among the
first to utilize athletics as a means for university growth, using the
school’s football team as a marketing device.
160
Exploiting athletics as
a marketing tool became popular when oilman and philanthropist
Lloyd Noble made donations to the University of Oklahoma to
invigorate a winning football program in order to attract top faculty
154
. Kisska-Schulze & Epstein, supra note 46, at 480; see also Annie Nova & Tucker
Higgins, Republican Sen. Richard Burr Proposes Taxing Scholarships of Student Athletes Who
‘Cash in’, CNBC (Oct. 29, 2019, 6:13 PM), https://www.cnbc.com/2019/10/29/
richard-burr-proposes-taxing-scholarships-of-student-athletes-who-cash-in.html
[https://perma.cc/FUN7-MQRZ].
155
. See, e.g., Schmalbeck & Zelenak, supra note 49, at 1089 (recommending that
the IRS reconsider its favoritism toward college sports, and proposing that the Service
reconsider its stance on excluding athletic scholarships from taxation); Timothy Davis,
Intercollegiate Athletics: Competing Models and Conflicting Realities, 25 RUTGERS L.J. 269, 316
(1994) (opining that there exists a quid pro quo relationship between student-athletes
and their institutions); Kathryn Kisska-Schulze & Adam Epstein, Northwestern,
O’Bannon, and the Future: Cultivating a New Era for Taxing Qualified Scholarships, 49
AKRON L. REV. 771, 789 (2016) (noting that the Bingler standard has not been applied
to student-athletes’ scholarship funds); McCormick & McCormick, The Myth of the
Student-Athlete, supra note 130, at 115 (promoting that student-athletes’ grants-in-aid
are directly related to their decision to play sports, thus evincing a quid pro quo).
156
. Schmalbeck & Zelenak, supra note 49, at 1088–89.
157
. John Feinstein, The Passion and Pitfalls of Giving to College Sports, PHILANTHROPY
ROUNDTABLE (2016), https://www.philanthropyroundtable.org/philanthropy-magazine/
article/the-passion-and-pitfalls-of-giving-to-college-sports [https://perma.cc/X34J-HW27].
158
. Id.
159
. Id.
160
. Id.
2022] TAXING SPORTS 871
and raise the spirits of Oklahoma residents who had been ravaged by
the Great Depression.
161
Years later, using athletics as a marketing ploy
became dubbed the “Flutie Effect,” and it has become increasingly
popular across institutions.
162
The U.S. Tax Code has contributed to philanthropic and alumni
donors’ interests in giving charitably to athletic departments. Specifically,
I.R.C. § 170 allows taxpayers to deduct gifted contributions made to
charitable organizations.
163
In addition, prior to the enactment of the
TCJA, taxpayers could take an 80% charitable deduction on donations
made to educational institutions that included a right to purchase
preferred seating at athletic events (referred to as the 80/20 rule).
164
In the five-year period between 1998 and 2003, athletic department
donations increased from 14% to 26% of all college donations.
165
During the 2006–2007 athletic season, the largest college athletic
programs received over $1.2 billion in alumni donations.
166
Certainly,
as will be discussed Part III, the TCJA tax overhaul could play a critical
role in some athletic departments abilities to solicit donor funding in
the future.
167
As Bloomberg opines, athletic departments with “less-
enthusiastic donor bases” could face financial disaster.
168
The above examples illustrate notable and historical connections
between U.S. sports and taxation. However, the buck does not stop
here. Expanding the “business of sports,” to include novel areas like
esports and DFS, the signing of the TCJA into law, and the newly
legalized sports betting industry is engorging the scope and impact of
taxation across the greater sports industry. To appreciate the current
161
. Id.
162
. MURRAY SPERBER, BEER AND CIRCUS: HOW BIG-TIME COLLEGE SPORTS IS CRIPPLING
UNDERGRADUATE EDUCATION 60 (2000); see also Feinstein, supra note 157 (offering that
these marketing ploys were so-named for former Boston College quarterback Doug
Flutie, who led a last-minute comeback over the favored University of Miami in the
1984 Orange Bowl). The “Flutie Factor” is the concept that universities utilize athletic
success to market their school. Id.
163
. See I.R.C. § 170 (b)(1)(B)(ii) (charitable deductions are capped at 50% of
taxpayers’ adjusted gross income); see also Rev. Rul. 67-246, 1967-2 C.B. 104 (articulating
that so long as they are considered gifts, charitable donations are deductible).
164
. See I.R.C. § 170(l)(2); see also Rev. Rul. 86-63, 1986-1 C.B. 88.
165
. Luebchow, supra note 137.
166
. Id.
167
. See infra Section IV.A.1.
168
. Jack Pitcher, College Football Looks to Mega-Donors to Help Bail out Athletics,
BLOOMBERG (Aug. 17, 2020, 12:31 PM), https://www.bloomberg.com/news/articles/
2020-08-17/college-football-looks-to-mega-donors-to-help-bail-out-athletics
[https://perma.cc/R9XS-P4PR].
872 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
status of tax across this ever-expanding venture, Part II identifies
current tax issues impacting the professional sports arena.
II. TAXING PROFESSIONAL SPORTS: A MODERN UPDATE
Despite the lack of academic support justifying the economic
benefits of publicly subsidized stadiums, as discussed in Part I,
169
such
structural undertakings continue and are often supported by
questionable research promoting their positive impact on local
communities.
170
New stadium construction has seen an uptick, and
sports team owners and leagues demand that cities, municipalities, and
states fund new stadiums (often via taxpayer subsidies) with increasing
frequency.
171
In addition, the recently implemented TCJA has
impacted the greater professional sports industry. As detailed below,
Section A provides an update on publicly funded stadiums. Section B
details various TCJA reforms that are affecting professional sports.
A. Financing Public Stadiums
The price tag on professional sports stadiums and arenas continues
to rise; a 2019 estimate suggests the average cost of an NFL stadium
over the past fifteen years is $1.2 billion.
172
Cities often cite job creation
as a means of enticing billionaire owners to entertain new stadium
subsidies.
173
As discussed, the origin of publicly funded stadiums began
with federal law enabling states and localities to issue tax-exempt bonds
169
. See supra Section I.A.1.
170
. See, e.g., Kevin Draper, Florida’s Go-to Stadium Economist Is a Hack, a Shill, and
Also Not an Economist, DEADSPIN (Apr. 17, 2017, 9:24 AM), https://deadspin.com/flori
das-go-to-stadium-economist-is-a-hack-a-shill-an-1794379314 [https://perma.cc/PN8Z
-E3GN] (noting that various Florida stadium construction projects utilized research by
an individual who, despite lacking a background in economics, conducted economic
impact studies).
171
. See Christopher M. McLeod & John T. Holden, Ecological Economics and Sport
Stadium Public Financing, 41 WM. & MARY ENV’T. L. & POL’Y REV. 581, 581–82 (2017)
(describing the increases in stadium construction and expenditures of public money
on construction).
172
. Karthik Vegesna, The Economics of Sports Stadiums: Does Public Financing of Sports
Stadiums Create Local Economic Growth, or Just Help Billionaires Improve Their Profit Margin?,
BERKELEY ECON. REV. (Apr. 4, 2019), https://econreview.berkeley.edu/the-economics-of-
sports-stadiums-does-public-financing-of-sports-stadiums-create-local-economic-growth-or-
just-help-billionaires-improve-their-profit-margin [https://perma.cc/6CL3-LJT5].
173
. Andrew Zimbalist & Roger G. Noll, Sports, Jobs, & Taxes: Are New Stadiums Worth
the Cost?, BROOKINGS (June 1, 1997), https://www.brookings.edu/articles/sports-jobs-
taxes-are-new-stadiums-worth-the-cost [https://perma.cc/9AEJ-HSR6].
2022] TAXING SPORTS 873
to finance stadium construction.
174
Use of these bonds for stadium
construction projects was largely ignored by legislators until then-
President Barack Obama’s administration sought to end the
exemption in its 2015 budget proposal.
175
This measure was followed
by several bipartisan efforts to eliminate federal benefits to subsidize
stadium construction; however, to date, these efforts have failed.
176
Of the fifty-seven stadiums across the four major American sports
leagues that have been constructed or substantially renovated, forty-three
were at least partially funded by tax-exempt municipal bonds.
177
Such
subsidies represent an estimated $4.3 billion loss in federal tax revenue.
178
To mitigate the use of tax-exempt bonds in constructing sports
stadiums, Congress executed the “Private Activity Test” within the
purview of I.R.C. § 141 as part of the Tax Reform Act of 1986.
179
Under
this test, federal bonds must qualify under one of two prongs to remain
tax-exempt: (1)(a) the private business use test, and (1)(b) the private
payment/security test, or (2) the private loan financing test.
180
Under
the private business use test, if a private entity (including a privately
owned sports team) consumes over 10% of the stadium’s overall useful
services, it can no longer be tax-exempt.
181
Per the private
payment/security test, tax-exempt bonds are confined to those where
less than 10% of the principal is secured by a private business property
interest, or by revenues derived from that property.
182
Rather than depressing the use of tax-exempt bonds to finance
sports stadiums, the Private Activity Test actually made taxpayer-
funded projects more attractive.
183
To meet the 10% restriction limit,
which ultimately required that 90% of financing come from outside
174
. See supra Section I.A.1.
175
. Austin J. Drukker et al., Tax-Exempt Municipal Bonds and the Financing of
Professional Sports Stadiums, 73 NAT’L TAX J. 157, 158 (2020).
176
. Id.
177
. Id. at 159.
178
. Id.; see also I.R.C. § 141(a).
179
. Nicholas Baker, Note, Playing a Man down: Professional Sports and Stadium
Finance—How Leagues and Franchises Extract Favorable Terms from American Cities, 59 B.C.
L. REV. 281, 303 (2018).
180
. Bhasin, supra note 96, at 186–87. The Private Loan Financing Test is met if
more than the lesser of 5% or $5 million of the proceeds of the issues is to be used
(directly or indirectly) to make or finance loans to persons other than governmental
persons. Id. at 188; see also I.R.C. § 141(c)(1).
181
. Drukker et al., supra note 175, at 162.
182
. Baker, supra note 179, at 303.
183
. Gans, supra note 72, at 758.
874 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
resources unaffiliated with the property interest, localities were under
increased pressure to use local tax revenue to fund the majority of
these projects.
184
Jurisdictions introduced tourist taxes that levied taxes
on items like hotel stays and car rentals to shift some of the tax burden
to nonresidents.
185
In addition, sales taxes were assessed to help fund
stadium construction. However, as scholar Austin Drukker and his
colleagues note, both the tourist taxes and sales taxes are regressive,
overly burdening lower income individuals while wealthy sports team
owners realize the primary benefits of new stadiums.
186
While alternate
means of financing stadiums are available,
187
to date, taxpayer-funded
sports stadiums continue to remain in vogue.
188
B. The TCJA’s Impact on Professional Sports
On December 22, 2017, President Trump signed into law the
TCJA.
189
While a major impetus of the TCJA was to reduce the
corporate tax rate to 21%, select provisions impacted the greater sports
industry.
190
Certainly, the decreased personal income tax rates benefit
those within the highest tax bracket, including professional athletes.
191
However, the TCJA likewise limited state and local income, sales and
property tax (SALT) deductions to $10,000 annually.
192
Prior to
imposing such limits, SALT deductions were unlimited, thus affording
high-income earners (like professional athletes) significant opportunities
to reduce their overall tax burdens.
193
With this new (albeit temporary)
184
. Id.; see also Drukker et al., supra note 175, at 162, 163 (describing the ten
percent restriction limit as an “artificial financing structure” in which the state or local
governments achieve federal tax exemption by financing at least 90% of the debt
service despite an inability to rely on stadium-generated revenue).
185
. Drukker et al., supra note 175, at 163.
186
. Id. at 163–64.
187
. Options include circumstances where sports teams fund the stadium
construction and subsequently sell the property to a state or locality while maintaining
a facility lease. See Bhasin, supra note 96, at 190–92.
188
. See Sebastian Pellejero & Heather Gillers, as Covid-19 Closes Stadiums, Municipalities
Struggle with Billions in Debt, WALL ST. J. (June 4, 2020, 5:30 AM), https://www.wsj.com/
articles/as-covid-19-closes-stadiums-municipalities-struggle-with-billions-in-debt-1159126
3000?mod=searchresults&page=1&pos=2 [https://perma.cc/5ZSW-2767] (noting the
extent to which taxpayers fund sports stadiums).
189
. Kisska-Schulze & Holden, supra note 26, at 467.
190
. Smoker et al., supra note 29, at 293.
191
. See Tax Cuts and Jobs Act §§ 11001(a), (b), 131 Stat. 2054–55 (2017) (codified
as amended at I.R.C. § 1).
192
. See id. § 11042(a) (codified as amended at I.R.C. § 164(b)(6)).
193
. See I.R.C. § 164.
2022] TAXING SPORTS 875
limitation in place, professional athletes playing on franchise teams
located in high-tax jurisdictions, including California or New York,
endure a tangible impact on their earnings, particularly as compared
to athletes residing in low or no tax jurisdictions.
194
In addition, the I.R.C. allows deductions for certain trade or business
expenses that are “ordinary and necessary.”
195
For professional athletes,
expenses that are “(1) paid or incurred during the taxable year, (2)
related to . . . [their] playing [a] professional sport[],” (3) common to
professional athletes in a given sport, and (4) are of “reasonable . . . cost”
are generally considered ordinary and necessary.
196
Historically,
professional athletes’ deductible expenses included the cost of agents
and trainers, workout apparel, gym memberships, mobile phones,
training equipment, and business attire.
197
However, as part of its
sweeping overhaul, the TCJA suspended these “miscellaneous itemized
deductions,” thus disallowing athletes from deducting numerous
unreimbursed employee business expenses previously available to
them.
198
The TCJA also impacted personnel contracts for professional sports
teams. Prior to the law’s signing, trading contracts and draft picks
between sports teams qualified for “like-kind” exchange treatment
under I.R.C. § 1031.
199
Essentially, players could be traded without major
league sports teams recognizing any gain or loss on the transactions.
200
The TCJA changed this rule, reducing the types of assets subject to like-
kind exchanges to only real property,
201
thereby subjecting sports
franchises to gain (or lose) recognition under I.R.C. § 1001.
202
To
remedy what seemed to be an oversight on Congress’s part in drafting
the TCJA, the IRS implemented a safe harbor rule for professional
sports teams in 2019 that now allows teams that fall within four
194
. See Steven Kutz, Why Pro Athletes May Lose a Fortune Because of the New Tax Law,
MARKETWATCH (Dec. 9, 2018, 12:37 PM), https://www.marketwatch.com/story/why-
pro-athletes-may-lose-a-fortune-because-of-the-new-tax-law-2018-12-06
[https://perma.cc/3ZZW-LP7Q]. The provision is set to expire December 31, 2025. See
Tax Cuts and Jobs Act § 11042(a).
195
. See I.R.C. § 162(a).
196
. Kisska-Schulze & Epstein, supra note 46, at 489.
197
. Id.
198
. Id. at 489–90; see also I.R.C. § 67(g) (the suspension is in effect until the end of
2025).
199
. Smoker et al., supra note 29, at 294, 304–05, 305 n.95.
200
. Id. at 294–95, 304–05.
201
. Id. at 294–95.
202
. See I.R.C. § 1001.
876 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
prescribed requirements to treat trading contracts as having zero value
when calculating gain or loss.
203
However, absent a legislative exemption
for professional sports trades, player exchanges remain fully taxable if
they fall outside the boundaries of the newly established safe harbor
rule.
204
A fourth TCJA issue impacting the professional sports arena pertains
to I.R.C. § 199A. Congress established a qualified business income
(QBI) deduction that allows select domestic businesses (operating as
sole proprietorships, partnerships, S corporations, trusts, or estates) to
deduct 20% of their QBI to better align pass-through entity income
taxation with the newly decreased corporate income tax rate.
205
Such a
deduction, however, is limited to returns on investment capital, rather
than returns on labor.
206
Any business identified as a “specified services
trade[] or business” (SSTB)—which includes any ventures performing
athletic services—fails to qualify for the deduction.
207
The Treasury
rejected criticisms from various commentators, including MLB
Commissioner Robert Manfred Jr., who argued sports team owners
should qualify for the deduction. Critics argued that team owners
provide services that fall outside of the definition of SSTB under I.R.C.
§ 199A.
208
Lawmakers raise taxes to collect revenue. As the dollar figures in
professional sports escalate, it is unsurprising that Congress has
203
. See Rev. Proc. 2019-18, 2019-18 I.R.B. 1077 (qualifying for the safe harbor
requires (1) “[a]ll parties . . . must use [the] safe harbor;” (2) each trading party “must
transfer and receive a personnel contract or draft pick;” (3) no contract or draft pick
can be amortizable under I.R.C. § 197; and (4) the team’s financial statements cannot
“reflect assets or liabilities resulting from the trade other than cash”); see also Smoker
et al., supra note 29, at 319–20.
204
. Smoker et al., supra note 29, at 321.
205
. See I.R.C. § 199A (allowing up to 20% deduction of qualified real estate
investment trust (REIT) dividends and qualified publicly traded partnership (PTP)
income).
206
. Section 199A Pass-Through Deduction Eludes Professional Sports Team Owners, MORGAN
LEWIS (Jan. 23, 2019) [hereinafter Section 199A Pass-Through Deduction],
https://www.morganlewis.com/pubs/2019/01/section-199a-pass-through-deduction-
eludes-professional-sports-team-owners#_ftn7 [https://perma.cc/DZZ7-GCMP].
207
. The IRS defines an SSTB as “a trade or business involving the performance of
services in the fields of . . . athletics . . . .” See Facts About the Qualified Business Income
Deduction, IRS (Apr. 2019), https://www.irs.gov/newsroom/facts-about-the-qualified-
business-income-deduction [https://perma.cc/Z9TC-5AZL].
208
. Id.
2022] TAXING SPORTS 877
increasingly sought opportunities to siphon off industry funds.
209
In
conjunction, billionaire sports owners expose tax loopholes and
advantageously use their teams to minimize otherwise hefty tax bills.
210
Realistically, such bartering will likely endure. Still, as the “business of
sports” expands beyond the realm of traditional professional leagues,
so too have the tax issues surrounding amateur sports. As Part III
details, evidence supports that the collegiate sports industry is
Congress’s next target.
III. TAXING COLLEGE SPORTS
In select ways, professional sports differ from their collegiate
counterparts when assessing rules of the game.
211
However, the critical
distinction separating professional from collegiate athletics comes
down to pay.
212
Professional athletes receive compensation for their
athletic prowess, while student-athletes remain subject to the NCAA’s
principle of “amateurism.”
213
Such division has prompted significant
literary interest, particularly given that college football and basketball
209
. See William H. Baker, Taxation and Professional Sports—A Look Inside the Huddle,
9 MARQ. SPORTS L. REV. 287, 287–88 (1999); Government, Community, and Sports Teams:
Tax Credits, POL’Y CIRCLE, https://www.thepolicycircle.org/minibrief/government-
community-and-sports-teams-tax-credits [https://perma.cc/TED7-XPNW].
210
. See Faturechi et al., supra note 55.
211
. See Victoria Bryant, The Differences Between College Football and the NFL, HALL FAME
EXPERIENCES (July 20, 2016), https://hofexperiences.com/blog/the-differences-
between-college-football-and-the-nfl [https://perma.cc/2M4G-PJF5] (noting basic
rule of game differences between collegiate and NFL football); Daniel Wilco, College
and NBA Basketball’s Biggest Rule Differences, NCAA (Oct. 9, 2019),
https://www.ncaa.com/news/basketball-men/article/2019-09-26/college-and-nba-
basketballs-biggest-rule-differences [https://perma.cc/A8X2-P2JA] (identifying
“[g]ame time,” “[s]hot clock,” “[p]ossession arrow/jump balls,” fouls, and the “3-point
line” to help differentiate NCAA and NBA basketball rules).
212
. See Jason Rossi, All the Major Differences Between NFL and College Football,
SPORTSCASTING (Aug. 9, 2018), https://www.sportscasting.com/major-differences-betw
een-nfl-and-college-football [https://perma.cc/398Z-FV8N].
213
. See 2020–2021 NCAA DIVISION I MANUAL art. 2.9, The Principle of Amateurism,
http://www.ncaapublications.com/productdownloads/D121.pdf [https://perma.cc/
8GAH-BKSV] (“Student-athletes shall be amateurs in an intercollegiate sport, and their
participation should be motivated primarily by education and by the physical, mental and
social benefits to be derived. Student participation in intercollegiate athletics is an
avocation, and student-athletes should be protected from exploitation by professional and
commercial enterprises.”); see also Daly, supra note 6, at 487–88 (noting the existence of a
clear “line of demarcation between college athletics and professional sports” with regard to
pay).
878 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
have morphed into productive business enterprises over the last
seventy years.
214
Much has evolved since the earliest days of college sports when Ivy
League programs, such as Harvard and Yale, entertained “grudge
match” rivalries.
215
Significant concerns over intercollegiate sports
safety ultimately drew national attention, prompting the NCAA’s
founding in 1906.
216
From that juncture forward, public interest in
amateur sports magnified so that by the 1950s college football’s
popularity eclipsed that of its professional equivalent.
217
214
. See, e.g., Ellen J. Staurowsky, “A Radical Proposal”: Tile IX Has No Role in College Sport
Pay-for-Play Discussions, 22 MARQ. SPORTS L. REV. 575, 575, 580–81, 592 (2012) (proposing
that Title IX may not apply if athletic scholarships eventually represent a form of “pay-
for-play”); David A. Grenardo, The Duke Model: A Performance-Based Solution for
Compensating College Athletes, 83 BROOK. L. REV. 157, 163–64, 205–07, 209–11, 213–14
(2017) (offering that the NCAA structure morph to remove the prohibition on
compensation for student-athletes by implementing the Duke Model); William W. Berry
III, Amending Amateurism: Saving Intercollegiate Athletics Through Conference-Athlete Revenue
Sharing, 68 ALA. L. REV. 551, 556–57, 575, 577 (2016) (suggesting the formation of
conference-athlete unions that allow for negotiated compensation opportunities for
student-athletes); Michael N. Widener, Compensating Collegiate Athletes in “Store Credit”, 47
U. MEM. L. REV. 431, 435, 454–55, 457 (2016) (recommending the implementation of a
stipend program over and above tuition, room, board, books, and miscellaneous items
given to student-athletes); Marc Edelman, The Future of College Athlete Players Unions:
Lessons Learned from Northwestern University and Potential Next Steps in the College Athletes’
Rights Movement, 38 CARDOZO L. REV. 1627, 1629, 1642–45, 1648–50, 1652–53 (2017)
(proposing strategies that allow for unionization of student-athletes); Kevin Brown &
Antonio Williams, out of Bounds: A Critical Race Theory Perspective on ‘Pay for Play’, 29 J.
LEGAL ASPECTS SPORT 30, 38, 73, 80, 83–85 (2019) (arguing that the current
amateur/education model in college sports is racially exploitive); Daly, supra note 6, at
531, 536 (promoting that the NCAA drop the amateur model to allow for collective
bargaining and licensing agreements for student-athletes).
215
. Kisska-Schulze, supra note 11, at 349 (referencing the nineteenth century
rowing rivalry between Ivy league institutions); see also Blair Shiff, The History Behind
America’s Oldest Active Collegiate Sporting Event, ABC NEWS (June 9, 2017, 4:00 AM),
https://abcnews.go.com/Sports/history-americas-oldest-active-collegiate-sporting-
event/story?id=47852376 [https://perma.cc/6ELS-WPHM].
216
. Michael A. McCann, Jump Ball: The Unsettled Law of Representing College Basketball
Stars and Monetizing Their Names, Images and Likenesses, 61 SANTA CLARA L. REV. 177, 186
(2020).
217
. Daniel Laws, Comment, Amateurism and the NCAA: How a Changing Market Has
Turned Caps on Athletic Scholarships into an Antitrust Violation, 51 U. RICH. L. REV. 1213, 1225
(2017) (noting that the NCAA’s principal of amateurism drove “college sports’
popularity”); see also 1950s Sports: History, Facts, MVPs & Champions, RETROWASTE,
https://www.retrowaste.com/1950s/sports-in-the-1950s [https://perma.cc/HY74-
AAW4] (noting the popularity of college sports as compared to professional sports in the
1950s).
2022] TAXING SPORTS 879
Increased social interest in college sports was due in large part to the
advent of televised sports broadcasting.
218
Twenty years after the NCAA
threatened the University of Pennsylvania with expulsion following its
1951 refusal to comply with the Association’s prohibition on televised
college football games,
219
all major college sports teams were actively
pursuing television and media rights, even amidst rigid controls.
220
It was
not until 1984, that the U.S. Supreme Court found the NCAA’s
restrictive media policies an unreasonable restraint on trade, thus
initiating the start of competitive free market amateur sports
operations.
221
Today, broadcast media serves as a significant revenue source for
both the NCAA and its member institutions.
222
For example, in 2012,
the Atlantic Coast Conference (ACC) and ESPN extended their
original twelve-year, $3.6 billion contract, thus allowing $17 million in
annual revenue per member school.
223
In 2021, the NCAA generated
$850 million in yearly revenue from television broadcasts and licensing
218
. See Allen R. Sanderson & John J. Siegfried, The Role of Broadcasting in National
Collegiate Athletic Association Sports, 52 REV. INDUS. ORG. 305, 309–12 (2018)
(documenting the impact of television broadcast on college sports in the 1950s and
beyond); see also 1950s Sports: History, Facts, MVPs & Champions, supra note 217 and
accompanying text.
219
. Sanderson & Siegfried, supra note 218, at 309.
220
. Michael Weinreb, The Age of the Giants: How College Football’s Arms Race Took off in the
1970s, ATHLETIC (June 17, 2019), https://theathletic.com/1026003/2019/06/17/college-
football-1970s-power-major-schools-ncaa [https://perma.cc/KVG9-BNCM]. Despite this
active pursuit of televising games, the NCAA maintained a strict “Television Plan,” limiting
televised broadcasts among member schools from 1952 until 1984. Sanderson & Siegfried,
supra note 218, at 309.
221
. See Nat’l Collegiate Athletic Ass’n v. Bd. of Regents of the Univ. of Okla., 468
U.S. 85, 104–08, 110, 112–13, 120 (1984); see also Thomas Scully, Note, NCAA v. Board
of Regents of the University of Oklahoma: The NCAA’s Television Plan Is Sacked by the
Sherman Act, 34 CATH. U. L. REV. 857, 858–59 (1985).
222
. See NCAA Television and Licensing Rights Revenue 2011–2025, STATISTA (Mar. 1,
2021) [hereinafter Revenue of the NCAA], https://www.statista.com/statistics/219608/nc
aa-revenue-from-television-rights-agreement (illustrating that the NCAA’s revenue from
broadcasting has continually increased since 2012); see also CHRIS MURPHY, MADNESS, INC.:
HOW EVERYONE IS GETTING RICH OFF COLLEGE SPORTS—EXCEPT THE PLAYERS 4, 11,
https://www.murphy.senate.gov/imo/media/doc/NCAA%20Report_FINAL.pdf
[https://perma.cc/K9YQ-4K4F] (noting that college sports’ revenue has tripled since
2003).
223
. Mark Giannotto, ACC, ESPN Agree to 15-Year Extension, WASH. POST (May 9, 2012),
https://www.washingtonpost.com/blogs/hokies-journal/post/acc-espn-agree-to-15-
year-extension/2012/05/09/gIQAoRkdDU_blog.html [https://perma.cc/T6EN-VKY8].
880 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
rights.
224
Effective 2024, ESPN/ABC entered into a ten year, $300
million annual televised broadcasting contract with the Southeastern
Conference (SEC).
225
Combined with ticket sales, branding, and
internet broadcasting rights, such resources have fueled college sports
growth, particularly among a select group of elite programs that enjoy
annual revenues in excess of $100 million.
226
College sports equate to big money, and big money leads to changes
that appreciably impact the entire college sports landscape. Coaching
salaries have soared, ushering in the so-called “arms race.”
227
Millions
are spent on extravagant new athletic facilities to entice top recruits.
228
Billionaire donors and ardent supporters pour serious money into
successful college sports programs.
229
Student-athletes have filed
numerous lawsuits in an effort to bridge the gap between amateur and
professional sports, seeking employment-type protections under the
224
. See Revenue of the NCAA, supra note 222; see also Mike Ozanian, Here’s the College
Football TV Money at Stake for Each Conference and Network, FORBES (June 8, 2020, 6:07
PM), https://www.forbes.com/sites/mikeozanian/2020/06/08/heres-the-college-
football-tv-money-at-stake-for-each-conference-and-network/?sh=1324919c7dc9
[https://perma.cc/S4FY-5NK7].
225
. Paul Myerberg, Analysis: New ESPN/ABC TV Deal Will Give SEC Even More Resources
to Dominate College Sports, USA TODAY (Dec. 10, 2020, 7:38 PM), https://www.usa
today.com/story/sports/ncaaf/sec/2020/12/10/sec-contract-abc-espn-gives-league-
more-resources-dominate/3884360001 [https://perma.cc/7497-RKQY].
226
. See Kisska-Schulze, supra note 11, at 351; Brad Crawford, Ranking College Sports’
Highest Revenue Producers, 247SPORTS (July 17, 2020), https://247sports.com/LongFormArt
icle/College-football-revenue-producers-USA-Today-Texas-Longhorns-Ohio-State-Buckey
es-Alabama-Crimson-Tide-149248012/#149248012_1 [https://perma.cc/4QFC-BEKT].
But see Kisska-Schulze & Holden, supra note 26, at 488–89 (offering that while the
commercialization of colleges sports continues to increase, only a “small fraction” of
programs actually make money).
227
. Kisska-Schulze & Epstein, supra note 46, at 468.
228
. Dave Wilson, Massachusetts at the Forefront: How to Protect the Most Vulnerable Group
in a Post-Legal Sports Betting World—NCAA Student-Athletes, 15 U. MASS. L. REV. 124, 148
(2020).
229
. Jack Pitcher, College Football Looks to Mega-Donors to Help Bail out Athletics,
BLOOMBERG (Aug. 17, 2020, 12:31 PM), https://www.bloomberg.com/news/articles/
2020-08-17/college-football-looks-to-mega-donors-to-help-bail-out-athletics [https://p
erma.cc/P5XC-BP72]; see also David A. Grenardo, The Continued Exploitation of the
College Athlete: Confessions of a Former College Athlete Turned Law Professor, 95 OR. L. REV.
223, 238 (2016).
2022] TAXING SPORTS 881
auspices of workers’ compensation,
230
the Fair Labor Standards Act,
231
unionization and collective bargaining agreements,
232
and equitable
pay-for-play models.
233
In 2018, the U.S. Supreme Court opened the
door for all fifty states and the District of Columbia to legalize sports
betting, to include wagers made on college athletic events.
234
Following
California’s recent passage of the Fair Pay to Play Act
235
(FPTPA),
allowing student-athletes to capitalize on the commercialized use of
their NIL, the majority of states have either introduced or passed
similar laws.
236
Both the Supreme Court and Congress have become
deeply involved in assessing the legality of restrictions on student-
230
. See, e.g., Univ. of Denver v. Nemeth, 257 P.2d 423, 429–30 (Colo. 1953) (en
banc) (holding that a college football player, who was also employed by the university,
qualified for workers’ compensation following an injury sustained during practice);
State Comp. Ins. Fund v. Indus. Accident Comm’n of Colo., 314 P.2d 288, 290 (Colo.
1957) (en banc) (denying workers’ compensation benefits to the widow of a college
football player who died following an injury incurred during a football game);
Coleman v. W. Mich. Univ., 336 N.W.2d 224, 225, 228 (Mich. Ct. App. 1983) (per
curiam) (holding no employment contract existed between a university and student-
athlete that would elevate to a level of workers’ compensation eligibility).
231
. 29 U.S.C. § 203 (1938); see, e.g., Berger v. Nat’l Collegiate Athletic Ass’n, 162 F.
Supp. 3d 845, 856–57 (S.D. Ind. 2016) (holding that NCAA student-athletes are not
employees for Fair Labor Standards Act purposes), aff’d, 843 F.3d 285 (7th Cir. 2016).
232
. See, e.g., Nw. Univ. and Coll. Athletes Players Ass’n, No. 13-RC-121359, 2014
WL 1246914 (N.L.R.B. Mar. 26, 2014), review dismissed by Nw. Univ. & Coll. Athletes
Players Ass’n (CAPA), 362 NLRB 1350, 1350, 1352 (Aug. 17, 2015) (declining to assert
jurisdiction that would allow consideration of Northwestern University football
players’ efforts to unionize and bargain collectively).
233
. See, e.g., Waldrep v. Tex. Emps. Ins. Ass’n, 21 S.W.3d 692, 699, 702 (Tex. App.
2000) (finding no indication of an employer-employee relationship between Texas
Christian University and its football player, Kent Waldrep); Rensing v. Ind. State Univ.
Bd. of Trs., 444 N.E.2d 1170, 1173–74 (Ind. 1983) (holding that no employment
relationship existed between a university and its football player); O’Bannon v. Nat’l
Collegiate Athletic Ass’n, 802 F.3d 1049, 1079 (9th Cir. 2015) (finding that the NCAA’s
compensation rules surrounding Division I men’s basketball and football players
violate federal antitrust laws); In re Nat’l Collegiate Athletic Ass’n Athletic Grant-in-Aid
Cap Antitrust Litig., 375 F. Supp. 3d 1058, 1062 (N.D. Cal. 2019), aff’d, 958 F.3d 1239
(9th Cir. 2020), cert. granted, NCAA v. Alston, 141 S. Ct. 123 (2020) (examining whether
the NCAA eligibility rules pertaining to student-athlete compensation violate federal
antitrust law), cert. granted, Am. Athletic Conf. v. Alston, 141 S. Ct. 972 (2020), aff’d by
NCCA v. Alston, 141 S. Ct. 972 (2021).
234
. See Murphy v. Nat’l Collegiate Athletic Ass’n, 138 S. Ct. 1461 (2018).
235
. CAL. EDUC. CODE § 67456 (West 2021).
236
. See id.; see also Kisska-Schulze & Epstein, supra note 46, at 471–76.
882 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
athletes’ payment limits,
237
and the implementation of a national
standard for student-athlete compensation.
238
These important changes have prompted federal and state
legislatures, and academic scholars, to assess the tax implications
surrounding college sports.
239
Although historically protected by
rather amiable tax treatment as discussed in Section I.B, more recently
college sports have become the target of pointed tax measures.
240
In
particular, the TCJA both directly and indirectly impacts the collegiate
sports arena, indicating that Congress intends to narrow the tax-paying
field between amateur and professional sports.
241
Still, such legislative
action creates tension, particularly given the increased scrutiny over
the NCAA’s stance that college sports remain vital to the educational
mission of their institutions, and are therefore not professional
organizations.
242
To better evaluate the greater college sports tax
landscape, Section A examines the TCJA’s impact on college sports.
237
. See Alston, 141 S. Ct. at 972 (granting certiorari).
238
. See Rebecca Shabad & Kyle Stewart, Senators Agree on Need for a National Standard
for College Athlete Compensation, NBC NEWS (June 9, 2021, 2:32 PM), https://w
ww.nbcnews.com/politics/congress/senators-agree-need-national-standard-college-
athlete-compensation-n1270208 [https://perma.cc/NW2P-A9TA].
239
. See, e.g., Kisska-Schulze, supra note 11 (examining the tax implication for
college athletics following the implementation of the TCJA); Kisska-Schulze & Epstein,
supra note 46, at 461–62 (opining on the federal and state tax issue that could arise
following California’s passage of the Fair Pay to Play Act); Kisska-Schulze & Epstein,
supra note 67, at 233 (examining the tax ambiguities surrounding student-athlete
disability payouts when colleges or universities cover the cost of their insurance
policies); Schmalbeck & Zelenak, supra note 49, at 1088–89 (proposing that the IRS
consider following Congressional suit, and reassess the amicable tax treatment it has
historically granted across the entire college sports arena); Kisska-Schulze & Epstein,
supra note 22, at 16–17 (offering an in-depth exploration of the state tax consequences
that could arise under a pay-for-play model); Marc Edelman, From Student-Athletes to
Employee-Athletes: Why a “Pay for Play” Model of College Sports Would Not Necessarily Make
Educational Scholarships Taxable, 58 B.C. L. REV. 1138, 1140 (2017) (suggesting tax
planning options that may diminish the tax impact of student-athletes’ grants-in-aid).
240
. Kisska-Schulze, supra note 11, at 355.
241
. See Tax Cuts and Jobs Act of 2017, Pub. L. No. 115–97, § 13704, 131 Stat. 2054,
2169 (codified at 26 U.S.C. § 170(l)) (repealing donors’ ability to receive seating rights
for donations and removing the deduction under the section).
242
. Michael M. O’Hear, Should College Sports Revenue Be Taxed?, MARQ. U. L. SCH.
FAC. BLOG (Apr. 25, 2010), https://law.marquette.edu/facultyblog/2010/04/should-
college-sports-revenue-be-taxed [https://perma.cc/S8D5-D4PF]; see also Michael H.
LeRoy, Courts and the Future of “Athletic Labor” in College Sports, 57 ARIZ. L. REV. 475, 497–
98 (2015) (noting the NCAA’s amateurism stance on the relationship between college
sports and institutions’ educational missions).
2022] TAXING SPORTS 883
Section B addresses the potential tax consequences of student-athletes’
capitalizing on their NIL.
A. The TCJA’s Impact on College Sports
Similar to the professional sports arena, the TCJA also impacts the
collegiate sports arena.
243
As introduced below, select provisions of the
new law that threaten college sports’ viability include (1) the
elimination of the 80/20 rule on athletic seating rights, (2) the 21%
excise tax on executive compensation, (3) the 1.4% excise tax imposed
on private institution endowments, and (4) the impact of the increased
standard deduction on charitable giving.
1. Eliminating 80/20
Perceived as a direct hit to college sports, the TCJA repealed the
previously introduced 80% tax deduction on athletic booster
contributions made in exchange for athletic ticket or seating rights at
college athletic events.
244
Beginning in 1986, most major universities
heavily relied on the 80/20 rule as a significant revenue boost for
athletic program budgets.
245
Eliminating this deductibility allowance
resulted in universities and booster clubs quickly recommending that
donors make multi-year contributions before the close of 2017, to help
moderate short-term budget shortfalls.
246
In conjunction, the TCJA
eliminated the 50% deduction previously allowed for corporate
business entertainment expenses, including the purchase price of
tickets and stadium suites to sporting events.
247
Following the COVID-
19 pandemic, some anticipate that corporate stadium seat renewals will
deplete even further due to the pandemic’s economic impact, thus
resulting in additional revenue losses at the collegiate athletic level.
248
243
. Kisska-Schulze, supra note 11, at 347.
244
. See Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, § 13704, 131 Stat. 2054, 2169
(codified at 26 U.S.C. § 170(l)); I.R.C. § 170(b)(l)(A)(ii), (l); see also supra Section II.B.4.
245
. Forget the Playoffs, College Football’s All About New Tax Laws and Tickets, SOBUL,
PRIMES & SCHENKEL (Dec. 1, 2018), https://www.spscpa.com/blog/forget-the-playoffs-
college-footballs-all-about-new-tax-laws-and-tickets [https://perma.cc/E35H-MX9B].
246
. Kisska-Schulze & Holden, supra note 26, at 492.
247
. Tax Cuts and Jobs Act § 13304, 131 Stat. at 2124 (codified at 26 U.S.C.
§ 274(a)).
248
. Alex Silverman, Ticket Sales Pros Say They’d Welcome Back Tax Incentive, but It’s Not a
Game Changer, MORNING CONSULT (Apr. 13, 2020, 4:25 PM), https://morningconsult.com
/2020/04/13/ticket-sales-tax-deduction-coronavirus [https://perma.cc/WK76-5J7B].
884 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
2. Taxing executive compensation
Also impacting the college sports arena, the TCJA levied a 21% excise
tax on the five highest paid employees at tax-exempt organizations,
which include entities fostering “national or international amateur
sports competition,” whose compensation exceeds $1 million annually,
or is considered an excess parachute payment.
249
The continued arms
race in coaching salaries has been dubbed “unsustainable,” yet remains
among elite institutions belonging to the NCAA’s Football Bowl
Subdivision (FBS).
250
Currently, the average head college football coach
earns $2.7 million annually.
251
University of Alabama head coach Nick
Saban sits towards the top with a $9.75 million-per-year contract.
252
Across forty U.S. states, NCAA head coaches are the highest paid state
employees.
253
In December 2018, the IRS issued interim guidance on this
provision, stipulating that the tax would not apply to college and
university coaching salaries if their institutions proactively abandoned
tax-exempt status, yet the guidance retained implied sovereign
immunity as state instrumentalities.
254
In 2021, the Treasury finalized
the I.R.C. § 4960 regulations concerning excess compensation.
255
Pursuant to these regulations, colleges and universities falling within
the purview of I.R.C. § 501(a)—which most do
256
—could still be
249
. See § 13602, 131 Stat. at 2157 (adding 26 U.S.C. § 4960(a)(1)); see also Tax
Reform Act of 1976, Pub. L. No. 94-455, § 1313(a), 90 Stat. 1520, 1730 (codified as
amended at I.R.C. § 501(c)(3)).
250
. Tom McMillen & Brit Kirwan, Opinion, Op-Ed: The ‘Arms Race’ in College Sports Is
out of Control. Here’s How to Stop It, L.A. TIMES (Apr. 11, 2021, 3:05 AM), https://www.la
times.com/opinion/story/2021-04-11/ncaa-alston-professionalization-coaches-salaries
[https://perma.cc/DL8B-V95M].
251
. Id.
252
. College Football Head Coach Salaries, USA TODAY (Oct. 14, 2021, 10:09 AM),
https://sports.usatoday.com/ncaa/salaries.
253
. McMillen & Kirwan, supra note 250.
254
. Kisska-Schulze & Holden, supra note 26, at 494; see also I.R.S. Notice 2019-09,
2019-04 I.R.B. 403.
255
. See I.R.C. § 4960; TD 9938 (2021); see also Seth J. Safra et al., Final Regulations on
Executive Compensation Excise Tax (Section 4960) Carries Forward Most Concepts from Proposal,
NAT’L L. REV. (Feb. 2, 2021), https://www.natlawreview.com/article/final-regulations-
executive-compensation-excise-tax-section-4960-carries-forward [https://perma.cc/
2AFB-H73Z] (noting that “covered employees” are identified as the five highest paid
employees of the applicable tax-exempt organization).
256
. Non-profit universities, and their affiliated athletic departments, generally fall
within the purview of I.R.C. § 501(c), which grants non-profit status to those entities
2022] TAXING SPORTS 885
subject to the excise tax. However, the embedded loophole remains,
allowing public institutions to claim tax-exempt status as a state unit in
lieu of a section 501 organization, thus relieving them from the 21%
tax imposition.
257
Such relief, however, is not so readily available to
private institutions.
258
3. Taxing private endowments
Private institutions took an additional strike with the imposition of a
1.4% excise tax on net investment income at institutions with 500 or
more students enrolled and with endowments worth at least $500,000
per student.
259
Prior to the TCJA’s implementation of such tax, most
private non-profit colleges and universities enjoyed tax-exempt status
under the umbrella of I.R.C. § 501(c)(3).
260
In fall 2020, the IRS issued
final regulations to clarify the I.R.C. § 4968 excise tax, ultimately
subjecting numerous private institutions to the so-called “Harvard tax”
on income derived from their controlled and supporting
organizations.
261
Though not a direct impact on college athletic
programs, Ivy League sports could be indirectly impacted by their
institutions’ revenue losses.
262
4. Disincentivizing charitable giving
One of the TCJA provisions that could negatively impact college
athletics is the effect of the increased standard deduction on charitable
operating exclusively for (among other things) educational purposes. See I.R.C.
§ 501(c)(3).
257
. Laura Davison & Samuel McQuillan, Colleges Paying Top Dollar for Coaches Will
Pay Extra to IRS, BLOOMBERG (Jan. 11, 2021, 5:53 PM), https://www.bloomberg.com/
news/articles/2021-01-11/colleges-paying-top-dollar-for-coaches-will-pay-extra-to-irs
[https://perma.cc/UM4S-9ZKB].
258
. Id.
259
. Tax Cuts and Jobs Act of 2017, § 13701, 131 Stat. 2054, 2167 (codified at 26
U.S.C. § 4968).
260
. See Briefing Book: Key Elements of the U.S. Tax System—What is the Tax Treatment of
College and University Endowments?, TAX POL’Y CTR., https://www.taxpolicycenter
.org/briefing-book/what-tax-treatment-college-and-university-endowments
[https://perma.cc/32TJ-4NSA].
261
. See IRS Issues Final Regulations for Determining IRC Section 4968 Excise Tax on Net
Investment Income of Private Colleges and Universities, ERNST & YOUNG (Sept. 25, 2020),
https://taxnews.ey.com/news/2020-2322-irs-issues-final-regulations-for-determining-
irc-section-4968-excise-tax-on-net-investment-income-of-private-colleges-and-
universities [https://perma.cc/9879-RMG7]; Kisska-Schulze & Holden, supra note 26,
at 495.
262
. Kisska-Schulze & Holden, supra note 26, at 495.
886 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
giving.
263
The TCJA almost doubled previous standard deduction
amounts for individuals, resulting in millions of taxpayers electing the
standard deduction over itemization.
264
Significant concerns emerged
regarding taxpayers’ resistance to philanthropic gifting without the
hanging carrot of tax deductibility,
265
particularly given that thirty
million U.S. households lost this charitable benefit.
266
Data supports that taxpayers itemized $54 billion less in charitable
contributions in 2019;
267
however, one year later, charitable giving
actually rose 2%.
268
Fiscal year 2019 reports indicate record high
donations to colleges and universities, though such amounts were
skewed given Michael Bloomberg’s one-time, $1.8 billion gift to Johns
Hopkins University during that period.
269
More than 40% of higher
education institutions anticipated a 10% or more decrease in
fundraising for fiscal year 2020, with fiscal year 2021 expected to result
in more pronounced deterioration with regard to gifted revenue.
270
Reduced gifting at the college and university levels could result in a
trickle-down effect to their affiliated sports programs.
271
Combined
with unexpected COVID-19 revenue losses, over 300 college sports
263
. § 11021(a), 131 Stat. at 2072 (codified at 26 U.S.C. § 63(c)(7)(A)(ii)).
264
. Kisska-Schulze, supra note 11, at 369–70 (noting that section 11021 of the TCJA
now provides standard deductions in the amounts of $12,000 for individuals, $18,000
for heads of households, and $24,000 for married filing jointly through tax year 2025).
265
. Eric S. Smith, Exploiting the Charitable Contribution Deduction’s Hypersalience, 2020
UTAH L. REV. 419, 421–22 (2020).
266
. Darla Mercado, About 30 Million People Lost These Tax Breaks when They Filed Last
Year, CNBC (Apr. 9, 2020, 1:37 PM), https://www.cnbc.com/2020/04/09/about-30-
million-people-lost-these-tax-breaks-in-2018.html [https://perma.cc/HH48-VSK4].
267
. Leslie Albrecht, Americans Slashed Their Charitable Deductions by $54 Billion After
Republican Tax-Code Overhaul, MARKETWATCH (July 11, 2019, 8:52 AM), https://www.
marketwatch.com/story/americans-slashed-their-charitable-deductions-by-54-billion-
after-trumps-tax-overhaul-2019-07-09 [https://perma.cc/9E7J-HWX4].
268
. Leslie Albrecht, Charitable Giving Rose in 2020, Despite Financial Turmoil from
COVID-19—Why Did Americans Show Such Generosity?, MARKETWATCH (Feb. 22, 2021, 8:00
AM), https://www.marketwatch.com/story/charitable-giving-rose-in-2020-despite-finan
cial-turmoil-from-covid-19-why-did-americans-show-such-generosity-11613662427
[https://perma.cc/8RKP-YRCE].
269
. Madeline St. Amour, Giving Growth Slows, INSIDE HIGHER ED (Feb. 6, 2020), https://
www.insidehighered.com/news/2020/02/06/college-and-university-fundraising-rises-
growth-slows-down [https://perma.cc/22V5-6J2K].
270
. Emma Whitford, Survey Warns of ‘Dramatic Decline’ in Fundraising, INSIDE HIGHER ED
(June 8, 2020), https://www.insidehighered.com/news/2020/06/08/survey-forecasts-%E
2%80%98dramatic-decline%E2%80%99-fundraising-pandemic [https://perma.cc/
9WDV-63PY].
271
. Id.
2022] TAXING SPORTS 887
teams were eliminated in 2020 across all three NCAA Divisions (I, II,
and III), and the National Association of Intercollegiate Athletics
(NAIA).
272
Absent increased funding measures, the future of collegiate
athletics at some institutions remains uncertain.
B. Taxing NIL Income
A monumental revolution in collegiate sports came to fruition on
September 30, 2019, when California Governor Gavin Newsom signed
into law the FPTPA (also referred to as Senate Bill 206 (S. 206)).
273
The
NCAA quickly attacked the action, threatening to ban California from
membership; however, the Association changed course to later support
student-athlete NIL revenue earnings so long as such funds are derived
within the stricture of the amateur “collegiate model.”
274
Since its
passage, most states have introduced similar legislation.
275
To date,
nineteen jurisdictions have signed some form of NIL legislation into
law.
276
Less than two years after S. 206’s signing, on June 21, 2021, the U.S.
Supreme Court unanimously held that the NCAA cannot limit
educational benefits, such as computers, paid internships, study-
abroad programs, and graduate scholarships offered to student-
athletes by colleges and universities.
277
The Court deemed any limits
imposed on education-related benefits to student-athletes as violative
of antitrust laws.
278
While on its merits this decision has no direct effect
272
. Molly Ott & Janet Lawrence, Colleges Are Eliminating Sports Teams—and Runners
and Golfers Are Paying More of a Price than Football or Basketball Players, CONVERSATION
(Mar. 3, 2021, 8:26 AM), https://theconversation.com/colleges-are-eliminating-
sports-teams-and-runners-and-golfers-are-paying-more-of-a-price-than-football-or-
basketball-players-148965 [https://perma.cc/Y63N-MNDQ].
273
. See Fair Pay to Play Act, CAL. EDUC. CODE § 67456 (West 2021).
274
. Kisska-Schulze & Epstein, supra note 46, at 458, 473; see also Board of Governors Starts
Process to Enhance Name, Image and Likeness Opportunities, NCAA (Oct. 29, 2019),
http://www.ncaa.org/about/resources/media-center/news/board-governors-starts-
process-enhance-name-image-and-likeness-opportunities [https://perma.cc/V486-CKDA].
275
. Kisska-Schulze & Epstein, supra note 46, at 473–76.
276
. Tracker: Name, Image and Likeness Legislation by State, BUS. COLL. SPORTS (Sept. 21,
2021), https://businessofcollegesports.com/tracker-name-image-and-likeness-legislatio
n-by-state [https://perma.cc/2YPK-9VPF]. States that have thus far passed NIL
legislation are: Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia,
Illinois, Louisiana, Maryland, Michigan, Mississippi, Missouri, Montana, Nebraska,
Nevada, New Jersey, New Mexico, Oklahoma, Oregon, South Carolina, Tennessee, and
Texas. Id.
277
. See Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 2141, 2164–65 (2021).
278
. Id.
888 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
on NIL licensing, it provides a modicum of protection to institutions
and student-athletes from any bar(s) that the NCAA may attempt to
enforce with regard to NIL rights.
279
Once student-athletes start capitalizing on the commercialized use
of their NIL, federal and state tax issues will surface. Paying taxes raise
unique issues for student-athletes, particularly given the agreeable tax
treatment the IRS has historically showered on them due to their
amateur status.
280
From a federal income tax perspective, student-
athletes capitalizing on the use of their NIL will have to include in their
gross income all monetary earnings, as well as the fair market value of
any nonmonetary items provided by third parties.
281
Specifically,
earnings that must be included in a paid student-athletes’ gross income
could include endorsement contract royalties,
282
constructively received
income,
283
income earned and held by an agent for their benefit,
284
pre-
paid income,
285
and fringe benefits.
286
Any income earned should qualify for some form of tax deduction
(whether it be the standard deduction, or through itemization). Since
only about 10% of American taxpayers continue to itemize post-
TCJA,
287
it is reasonable to assume that most student-athletes will claim
the standard deduction as well.
288
However, those who might
279
. Marc Edelman, What Happens Now that the Supreme Court Has Decided Alston v.
NCAA?, FORBES (June 22, 2021), https://www.forbes.com/sites/marcedelman/2021/
06/22/what-happens-now-that-the-supreme-court-has-decided-alston-v-ncaa/?sh=475
a45573937 (noting that the NCAA bans on universities that allow their student-athletes
to capitalize on the use of their NIL would likely violate antitrust law).
280
. See supra Section I.B.3.
281
. See I.R.C. § 61; see also Kisska-Schulze & Epstein, supra note 46, at 481–82.
282
. See Kisska-Schulze & Epstein, supra note 46, at 483–84 (noting that royalty payments
could derive from a corporate sponsor’s use of a student-athlete’s NIL in their advertising).
283
. Id. at 484 (meaning taxpayers have control over their earnings, even if not yet
in their actual physical possession).
284
. This situation is referred to as the “assignment of income doctrine,” whereby
income is taxed by those who earn it, regardless of when it is actually transferred over
to them from an agent. See Comm’r v. Banks, 543 U.S. 426, 437 (2005).
285
. See I.R.C. § 451(a).
286
. See id. § 61(a)(1). Fringe benefits refer to compensation beyond the scope of
cash earnings, to include items such as personal use of a corporate vehicle, subsidized
meals, entertainment tickets, and health insurance.
287
. See Briefing Book: Key Elements of the U.S. Tax System, TAX POL’Y CTR.,
https://www.taxpolicycenter.org/briefing-book/what-standard-deduction
[https://perma.cc/3GHU-QS6Y].
288
. See Kisska-Schulze & Epstein, supra note 46, at 487–93.
2022] TAXING SPORTS 889
financially benefit from itemizing will have to keep detailed records of
their business expenses.
289
Due to the nature of current NIL legislation (which does not
transform student-athletes into employees of their institutions per se,
but instead allows them to entertain endorsement deals and/or receive
financial benefits from outside third parties), student-athletes will be
deemed self-employed taxpayers.
290
As such, most (if not all) student-
athletes will be required to file an annual individual income tax return,
and likely be subject to quarterly payment obligations.
291
Further, as
self-employed taxpayers, student-athletes will have to pay the entire
15.3% self-employment tax on the first $142,800 of net earnings
(which would otherwise be split between employer and employee as a
payroll tax).
292
However, they can deduct 50% of this tax regardless of
whether they choose to itemize or claim the standard deduction.
293
From a state tax perspective, student-athletes earning NIL income
will have to comply with various jurisdictional directives above and
beyond their federal income tax obligations. The vast majority of states
impose some form of income tax;
294
however, each levies the tax
differently and at varying rates.
295
Likewise, state tax residency and
nexus requirements differ across jurisdictions,
296
thus requiring that
289
. Id. at 490–91.
290
. Kisska-Schulze & Epstein, supra note 46, at 482; see also Board of Governors Starts
Process to Enhance Name, Image and Likeness Opportunities, supra note 274 (reaffirming “that
student-athletes are students first and not employees of the university”).
291
. See I.R.C. § 6017; see also Self-Employed Individuals Tax Center, IRS, https://www.irs.
gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center
[https://perma.cc/QG8B-G5VM] (stating that self-employed taxpayers who earn $400 or
more during the tax year are required to file an individual income tax return).
292
. See I.R.C. § 1401(a)–(b); see also Self-Employment Tax (Social Security and Medicare
Taxes), IRS, https://www.irs.gov/businesses/small-businesses-self-employed/self-
employment-tax-social-security-and-medicare-taxes [https://perma.cc/F9QM-L48A]
(stating the $142,800 wage base represents the 2021 base amount).
293
. See I.R.C. § 1401(a)–(b).
294
. States that do not impose an income tax include: Alaska, Florida, Nevada,
South Dakota, Texas, Washington, and Wyoming. Tennessee and New Hampshire
impose an income tax only on income from dividends and interest. Kisska-Schulze &
Epstein, supra note 46, at 495.
295
. Id. at 495–96.
296
. See South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2091 (2018). Prior to a tax
being legitimately imposed by any jurisdiction under the purview of the Due Process
and Commerce Clauses of the U.S. Constitution, there must exist sufficient nexus
between the taxpayer and taxing jurisdiction. “Nexus” refers to a taxpayer’s business
having some minimum connection, or taxable presence, in a given jurisdiction, even
if the taxpayer is not an actual resident of that jurisdiction. Id.
890 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
paid student-athletes manage potential dual-residency concerns, as
well as multiple states asserting jurisdictional nexus over the same
earned income.
297
In addition, many states require that self-employed
taxpayers file quarterly estimated payments (akin to the federal
requirements), resulting in student-athletes having to keep detailed
records of the amount and location of their earnings.
298
As transformations continue within college sports, so too does the
evolution of the entire U.S. sports arena. The business of sports no
longer encompasses mere traditional athletic events. In the current
economic dominion of information technology, sports have expanded
to include legalized gambling, DFS, and esports. As Part IV details,
taxes play a visible role amidst this ever-expanding enterprise.
IV. TAXING THE EVOLVING U.S. SPORTS INDUSTRY
Once upon a time, the term “sport” was employed to showcase
human physical activity.
299
Words that accentuated historic sports
dialogues included the likes of agility, speed, strength, endurance, and
flexibility.
300
If a certain activity was not broadcasted on ESPN, some
questioned whether it was an actual sport at all.
301
In contrast, if an
activity was aired on ESPN—like the World Series of Poker—others
argued that it simply must qualify as sport.
302
The world of sport is not static, but instead, continuously evolving.
In this fourth industrial revolution, where artificial intelligence,
robotics, and the internet reign prominent, the traditional boundaries
of sport have blurred the physical, digital, and biological realms.
303
297
. Kisska-Schulze & Epstein, supra note 46, at 496–98. Multi-state apportionment
rules would come into play in those circumstances where earned income is subject to
tax in multiple jurisdictions.
298
. Id. at 498.
299
. See Sport, MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY (11th ed. 2007)
(defining sport as “physical activity engaged in for pleasure”).
300
. See, e.g., Jonathan Wasserman, 2022 NBA Draft Class Rankings: The Top 5 Prospects
at Every Position, BLEACHER REPORT (Oct. 1, 2021), https://bleacherreport.com/
articles/2948858-who-are-the-top-5-prospects-at-every-position-in-2022-nba-draft
[https://perma.cc/CE82-U6HH].
301
. Nathan Deen, There’s No Clear-cut Answer as to What Defines a Sport, BRUNSWICK
NEWS (June 4, 2014), https://thebrunswicknews.com/sports/local_sports/theres-no-
clear-cut-answer-as-to-what-defines-a-sport/article_e7d2b1d1-fc6a-535d-a7ec-0c6de43
a7065.html.
302
. Id.
303
. See Julien Chaisse & Cristen Bauer, Cybersecurity and the Protection of Digital Assets:
Assessing the Role of International Investment Law and Arbitration, 21 VAND. J. ENT. & TECH.
2022] TAXING SPORTS 891
DFS, which involves fantasy contests where players create virtual teams
composed of real-life professional athletes from different sports to
compete against other players in cash-prize tournaments, has
propelled sports into a fresh and innovative cyber dimension.
304
The
newly legalized sports gambling industry enables persons across the
nation to lawfully place wagers on a multitude of sports-related
predictions.
305
Esports, or competitive video gaming, has transcended
the boundaries of what some might otherwise claim as true “sport.”
306
No matter the noise surrounding the definition of “sport,” a particular
activity’s nomenclature, or the industry’s blurring identity lines, one
constant remains—sports make money. Esports revenue is projected to
hit $1.5 billion by 2023.
307
The U.S. DFS industry generated $2.9 billion
in 2018 revenue.
308
In August 2020 alone, Americans wagered a record
$2.1 billion in legalized sports betting.
309
Such numbers incite tax
implications. To better evaluate this evolving landscape, Section A
examines the tax issues surrounding legalized sports gambling. Section
B addresses the tax implications of DFS. Section C introduces esports
taxation.
L. 549, 555 n.30 (2019) (explaining that sports are not immune from the widespread
and transformative nature of the fourth industrial revolution).
304
. See Zachary Shapiro, Note, Regulation, Prohibition, and Fantasy: The Case of
FanDuel, DraftKings, and Daily Fantasy Sports in New York and Massachusetts, 7 HARV. J.
SPORTS & ENT. L. 277, 278 (2016).
305
. See generally Jim Sergent, Six Charts Show Sports Betting’s Digital Explosion with NFL
Season About to Kick off, USA TODAY (Sept. 12, 2021, 7:36 AM), https://www.usa
today.com/in-depth/graphics/2021/09/09/online-sports-gambling-good-bet-industry-
continue-winning-ways/5686836001 [https://perma.cc/E6JM-MVZN] (illustrating that
nearly half of U.S. States have fully implemented sports-betting legislation with more on
the way, and identifying the current NFL season as a major contributor to the general
rise in interest in online sports betting).
306
. John T. Holden et al., The Future Is Now: Esports Policy Considerations and Potential
Litigation, 27 J. LEGAL ASPECTS SPORT 46, 47 (2017) (examining whether esports are a
sport).
307
. Mariel Soto Reyes, Esports Ecosystem Report 2021: The Key Industry Companies and
Trends Growing the Esports Market Which Is on Track to Surpass $1.5B by 2023, BUS. INSIDER
(Jan. 5, 2021, 3:24 PM), https://www.businessinsider.com/esports-ecosystem-market-
report?op=1 [https://perma.cc/72Y5-LUVK].
308
. North American Fantasy Sports Market—Growth, Trends, COVID-19 Impact, and
Forecasts (2021–2026), MORDOR INTEL., https://www.mordorintelligence.com/industry-
reports/north-america-fantasy-sports-market [https://perma.cc/D3SE-T6RQ].
309
. Ryan Butler, U.S. Sports Betting Handle Hits Record as Casinos Bounce Back Slowly,
ACTION NETWORK (Sept. 23, 2021, 2:06 PM), https://www.actionnetwork.com/legal-
online-sports-betting/us-sportsbooks-betting-news-record-handle-revenue-total-
august-2020 [https://perma.cc/4VBQ-33ZR].
892 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
A. Taxing Legalized Sports Gambling
For decades, state governments have pursued revenue opportunities
outside the strictures of income and property taxes.
310
Following the
U.S. Supreme Court’s 2018 decision in Murphy v. National Collegiate
Athletic Ass’n,
311
which ended a near-quarter century freeze on states’
ability to authorize new sports gambling schemes, the majority of
jurisdictions perceive gambling taxes as a means to solve fiscal
problems.
312
In fact, thirty-one states have legalized sports gambling,
with many citing increased tax revenue as a principal motivator.
313
Gambling has long been used as a source of funding for both public
and private endeavors dating back to pre-colonial times.
314
Social
approval of U.S. gambling operations has experienced ebbs and flows
over the last two centuries.
315
However, since the reauthorization of the
first state lottery in New Hampshire in 1964, the United States has
witnessed an ongoing expansion in wagering opportunities.
316
A
310
. See Kisska-Schulze & Holden, supra note 26, at 480 (discussing the Great
Recession’s impact on federal government funding for state and local governments).
311
. 138 S. Ct. 1461 (2018).
312
. See Charles Norton, Why States Are Betting on Sports Gambling to Cover Budget
Deficits, FORBES (July 1, 2020, 8:52 AM), https://www.forbes.com/sites/charlesnorton/
2020/07/01/why-states-are-betting-on-sports-gambling-to-cover-budget-deficits/?sh=
35c4558f5255 (“Higher state budget deficits could serve as a potential catalyst for faster
regulatory approval of sports betting, and its cousin, mobile casino gambling.”); see also
Jonathan D. Cohen, Sports Gambling Could Be the Pandemic’s Biggest Winner, WASH. POST
(Feb. 5, 2021, 6:00 AM), https://www.washingtonpost.com/outlook/2021/02/
05/sports-gambling-could-be-pandemics-biggest-winner [https://perma.cc/2FFW-
8ELL] (“Gambling is not a panacea, and, as history reveals, it never has been. The
profits are small relative to states’ overall income.”).
313
. See, e.g., Will Yakowicz, Mobile Sports Betting to Bring New York 100% More in Tax
Revenue Than Cannabis, FORBES (May 6, 2021, 9:56 AM), https://www.forbes.com/
sites/willyakowicz/2021/05/06/mobile-sports-betting-to-bring-new-york-state-100-more-
in-tax-revenue-than-cannabis/?sh=1bac670140f9 (noting that New York views sin taxes
on both legal marijuana sales and sports betting to serve as prominent boosts to the
state’s budget); see also Jennifer McDermott & Geoff Mulvihill, Most States’ Sports Betting
Revenue Misses Estimates, ASSOCIATED PRESS (Apr. 2, 2019), https://apnews.com/article/
21f9833e917948d6a36422bb286541b4 (discussing some states’ early projections for
sports betting revenues).
314
. Kisska-Schulze & Holden, supra note 26, at 483.
315
. Id. at 481–86. Professor Nelson Rose has referred to these ebbs and flows as
“waves” of legalized gambling. See I. Nelson Rose, Gambling and the Law: The Third Wave
of Legal Gambling, 17 VILL. SPORTS & ENT. L.J. 361, 368 (2010).
316
. See Kisska-Schulze & Holden, supra note 26, at 484 (noting that in 1964, New
Hampshire became the first state to reauthorize a state lottery); see also John T. Holden
& Marc Edelman, A Short Treatise on Sports Gambling and the Law: How America Regulates
2022] TAXING SPORTS 893
number of states moved quickly in an effort to capitalize on the new
revenue stream post-Murphy.
317
While the federal government lagged
in embracing this long-restricted activity,
318
it has been ardent about
taxing it. As depicted below, both (1) federal and (2) state taxes play
an integral role in this now legalized industry.
1. Federal taxation of sports gambling
In 1947, Nevada became the first state to allow sports wagering at
gambling facilities across the state.
319
Two years later, such wagers were
formally legalized.
320
In 1951, the federal government imposed a 10%
excise tax on total amounts wagered with a bookmaker as a means of
expressing the government’s displeasure with sports betting and its
connection to organized crime.
321
A separate annual occupational
stamp tax on persons accepting wagers complemented the excise
tax.
322
Significant penalties accompanied both taxes, including fines of
$1,000 and $5,000 for failure to remit payments, and fines up to
$10,000 (and five-years imprisonment) for willful violations.
323
While the 10% excise tax was promoted to deter organized crime,
324
it was more likely intended as a show of disapproval of Nevada’s
regulated gaming industry because organized crime was rarely known
Its Most Lucrative Vice, 2020 WIS. L. REV. 907, 942 n.302 (2020) (noting that Utah and
Hawaii are the only two states without any form of legalized gambling, although a
Hawaiian legislator introduced a bill that would have legalized sports gambling in
2019).
317
. Holden & Edelman, supra note 316, at 947.
318
. See John T. Holden, Regulating Sports Wagering, 105 IOWA L. REV. 575, 591–94
(2020) (describing failed efforts to regulate sports wagering, to some degree, at the
federal level).
319
. Becky Harris, Federal Interference with State and Tribal Sports Betting Regulations
Will Not Work: Where the Sports Wagering Integrity Act of 2018 Went Wrong and How Federal
Legislation Might Be Effective, 30 J. LEGAL ASPECTS SPORT 106, 106 (2020).
320
. Id. at 110–11.
321
. Id.; see also Ulrik Boesen, Arcane Federal Tax on Sports Betting Is Too Much to
Handle, TAX FOUND. (Apr. 8, 2021), https://taxfoundation.org/federal-tax-on-sports-
betting [https://perma.cc/SM62-EF3T] (offering that revenue projections initially
estimated that the excise tax would generate $400 million; however, that estimate was
revised to $9 million after only six months).
322
. Note, The Federal Gambling Tax and the Constitution, 43 J. CRIM. L. CRIMINOLOGY
& POLICE SCI. 637, 637 (1953).
323
. Id.
324
. Id.
894 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
for prompt and accurate I.R.C. compliance.
325
The 10% tax proved
devastating to Nevada operators because it was imposed on the total
amount wagered (referred to as the “handle”), even though bookmakers
typically retain just a small portion of the handle.
326
For example,
between 2000 and 2018, Nevada bookmakers only retained 7.6% of the
handle, resulting in their profits failing to meet the minimum amount
of tax owed to the federal government.
327
This tax ultimately claimed
twenty-one of Nevada’s twenty-four sportsbooks,
328
leading some
operators to move their ventures underground while others chose to
report just 1% of their handle as a means of staying in business.
329
Following a pair of cases challenging both federal excise taxes, the U.S.
Supreme Court found them to be “so unfair and onerous” as to violate
bookmakers’ Fifth Amendment rights against self-incrimination.
330
Following years of effort by Nevada’s congressional delegation, in 1974,
Senator Howard Cannon succeeded in reducing the 10% excise tax to
2%.
331
This tax was again modified in 1982.
332
It bifurcated legal from illegal
wagers, charging legal sports betting operations .25% of the total handle,
while maintaining the 2% rate for illegal operations.
333
This excise tax,
however, created a narrow carve-out for state-run lotteries deemed exempt
325
. See Brenda L. Roubidoux Taylor & Gregory R. Gemignani, Feeling the Limits of
McCarran’s Power Today—The Remaining Wagering Excise Tax, NEV. GAMING LAW. (Sept. 2019),
https://www.nvbar.org/wp-content/uploads/15-Wagering-Excise-Tax.pdf
[https://perma.cc/CH4M-D988].
326
. Id.; Becky Harris, Regulated Sports Betting: A Nevada Perspective, 10 UNIV. NEV. LAS
VEGAS GAMING L.J. 75, 76 (2020).
327
. Taylor & Gemignani, supra note 325.
328
. Id.
329
. See Harris, supra note 326, at 76 (noting the underground movement of Nevada
sports gambling); see also Holden & Edelman, supra note 316, at 918 (discussing
operators’ need to reduce their handle reporting to stay in business).
330
. Kevin P. Braig, Reform the Federal Sports Betting Excise Tax “Dilemma”, SHUMAKER
LOOP & KENDRICK (Nov. 3, 2017), https://www.lexology.com/library/detail.aspx?g=2b
160213-645e-48bf-b484-f7bcb6941831 [https://perma.cc/FT7C-D9V5] (citing Grosso
v. United States, 390 U.S. 62 (1968); Marchetti v. United States, 390 U.S. 39 (1968)).
Interestingly, during the same era, an excise tax on cannabis was successfully
challenged, leading to an overhaul of U.S. drug laws and the establishment of the
Controlled Substances Act. See Leary v. United States, 395 U.S. 6 (1969); see also John
T. Holden & Marc Edelman, Regulating Vice: What the U.S. Marijuana Industry Can Learn
from State Governance of Sports Gambling, 2021 U. ILL. L. REV. 1051 (2021) (comparing
the historical treatment of sports gambling and marijuana).
331
. Braig, supra note 330.
332
. 26 U.S.C. § 4401(a)(1)–(2) (1982).
333
. See Holden & Edelman, supra note 330, at 1056 n.39; see also 26 U.S.C.
§ 4401(a)(1)–(2) (1982).
2022] TAXING SPORTS 895
from the tax.
334
Despite more recent efforts to repeal it,
335
this federal tax
remains a substantial outflow of sports betting operator revenue.
336
While gambling operators face substantial federal tax burdens, so
too do professional and recreational sports bettors.
337
Cash winnings
and the fair market value of noncash prizes valued in excess of $600
during any taxable year must be reported as income
338
and are taxed
at regular individual income tax rates.
339
Unlike capital losses from
investments, which can be used to offset other income up to $3,000,
340
gambling loss deductibility is limited to the extent of gambling
winnings.
341
In addition, loss deductibility is only available for those
taxpayers who itemize.
342
Further, the TCJA removed the U.S. Tax
Court’s favorable determination that allowed professional gamblers
with business expenses exceeding net gambling winnings to deduct a
net operating loss as a trade or business.
343
Beginning in 2018,
professional gamblers are temporarily prevented from deducting non-
wagering business expenses (such as travel expenses to gambling
locations) that exceed their net wagering income.
344
334
. Boesen, supra note 321; see also I.R.C. § 4402 (3).
335
. Matt Rybaltowski, Nevada Congresswoman Resumes Push to Repeal Excise Tax on
Sports Betting, SPORTS HANDLE (Mar. 24, 2021), https://sportshandle.com/titus-excise
tax-proposal [https://perma.cc/XP6J-FK2Q].
336
. BRENDAN BUSSMAN & JOHN ENGLISH, GLOBAL MARKET ADVISORS, RESEARCH BRIEF:
THE ECONOMICS OF SPORTS BETTING 3 (2018), http://globalmarketadvisors.com/wp-
content/uploads/Research-Brief-the-economics-of-sports-betting-1.pdf
[https://perma.cc/FJT2-PCCR].
337
. Taylor DesOrmeau, Do You Have to Pay Taxes on Sports Betting Winnings in Michigan,
MICH. LIVE (Mar. 23, 2021, 10:32 AM), https://www.mlive.com/public-
interest/2021/03/do-you-have-to-pay-taxes-on-sports-betting-winnings-in-michigan.html
[https://perma.cc/F8LS-WVUV].
338
. See I.R.C. § 61; see also Eric Smith, Taxation of Gambling Income, CPA J. (Dec. 2019),
https://www.cpajournal.com/2019/12/24/taxation-of-gambling-income
[https://perma.cc/XX7A-BLQ4].
339
. See I.R.C. § 1; see also DesOrmeau, supra note 337.
340
. See I.R.C. § 1211(b).
341
. See id. § 165(d); see also Smith, supra note 338.
342
. Smith, supra note 338.
343
. See Mayo v. Comm’r, 136 T.C. 81 (2011); see also Wei-Chih Chiang et al., Tax
Reform Law Deals Pro Gamblers a Losing Hand, J. ACCOUNTANCY (Oct. 1, 2018),
https://www.journalofaccountancy.com/issues/2018/oct/pro-gambling-net-losses.htm
l [https://perma.cc/524Q-YPHJ].
344
. See I.R.C. § 165(d) (explaining that such modification extends from 2018–2025).
896 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
2. State taxation of sports gambling
In conjunction with the federal income tax considerations discussed
above, sports gambling operators and individual gamblers must
account for various state and local tax obligations. States vary in their
approaches to taxing operators.
345
Some pursue maximized revenue
from legalized sports gambling, typically restricting market access to
select firms and imposing high tax rates on revenue.
346
Others elect to
follow the Nevada model (or a similar variation), offering attractive tax
rates and encouraging market competition in an effort to entice
consumers away from the black or gray markets.
347
Still, others have
granted sports betting monopolies to resident tribal nations, foregoing
any state tax imposition in exchange for a share of tribal gaming
revenues via a tribal gaming compact.
348
For jurisdictions that do impose income taxes on sports betting,
most levy their standard rates on gross gaming revenue rather than the
total handle.
349
State tax rates range from Nevada’s low of 6.75%, to
345
. Jackson Brainerd, The Early Bets Are in: Is Sports Betting Paying off?, NAT’L CONF.
STATE LEGISLATURES (Mar. 1, 2021), https://www.ncsl.org/research/fiscal-policy/the-
early-bets-are-in-is-sports-betting-paying-off.aspx [https://perma.cc/LJ5F-R6S9].
346
. For example, Rhode Island entered into an agreement with the sports betting
operator DraftKings, granting the company a monopoly in the state in exchange for a
51% tax rate on the company’s gross gaming revenue. See Hilary Russ, Rhode Island
Legalizes Sports Betting, Gets 51 Percent of Revenues, REUTERS (June 22, 2018, 5:30 PM),
https://www.reuters.com/article/us-usa-betting-rhode-island/rhode-island-legalizes-
sports-betting-gets-51-percent-of-revenues-idUSKBN1JI2TQ
[https://perma.cc/8SGG-QCXH]. A similar approach is being considered in New
York. See Brad Allen, Analysis: New York Wants $500 Million a Year from Sports Betting,
so Good Luck with that, LEGAL SPORTS REP. (Jan. 25, 2021),
https://www.legalsportsreport.com/47017/ny-sports-betting-monopoly-analysis
[https://perma.cc/F6ZZ-7FQK].
347
. New Jersey closely followed the model laid out by Nevada. See John Brennan,
How New Jersey Became the U.S. Gambling Expansion Leader, N.J. ONLINE GAMBLING (June
11, 2021), https://www.njonlinegambling.com/how-new-jersey-became-the-u-s-gambl
ing-expansion-leader [https://perma.cc/8UL7-H5QV].
348
. States cannot tax tribes as sovereign nations; however, the Indian Gaming Regulatory
Act establishes a mechanism for states and tribes to enter into gaming compacts, which have
frequently exchanged a form of gaming exclusivity for a share of tribal gaming revenues. See
John Holden, so What Exactly Is IGRA and Why Will It Shape Sports Betting in 2021?, LEGAL SPORTS
REP. (June 29, 2021), https://www.legalsportsreport.com/53497/explaining-igra-tribal-
sports-betting [https://perma.cc/3WL6-X8EV]; see also Indian Gambling Regulatory Act,
Pub. L. 100-497, 102 Stat. 2467 (1988) (codified at 25 U.S.C. § 2701).
349
. Bussman & English, supra note 336.
2022] TAXING SPORTS 897
Rhode Island’s high of 51%.
350
From May 2018 to April 2021, states
imposing higher tax rates generated more tax revenue per resident
than states supporting a more “industry friendly” tax rate.
351
Nevada,
however, remains an outlier due to Las Vegas attracting a significant
volume of wagers from out-of-state residents.
352
New Jersey, similarly,
benefits from the close proximity of New York residents who cross the
state’s boundary to place wagers.
353
As Table 1 illustrates, those states
opting for a competitive market have not seen the same tax revenues
of states choosing to tax gambling operators at significantly higher
percentages of revenue.
354
350
. Brainerd, supra note 345 (providing that Rhode Island’s tax rates stand as an
outlier, as the majority state tax rates on sports gambling fall below 20%).
351
. We refer to states with tax rates, as well as states affording monopolies and
oligopolies to a few companies, as states seeking to maximize revenue. Conversely,
states that have imposed low barriers to entry, such as median or lower tax rates, could
be considered industry friendly.
352
. Revenue per Adult is displayed in Table 1.
353
. See Matthew Waters, How Much Money Is Mobile NY Sports Betting Fail Sending to
New Jersey, LEGAL SPORTS REP. (Mar. 1, 2021), https://www.legalsportsreport.com/381
80/ny-sports-betting-mobile-new-jersey [https://perma.cc/63NW-3SSG] (noting that
one estimate in 2019 suggested as much as 18.3% of the total amount wagered in New
Jersey came from New Yorkers).
354
. State Population by Characteristics: 2010–2019, CENSUS, https://www.census.gov/
data/tables/time-series/demo/popest/2010s-state-detail.html [https://perma.cc/
RWA7-ANRN] (last updated Oct. 8, 2021); Legal US Sports Betting Revenue, Handle and
Tax Totals Since PASPA Repeal, SPORTS HANDLE (Jan. 10, 2022),
https://sportshandle.com/sports-betting-revenue [https://perma.cc/8QEM-DC3P];
Ulrik Boesen, Large Spread in Tax Treatment of Sports Betting Operators, Tax Found. (July 8,
2021), https://taxfoundation.org/sports-betting-tax-treatment [https://perma.cc/XDP8-
H7G2].
898 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
Table 1: State Tax Revenue Per Adult
State
Population
2020 Handle
2020 Total Taxes
Collected
Tax
Revenue/
Adult
Arkansas
3,017,804
$32,822,807
$586,003
$0.19
Colorado
5,758,736
$1,185,754,317
$2,964,672
$0.51
Delaware
973,764
$90,242,755
$12,380,038
$12.71
Illinois
12,671,821
$1,882,855,414
$18,817,885
$1.49
Indiana
6,732,219
$1,768,632,211
$13,169,431
$1.96
Iowa
3,155,070
$575,239,746
$2,858,854
$0.91
Michigan
9,986,857
$130,793,498
$690,866
$0.07
Mississippi
2,976,149
$363,775,652
$5,256,452
$1.77
Montana
1,068,778
$17,779,330
State Collects
Revenue
Minus
Expenses
Nevada
3,080,156
$4,283,213,926
$17,591,379
$5.71
New
Hampshire
1,359,711
$292,550,239
$11,000,815
$8.09
New Jersey
8,882,190
$6,016,967,699
$50,025,117
$5.63
New York
19,453,561
$98,109,145
$ 1,094,831
$0.06
Oregon
4,217,737
$218,246,537
State Collects
Revenue
Minus
Expenses
Pennsylvania
12,801,989
$3,580,864,479
$64,498,909
$5.04
Rhode
Island
1,059,361
$221,916,076
$12,274,913
$11.59
Tennessee
6,829,174
$311,777,000
$5,443,918
$0.80
Washington,
DC
705,749
$80,527,760
$1,354,845
$1.92
West
Virginia
1,792,147
$392,488,754
$2,248,718
$1.25
2022] TAXING SPORTS 899
A number of states allocate recuperated sports betting revenue to
their general funds, while others earmark gambling tax revenue to
state education funds.
355
Such interconnection between gambling and
education has long existed, despite such a peculiar liaison given that
persons under the age of twenty-one are generally not eligible to legally
gamble.
356
Although jurisdictions anticipated that sports betting tax
revenue would serve as a catalyst for managing distressed budgetary
issues, many have not realized the kind of revenue that initially led
them to legalize the activity.
357
This disconnect is due in part to the
manner in which some jurisdictions draft their rules for calculating
gross gaming revenue.
358
Offering tax deductions for customer comps and promotions have
led some states to lose significant revenue.
359
In Colorado, for example,
sports betting companies can reduce a significant percentage of their
taxable revenue by deducting from their taxable base uncapped, free
play, and promotional bets.
360
Further, in this new legalized arena
where customer acquisition is key to long-term venture viability, sports
betting companies willingly offset current revenue by offering
customer promotions in the hopes of gaining a more dominant market
position in the future.
361
355
. Kisska-Schulze & Holden, supra note 26, at 496–513 (discussing varying
schemes for taxing sports betting revenue).
356
. Brett Smiley, Exploiting Kids for Florida Sports Betting Initiative ‘Poor Form and
Dangerous’, SPORTS HANDLE (July 7, 2021), https://sportshandle.com/florida-sports-
betting-ballot-campaign [https://perma.cc/H9KX-UGF5]; Kisska-Schulze & Holden,
supra note 26, at 480–86.
357
. See Wayne Parry, Mobile Sports Betting Money Tempts Cash-Strapped States,
ASSOCIATED PRESS (Apr. 14, 2021), https://apnews.com/article/technology-new-york-
smartphones-new-jersey-andrew-cuomo-5629c0abbe42e458cd351b13ee9b4875
(noting that a March 2021 report for the National Conference of State Legislatures
highlighted the “gap between the seemingly vast amount of money being wagered and
the much smaller amount of it flowing to states as tax revenue”).
358
. See Sam McQuillan, FanDuel, DraftKings Save Millions on Taxes Thanks to Free Play,
BLOOMBERG TAX (July 1, 2021, 4:46 AM), https://news.bloomberglaw.com/daily-tax-
report/fanduel-draftkings-save-millions-on-taxes-thanks-to-free-play [https://perma
.cc/398C-HAV3] (highlighting state rules that allow gambling companies to give free
plays to customers as promotions, and then deduct these promotions from the revenue
they pay to the state).
359
. Id.
360
. Id. (noting that other states with similar provisions include Pennsylvania,
Michigan, and Virginia).
361
. See Pat Evans, Sports Betting Primer, FRONT OFF. SPORTS (Sept. 2020),
https://frontofficesports.com/newsletter/sports-betting-primer [https://perma.cc/
900 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
For individual sports bettors, state income tax liability is determined
based on the location in which they win money.
362
As there is no
universal application of state income taxes across jurisdictions, taxing
winnings varies widely across borders.
363
For example, New Jersey levies
its state income tax on earnings, while Nevada (which has no income
tax) does not impose a tax on winnings.
364
In Maryland, individuals
must report winnings between $500 and $5,000, and pay the required
tax due within sixty days,
365
whereas Iowa imposes an automatic 5%
withholding.
366
In any jurisdiction that imposes an income tax on
gambling winnings, failure to report and pay could result in penalties
and interest accrual.
B. Taxing Daily Fantasy Sports
DFS origins date back to the mid-2000s, when fantasy sports contests
(that some argue resemble gambling) became part of the everyday
lexicon.
367
Although similarities exist between DFS and gambling,
FanDuel and DraftKings—the two largest DFS companies—contend
that their virtual products are distinct since they require skill, rather
than chance.
368
Despite the substantial efforts and capital expended by
7R7D-7Z4J] (noting that DraftKings was spending $371 on average to acquire a
customer who would have a lifetime value to the company of $2,500).
362
. Weston Blasi, Do I Have to Pay Taxes on Sports Betting? The Taxman Could Be
Coming for Your Winning Bets, MARKETWATCH (May 18, 2021, 11:37 AM), https://www.
marketwatch.com/story/did-you-bet-on-sports-this-year-the-taxman-could-be-coming-
for-your-winnings-11614960257 [https://perma.cc/S8ET-95GX].
363
. Id.
364
. Id.
365
. Jayne Thompson, How Much State & Federal Tax Is Withheld on Casino Winnings?,
ZACKS (Dec. 9, 2018), https://finance.zacks.com/much-state-federal-tax-withheld-
casino-winnings-3079.html [https://perma.cc/JXX3-Q2FT].
366
. Id. (Iowa’s law applies in circumstances where federal taxes are likewise
applied).
367
. See Marc Edelman, Navigating the Legal Risks of Daily Fantasy Sports: A Detailed
Primer in Federal and State Gambling Law, 2016 U. ILL. L. REV. 117, 124 (2016) (noting
that entrepreneur Kevin Bonnet conceived the concept of DFS in 2007); see also John
T. Holden et al., Regulatory Categorization and Arbitrage: How Daily Fantasy Sports
Companies Navigated Regulatory Categories Before and After Legalized Gambling, 57 AM. BUS.
L.J. 113, 132–35 (2020).
368
. See Holden et al., supra note 367, at 135–48 (discussing DraftKings’ and
FanDuel’s efforts to couch their products as something other than gambling).
Gambling has three elements: prize, consideration, and chance. The degree of chance
is typically the element evaluated by states to determine whether an activity is allowed
or prohibited as illegal gambling. State laws vary, but three tests are predominantly
used. The any chance test, which deems any activity having a degree of chance as a
2022] TAXING SPORTS 901
these companies to convince legislatures that DFS is not gambling,
369
the IRS disagreed.
370
In a 2020 memorandum issued by the IRS Office
of Chief Counsel, Senior Counsel Amy Wei concluded, “[t]he amount
paid by a daily fantasy sports player to participate in a daily fantasy
sports contest constitutes an amount paid for a wagering transaction
under [I.R.C.] § 165(d).”
371
Thus, DFS winnings and losses are subject
to the same federal tax treatment as gambling, discussed in Section
IV.A.
372
In reviewing the tax implications surrounding DFS, the IRS
considered three issues: (1) whether DFS companies should be liable
for the gambling excise tax at all; (2) whether the occupational stamp
tax should apply to DFS; and (3) whether a DFS operator should be
liable for the gambling excise tax at the lower .25% rate, or instead the
higher 2% rate.
373
The IRS concluded affirmatively to the first two
inquiries.
374
Regarding the third issue, the IRS noted that the
applicable rate depends on whether the operators accept wagers in
states that have legally authorized DFS.
375
While numerous operators avoid operating in states where DFS
violates state gambling laws,
376
others have flouted state attorney general
type of gambling, and is thus, prohibited. The material element test, which evaluates
whether or not a material element of the outcome of game is based on chance, if yes,
the game or activity is classified as gambling, and the most permissive test, which asks
whether chance is the dominant factor in the outcome of a game, if skill predominates
over chance in determining the outcome, the contest is permissible. See John T.
Holden, Trifling and Gambling with Virtual Money, 25 UCLA ENT. L. REV. 41, 79–81
(2018).
369
. See Jacob Pramuk, DraftKings, FanDuel Lobby Congress amid Legal Challenges,
CNBC (Jan 21, 2016, 1:24 PM), https://www.cnbc.com/2016/01/21/draftkings-fan
duel-lobby-congress-amid-legal-challenges.html [https://perma.cc/4TNE-Q8GL]
(detailing daily fantasy companies’ lobbying efforts).
370
. Taylor Anello & Peter Kulick, Internal Revenue Service Makes Determination
Regarding Tax Liability for Daily Fantasy Sports Operators and Potential Write-Offs for Players,
DICKINSON WRIGHT (Oct. 27, 2020), http://gamingandhospitalitypracticeblog.dick
inson-wright.com/2020/10/internal-revenue-service-makes-determination-regarding-
tax-liability-for-daily-fantasy-sports-operators-and-potential-write-offs-for-players
[https://perma.cc/LM88-BZN9].
371
. I.R.S. Gen. Couns. Mem. 2020-042015 (Sept. 14, 2020), https://www.irs.gov/
pub/irs-wd/202042015.pdf [https://perma.cc/TZ39-QL44].
372
. See supra Section V.A.
373
. I.R.S. Gen. Couns. Mem. AM 2020-09 (July 23, 2020),
https://www.irs.gov/pub/lanoa/am-2020-009.pdf [https://perma.cc/NXY7-6J8W].
374
. Id.
375
. Id.
376
. See generally What Are the States Where You Can Play Daily Fantasy Sports?, LEGAL
SPORTS REP., https://www.legalsportsreport.com/daily-fantasy-sports-blocked-allowed-
902 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
determinations regarding its legality, choosing to maintain operations
within those borders regardless of its legal status.
377
Applying the “legal
operation” tax rate of 0.25%, data supports that DFS companies would
have owed roughly $8 million on their $335 million revenue in 2018.
378
Those operating in states that deem fantasy sports as illegal gambling
operations could prove costly, as the “illegal operation” 2% tax on the
handle could equate to 20% of total operator revenue.
379
Although
DraftKings expressed intent to contest the IRS’s ruling, it has yet to
officially challenge the Treasury’s tax determination.
380
C. Taxing Esports
Esports, one of the fastest-growing segments of the sports and
entertainment industries,
381
are competitive video gaming events
played in highly organized settings.
382
This sub-industry’s growth and
popularity has attracted a diverse group of investors eager to generate
significant financial gains.
383
In fact, in 2021, esports revenue is
estimated to exceed $1.08 billion.
384
While many perceive esports as a
states [https://perma.cc/WKJ6-3FN7] (noting the states that major DFS operators do,
and do not, operate in).
377
. See Darren Heitner, DraftKings and FanDuel Are Playing with Fire in Florida,
FORBES (Feb. 22, 2016, 12:22 PM), https://www.forbes.com/sites/darrenheitner/20
16/02/22/draftkings-and-fanduel-are-playing-with-fire-in-florida/?sh=1eb7223f39d0
[https://perma.cc/4NLJ-MYG6] (noting a 1991 Florida Attorney General opinion
that determined pay-to-play fantasy sports violated Florida gambling laws).
378
. Daniel Roberts, IRS Guidance on Fantasy Fees Could Spell Major Trouble for
DraftKings, FanDuel, YAHOO (Aug. 14, 2020), https://www.yahoo.com/lifestyle/irs-
guidance-on-fantasy-fees-spells-major-trouble-for-draft-kings-fan-duel-205130959.html
[https://perma.cc/SY87-7AJK].
379
. Allyson Versprille & Sam McQuillan, DraftKings, FanDuel Fees Deemed Taxable in
Landmark IRS Memo (1), BLOOMBERG TAX (Aug. 14, 2020, 9:53 AM), https://news.bloo
mbergtax.com/daily-tax-report/draftkings-fanduel-fees-deemed-taxable-in-landmark-
irs-memo [https://perma.cc/J9KJ-A3TX].
380
. Marc Edelman, The Daily Fantasy Sports Tax Showdown Begins in Two and a Half
Months, FORBES (Feb. 2, 2021, 9:30 AM), https://www.forbes.com/sites/marcedelman/
2021/02/02/two-and-a-half-months-until-the-daily-fantasy-sports-tax-showdown-begins.
381
. See Holden et al., supra note 13, at 511 (noting the relationship between esports
and sports); see also John T. Holden & Mike Schuster, Copyright and Joint Authorship as
a Disruption of the Video Game Streaming Industry, 2020 COLUM. BUS. L. REV. 943, 947
(2021) (examining the relationship between esports and entertainment).
382
. Holden et al., supra note 13, at 511.
383
. Id. at 530.
384
. Christina Gough, eSports Market Revenue Worldwide from 2019 to 2024, STATISTA https://
www.statista.com/statistics/490522/global-esports-market-revenue (last visited Jan. 29, 2022).
2022] TAXING SPORTS 903
new phenomenon, its origins can be traced back decades.
385
Previously
it has been argued that pinball machines were the predecessor to video
games.
386
However, in the 1960s, Massachusetts Institute of Technology
(MIT) students created the first computerized video game—
Spacewar.
387
Such novelty was created using Cathcode Ray Tube
monitors and a Programmed Data Processor (PDP-1) that inspired
others to commercialize video gaming.
388
Nolan Bushnell, a pioneer in
the video gaming space, was the first to develop a coin-operated
machine that helped launch the arcade game industry.
389
By the early 1980s, when over 13,000 arcades were in operation in
the United States, the professional video gaming concept took root.
390
The 1980s saw the creation of the U.S. National Video Game Team,
which was composed of six of the best video game players who traveled
in roadshows across the country.
391
Contemporary esports are believed
to have their origins in 1997, with the launch of the Red Annihilation
Quake tournament.
392
Less than a decade later, tournament prize pools
often exceeded $1 million.
393
Since 2014, eight competitions have
individually offered prize pools surpassing $10 million,
394
with one of
the largest international esports tournaments entertaining a pool of
$40 million.
395
Professional gamers are beginning to rise to the level of popularity
of traditional sports athletes.
396
One of the most prolific esports players
currently has an estimated net worth of $6.9 million.
397
Ninja, a popular
385
. Holden et al., supra note 13, at 513.
386
. Id.
387
. Id. at 514.
388
. Id.
389
. Id.
390
. Id. at 515.
391
. Id.; see also Heyoka, Before Esports: America’s National Team, TEAM LIQUID (July 26,
2011), https://tl.net/blogs/247767-before-esports-us-national-video-game-team [https://
perma.cc/ZVE9-SJ8Y] (describing the formation of the U.S. National Video Game Team).
392
. Holden et al., supra note 13, at 517.
393
. Id. at 518.
394
. See Largest Overall Prize Pools in Esports, ESPORTS EARNINGS, https://www.esports
earnings.com/tournaments [https://perma.cc/4B92-2BB9].
395
. US Tax Considerations for ESports and the Online Games Industry, WOLTERS KLUWER
(Feb. 18. 2021), https://www.lowtax.net/articles/US-Tax-Considerations-for-eSports-
and-the-Online-Games-Industry-595943.html [https://perma.cc/WD39-2UUN].
396
. Id.
397
. Id.
904 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
American streamer, signed a streaming agreement in 2019 worth $30
million.
398
Big money draws big tax issues, and because of the international
nature of esports, the U.S. taxes are complicated.
399
U.S. citizens and
resident aliens are taxed on their worldwide income.
400
Non-resident
aliens are subject to U.S. taxes if their earnings derive from U.S.
sources.
401
Thus, whether a gamer is a U.S. citizen, resident, or non-
resident alien, income earned from their gaming activities could be
subject to U.S. federal income taxes. Esports taxable income may
include prize money,
402
royalties derived from endorsement
contracts,
403
fringe benefits,
404
donations or tips paid by viewing
audiences,
405
and any other form of employment or independent
contractor income earned by professional gamers.
406
As discussed in
Section III.B with regard to student-athletes’ NIL earnings,
407
deductions (in the form of standard or itemized) can help reduce
professional gamers’ taxable income.
408
In conjunction with federal
income taxes, professional gamers must also account for various state
tax obligations, including the jock tax as discussed in Section I.A.2 with
respect to professional athletes.
409
398
. Id.; @Ninja, TWITTER (Jan. 2, 2013, 5:14 PM), https://twitter.com/Ninja?ref_s
rc=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Eauthor
[https://perma.cc/2BHV-U9KN]. Ninja is the online alias for Richard Tyler Blevins.
399
. Id.
400
. See I.R.C. § 61(a); see also Treas. Reg. § 1.1-1 (2020).
401
. See I.R.C. § 871(b). This Article focuses on tax issues relating to U.S. citizens
and residents. While international gamers may be subject to tax in the U.S. for their
gaming activities, it is beyond the scope of this Article to address United States and
foreign jurisdiction tax issues that may apply to those identified as non-resident aliens
(i.e., individuals who do not hold a Green Card or who do not qualify under the
substantial presence test).
402
. See id. § 74.
403
. See Treas. Reg. § 1.61-8(a).
404
. See I.R.C. § 61(a).
405
. US Tax Considerations for ESports and the Online Games Industry, supra note 395.
406
. See I.R.C. § 61(a); see also id. § 3101 (pertaining to the self-employment tax on
income earned by independent contractors); supra Section IV.A.5 for further
explanation on the impact of the self-employment tax.
407
. See supra Section IV.A.5.
408
. See I.R.C. § 63.
409
. See supra Section II.A.2.
2022] TAXING SPORTS 905
V. RECOMMENDATIONS FOR THE EVOLVING BUSINESS OF SPORTS
In 2008, Holo and Talansky observed a shift in what they referred to
as the “special” tax treatment historically conferred upon the
professional sports industry.
410
Not only have there been notable
alterations to the federal and state taxing regimes impacting sports,
but equally significant is the fact that there has been a monumental
evolution of the business of sports since their article was published.
Amidst this growing, billion-dollar enterprise encompassing both
traditional and cyber events, extending into the professional and
collegiate sports arenas—and that allows players, coaches, leagues,
associations, commercial ventures, fans, sponsors, and the media to
generate considerable income—it is unsurprising that U.S. taxing
jurisdictions are pursuing a greater slice of the revenue-sharing pie.
Taxes are increasingly impacting the expanding professional and
collegiate U.S. sports industry. However, as the world of sports is not
static, neither are federal or state tax laws. As such, this Article offers
the following recommendations.
First, the federal government should remove the tax incentives
afforded to professional sports leagues and teams to renovate or build
new stadiums.
411
Academics and economists concur that stadium
construction fails to spur economic development.
412
The federal
government should terminate this program (which heavily benefits
billionaire sports team owners) by passing legislation that officially
ends tax exemptions for interest payments on municipal bonds.
413
Congress’s failure to act in this effort has led to dwindling stadium
lifespans and increased team owner wealth at the expense of
taxpayers.
414
The amount of public dollars spent on stadium
renovations and new construction between 1991 and 2004 was
equivalent to “three Nimitz-class nuclear-powered aircraft carriers.”
415
While it is unclear why Congress continues to allow this blatant tax
exploitation to exist, it likely involves the power of sports league
410
. Holo & Talansky, supra note 32, at 214.
411
. Patrick Hruby, Let’s Eliminate Sports Welfare, SPORTS ON EARTH (Dec. 2012),
https://www.patrickhruby.net/2012/12/lets-eliminate-sports-welfare.html
[https://perma.cc/ZP5V-X3NR].
412
. See Zimbalist & Noll, supra note 173; see also Drukker et al., supra note 175; supra
Section I.A.
413
. See Zimbalist & Noll, supra note 173.
414
. Id.
415
. Hruby, supra note 411.
906 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
lobbyists.
416
Rather than build new stadiums to benefit the wealthy
without the spur of economic growth, taxpayer funds and tax-exempt
bonds should be geared toward more critical social needs like
healthcare, education, and urban development.
Second, the Treasury should amend I.R.C. § 197 to cease application
of the RDA to professional sports teams. Although public stadium
funding has been the subject of meaningful academic attention to the
point where legislators have repeatedly threatened to close available
tax loopholes afforded to teams and leagues,
417
the RDA has largely
received a pass.
418
The RDA substantially benefits team owners because
sports teams are appreciable, rather than depreciable, assets.
419
Allowing team owners to deduct the purchase price of a franchise over
a fifteen-year amortization period is an archaic tax benefit, particularly
considering that fifty of the most valuable sports franchises continued
to enjoy a 9.9% valuation increase during the COVID-19 pandemic.
420
Over the previous five-year period, those same franchises increased in
value by 55%.
421
Few tax benefits achieve the inverse of their purported
objective as the RDA. As such, the time is ripe for Congress to
reevaluate its effectiveness regarding professional sports teams and
leagues.
Third, at this juncture, Congress should continue to bestow
favorable tax treatment on student-athletes’ grants-in-aid. As pay-for-
play traction increases in collegiate sports, queries remain as to
whether student-athletes’ scholarship funds should continue to receive
preferential tax treatment.
422
As discussed in Section III.B, student-
416
. See Daniel Libit, NBA Lobbying Spend Leaves D.C. for States as Gambling Grows, SPORTICO
(May 6, 2021, 5:55 AM), https://www.sportico.com/leagues/basketball/2021/nba-avoids-
congressional-lobbying-1234629039 [https://perma.cc/J9SF-LVES] (describing sports
leagues’ lobbying spending).
417
. Supra Section I.A.3.
418
. See Trejos, supra note 94.
419
. Keeney, supra note 56.
420
. Mike Ozanian, World’s Most Valuable Sports Teams 2021, FORBES (May 7, 2021, 6:00
AM), https://www.forbes.com/sites/mikeozanian/2021/05/07/worlds-most-valuable-
sports-teams-2021/?sh=294c6c5d3e9e [https://perma.cc/58V5-HCJE] (noting this
value increased over the period of May 2020 to May 2021).
421
. Id.
422
. See, e.g., Kisska-Schulze & Epstein, supra note 155 (proposing that the IRS may
categorize some student-athletes’ grants-in-aid as taxable should a pay-for-play model
be implemented in college sports); Edelman, supra note 239, at 1161 (proposing that
grants-in-aid may not necessarily be taxable under a pay-for-play model); Schmalbeck
& Zelenak, supra note 49, at 1153 (arguing that student-athletes’ athletic scholarships
are indeed taxable under the I.R.C., and that the IRS favors college sports); Adam
2022] TAXING SPORTS 907
athletes enjoy meaningful tax amicability with regard to their athletic
scholarship funds. Based on the current regime, athletic scholarships
are granted based on degree-seeking interests, coupled with athletic
ability, while NIL earnings are based on contractual relationships
between players and third parties having no direct relationship to the
student-athletes’ educational/collegiate sport interests. Student-
athletes will have to pay taxes on their NIL earnings; however, such
income has no connection to their institutional grants-in-aid and,
therefore, should play no role in their scholarship funding. Although
such a premise could change if the pay-for-play model eventually
morphs into that of an employer-employee relationship between
institution and player, that day is not today.
In concert with the above recommendation, allowing student-
athletes to benefit economically from the use of their NIL is a step
toward increased equality across the lucrative college sports enterprise.
However, earnings come at a price. For the first time in history,
student-athletes will have to toggle complicated federal and state tax
issues while playing sports and earning educational degrees. As there
is no precedent for some of the tax issues that may arise due to the
unique nature of college sports, this Article recommends that the
Treasury promulgate rulings to provide clarity and uniformity on the
federal taxability of student-athletes’ NIL income. In addition, the
NCAA and individual institutions should proactively assist student-
athletes in understanding the complex nature of their tax obligations
to help minimize tax penalties and interest accrual.
Fourth, this Article recommends that gambling tax revenue be
redirected back into higher education. Between the TCJA’s impact on
collegiate athletics, and the more recent COVID-19 pandemic, higher
education is in desperate need of funding.
423
Recent funding relief
came in the form of the federal Coronavirus Aid, Relief, and Economic
Hoeflich, Note, The Taxation of Athletic Scholarships: A Problem of Consistency, 1991 U. ILL.
L. REV. 581, 615 (1991) (supporting that the IRS should tax student-athletes’ athletic
scholarships, regardless of the implementation of any pay-for-play model).
423
. See Kisska-Schulze & Holden, supra note 26, at 468 (arguing college
administrators should direct attention toward embracing legalized sports wagering to
increase revenue to supplement loct income due to the TCJA); see also Emma Whitford,
Pandemic’s Fall Financial Toll Adds Up, INSIDE HIGHER ED (Jan. 12, 2021),
https://www.insidehighered.com/news/2021/01/12/colleges-spent-millions-covid-
19-expenses-fall-even-sources-income-shrank-data-show [https://perma.cc/XG6W-
VP7Z] (elaborating on the significant financial losses felt by institutions in the wake of
the COVID-19 pandemic).
908 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
Security (CARES) Act,
424
which provided $14 billion in financial
assistance to colleges and universities impacted by COVID-19 losses.
425
However, even prior to that, another financial relief opportunity came
in the form of sports gambling tax revenue. Post-Murphy,
426
over twenty-
four states have legalized some form of sports betting.
427
Across those
jurisdictions, total taxes collected exceeds $570 million.
428
Although
each state earmarks their tax revenue differently, few have officially
reinvested any of these earnings back into education.
429
A portion of this tax revenue should be redirected back into higher
education, and, more particularly, back into the same collegiate sports
programs generating such newfound income. Already, the University
of Colorado at Boulder (CU Boulder) is further capitalizing on sports
betting market opportunities by entering into a five-year sponsorship
contract with PointsBet, an Australian bookmaker.
430
The $1.6 million
agreement requires Buffalo Sports Properties, which holds the media
rights for CU Boulder, promote PointsBet on its media channels and
at CU Boulder’s Folsom Field and Events Center.
431
In addition, for
every new bettor that registers on PointsBet using a Colorado Athletics
424
. 15 U.S.C. § 9001.
425
. H.R. 748, 116th Cong. (2020); see also Summary of Higher Education Provisions in H.R.
748, The Coronavirus Aid, Relief, and Economic Security (CARES) Act, AM. COUNCIL ON EDUC.,
https://www.acenet.edu/Documents/Summary-CARES-Act-HigherEd-Provisions-032620.
pdf [https://perma.cc/F7LC-RCYH] (summarizing the higher education provisions of the
2020 CARES Act).
426
. See Murphy v. Nat’l Collegiate Athletic Ass’n, 138 S. Ct. 1461, 1484–85 (2018)
(holding Congress could not direct state legislatures not to pass laws that would permit
sports gambling).
427
. Ryan Rodenberg, United States of Sports Betting: An Updated Map of Where Every
States Stands, ESPN (Sept. 30, 2021, 2:19 PM), https://www.espn.com/chalk/story/_/
id/19740480/the-united-states-sports-betting-where-all-50-states-stand-legalization
[https://perma.cc/NY56-VYV3].
428
. US Sports Betting Revenue and Handle, LEGAL SPORTS REP., https://www.legal
sportsreport.com/sports-betting/revenue [https://perma.cc/8N7F-UPT3].
429
. Jill R. Dorson, How States Are Spending Their Sports Betting Tax Revenue, SPORTS
HANDLE (Oct. 25, 2018), https://sportshandle.com/how-states-are-spending-their-
sports-betting-tax-revenue [https://perma.cc/3GHT-V6DX].
430
. Chris Burt, U. of Colorado Goes All in with Sports Betting Partnership, UNIV. BUS.
(Sept. 10, 2020), https://universitybusiness.com/u-of-colorado-goes-all-in-with-sports-
betting-partnership [https://perma.cc/6LP4-4EU6]; see also Greta Anderson, Profits
over Principles?, INSIDE HIGHER ED (Nov. 18, 2020), https://www.insidehighered.com/
news/2020/11/18/cu-boulder-sports-betting-deal-goes-against-long-held-ncaa-stance
[https://perma.cc/T53E-MYQX].
431
. Anderson, supra note 430.
2022] TAXING SPORTS 909
promotion code, the CU Boulder athletics department will earn $30.
432
For every bet placed in Colorado through a legal, regulated sportsbook
like PointsBet, state taxes will be imposed, resulting in increased
revenue in the jurisdiction. Whether other institutions entertain
similar corporate sponsorships remains to be seen;
433
however, states
should ensure that increased tax revenue generated from the legalized
sports-betting market be redirected back into higher education.
Finally, state taxing jurisdictions must consider their primary
objectives when crafting tax rates and licensing fees amidst the
legalized sports gambling industry.
434
If a state’s objective is to provide
a regulated sports gambling market to recapture revenue from the
black or gray markets, it must create an environment that fosters
competition, resulting in consumers having a multitude of wagering
options at their disposal. Alternatively, if a state’s goal is to maximize
jurisdictional tax revenue, it should impose higher taxes on gambling
operators and consider granting a monopoly to just one or two high
bidders.
435
Early legalized sports betting returns have demonstrated
that states have not been penalized with decreased tax revenue, even
when they have imposed significant tax rates.
436
As a result, states
should have great latitude in setting tax rates that coincide with their
jurisdictional objectives.
CONCLUSION
The “business of sports” is changing. No longer do athletes compete
purely for love of the game. Sports have evolved into a highly
productive enterprise, where everyone stands to make a buck. The
business side of the industry has moved beyond professional sports into
432
. Id.
433
. See Brett Smiley, Recruiting Season: Just How Big a Deal Is the University of Colorado-
PointsBet Sportsbook Pact?, SPORTS HANDLE (Sept. 9, 2020), https://sportshandle.com/
pointsbet-colorado-ncaa-sports-betting [https://perma.cc/TG9G-9BSG] (noting that
the Colorado University Athletics and a sports betting operator is “one of the few in
existence between a sports betting operator and a major NCAA Division I Athletics
Program”).
434
. While licensing fees are not a tax, in some sense they can operate as a tax on
operators. Holden, supra note 354.
435
. See supra Table 1.
436
. Andrew Maykuth, Opinion, Pa.’s Sports Betting Taxes so High Legal Bookmakers
May Shun State, PHILA. INQUIRER (July 16, 2018), https://www.inquirer.com/philly/
business/pa-legal-sports-bookmakers-taxes-new-jersey-casinos-20180716.html
[https://perma.cc/5XT9-D9CX].
910 AMERICAN UNIVERSITY LAW REVIEW [Vol. 71:845
the realms of amateur athletics, DFS, esports, and the legalized sports
gambling industry, and the dollar signs generated are big.
437
Recently, Congress and states have shown increased interest in
usurping a greater percentage of these sports-related revenues,
438
even
amidst the more amicable treatment historically bestowed upon
professional and collegiate athletics.
439
The newly legalized sports
gambling industry allows states to capture tax revenues not previously
available to them.
440
In addition, the fourth industrial revolution has
blurred the traditional lines of sport, inviting significant revenue
generation from novel subsets of the sports culture that blend the
physical, digital, and biological spheres.
441
Across this ever-evolving
industry, taxes are and will continue to play an integral role. Sport is
not just a game anymore, and Congress and states taxing jurisdictions
have indicated they are ready to play ball.
437
. See supra Part IV.
438
. See supra Parts II, III.
439
. See supra Part I.
440
. See supra Section IV.A.
441
. See supra Sections IV.B–C.
