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Tunsil Draft Day Admission May Reignite Controversy Over Student Athlete Pay

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On Thursday, March 28, 2016, the Miami Dolphins selected Laremy Tunsil as the #13 pick in the National Football League (NFL) draft. The offensive tackle was expected by many to go #1: the drop likely cost Tunsil millions. His stock fell after a bizarre series of events unfolded over social media, including a video of Tunsil smoking out of a bong which was posted to Tunsil's Twitter account and screenshots of alleged text messages between Tunsil and members of the football program at Ole Miss which were posted to Tunsil's Instagram account.

The text messages purported to show Tunsil asking for money from the coaching staff to pay for rent and utility bills. Last night, Tunsil admitted, when pressed, that the text messages were genuine, telling a reporter, "That happened." When he was asked whether that meant that Tunsil had asked for and accepted money from the football program, he replied, "I’d have to say yeah."

Not only did the revelations affect Tunsil's draft ranking, they are potentially damaging for the football program at Old Miss. Ole Miss is already on the NCAA's radar after the university received a notice of allegations, thirteen of which were levied against the football program. Last year, an NCAA investigation at Ole Miss revealed that Tunsil had received perks including the use of a loaner vehicle for a significant period of time without payment, a four-month interest-free promissory note to buy a car, two overnight stays at a local home, an airline ticket, and the short-term use of a rental vehicle; Tunsil was suspended for seven games as a result. Following the suspension, Tunsil finished out the season and then entered the NFL draft.

There's no question that Tunsil's comments about the payments will likely trigger additional questions into the Ole Miss football program. But I suspect it will also trigger more questions about existing NCAA rules.

Under current NCAA rules, student athletes may not be compensated for playing college sports other than an approved student athlete scholarship. That doesn't just mean that they can't be paid in cash: compaensation also includes perks like cars and loans. Additionally, student athletes may not receive financial perks from fans, boosters, local businesses and the like.

The idea is to keep the focus on the student and not on the money. But you can't ignore the money. Consider the case of Ole Miss. The Ole Miss athletic department brought in nearly $17.3 million in ticket sales alone in 2015. The athletic department also brought in $31.5 million in licensing fees.

The reward for that? Hugh Freeze, Ole Miss' football coach, will be paid a cool $4.7 million in 2016 and that amount will bump up $150,000 each year until it hits $5.15 million in 2019. Freeze's nine assistant coaches? Their collective salary pool is now $4.26 million. And the student athletes? By rule, nothing.

Those sorts of numbers aren't restricted to Ole Miss. Last year, Texas A&M's NCAA programs brought in $192,608,876 in revenue (roughly 10% of the entire gross domestic product of Liberia). In fact, for the same year, 24 universities reported annual sports-related revenues in excess of $100 million.

With that kind of money in play, the rules remain firmly in place. Players don't get paid - but it seems like everyone else does. That includes big dollar supporters who, for years, have enjoyed tax deductions in exchange for buying plum seats. Many colleges and universities require football and other sports fans to make significant contributions (yes, they're called donations) in exchange for the right to buy season tickets, especially in highly sought-after seating sections. The result? The best seats in the house and an 80% tax deduction to boot. In 2012, Bloomberg estimated that the college ticket-related sports deduction costs U.S. taxpayers more than $100 million a year. Initially, there wasn't supposed to be a tax break for mandatory donations to buy tickets - the IRS routinely declined deductions for the scheme - but former LSU athletic director Bob Brodhead and others lobbied to make it legal.

On the other hand, payments made to secure those tickets - remember, they're donations - are tax-free to the schools, courtesy of the NCAA's tax-exempt status. Whether the NCAA should remain tax exempt has been the subject of debate for over a decade. Inquiries into the tax-exempt status of the NCAA heated up in 2006 but promptly and predictably faded.

Questions about the role of the NCAA's tax-exempt status were resurrected briefly in 2011 when allegations surfaced suggesting that Nevin Shapiro, a 42 year old former University of Miami football booster, bankrolled the lifestyles of University of Miami athletes, including Devin Hester (Atlanta Hawks), Antrel Rolle (Chicago Bears) and Vince Wilfork (Houston Texans), by giving them cash and jewelry and entertaining them with hookers; he is said to have even purchased a yacht to hold sex parties for the athletes. Shapiro is currently serving a 20-year sentence in federal prison for running a Ponzi scheme (a la Bernie Madoff) worth nearly a billion dollars; he has consistently maintained that the allegations he made against the University of Miami, including those related to betting on games based on inside information from the university are true.

While the argument about tax-exempt status was being debated publicly, behind the scenes, college athletes questioned whether they should be receiving compensation from what was arguably a money-making venture. In 2009, Ed O’Bannon, a former standout in the UCLA basketball program, sued the NCAA for profiting from the use of his name and image in television broadcasts and video games: he wanted a piece of the revenue. In 2011, other athletes including Bill Russell (University of San Francisco) and Oscar Robertson (University of Cincinnati) joined the suit as part of a class action certification.

O'Bannon's case was initially somewhat successful but in 2015, an appellate court sided with the NCAA upholding the status quo of "amateurism," that is, that college athletes should not be paid for their services. The court found that it was a fair exchange to pay the cost of attendance at a college or university in exchange for use of the players’ names, images and likenesses, ruling specifically that "[t]he Rule of Reason requires that the NCAA permit its schools to provide up to the cost of attendance to their student athletes. It does not require more." The court also expressed concern that to do more would create a sort of "minor league" sports league as opposed to what is, ostensibly, an opportunity for education.

When a college or university exchanges the cost of attendance for the services of a student athlete, it's not taxable. Under current law, athletic scholarships are considered qualified scholarships and are excluded from gross income under IRC Section §117 so long as the student is a degree candidate at an eligible educational organization and the scholarship is used for qualified expenses. Qualified expenses mean tuition and fees required for enrollment or attendance of a student at an educational organization and fees, books, supplies and equipment required for courses but do not include room and board, travel, and other costs.

The Internal Revenue Service (IRS) later confirmed the treatment of athletic scholarships in a 2014 letter to Senator Richard Burr (R-NC) (downloads as a pdf):

It has long been the position of the Internal Revenue Service that athletic scholarships can qualify for exclusion from income under section 117. Revenue Ruling 77-263, 1977-2 C.B. 47, addresses the tax treatment of athletic scholarships where the student athlete is expected to participate in the sport, and the scholarship is not cancelled in event the student cannot participate and the student is not required to engage in any other activities in lieu of participating in the sport. The ruling holds that the athletic scholarship awarded by the university is primarily to aid the recipients in pursuing their studies and, therefore, is excludable under section 117.

Payment for services not related to a qualified scholarship is clearly another matter. Compensation in exchange for services, including appearance fees, is considered taxable income. And again, compensation doesn't have to be in cash: it can include the use of a home or car, a vacation, clothing, or jewelry.

Currently, paying college students to play - beyond offering a scholarship - isn't allowed. But that doesn't mean it doesn't happen. The reality is that Tunsil likely didn't do anything that a number other sports athletes haven't also done - even, perhaps, some others on that stage last night. We know that the climate in college sports has resulted in athletes being paid to play under the table in the form of cash and perks and, without a rules change, will probably continue. Whether it will lead to a change that allows students to be lawfully paid remains to be seen.

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