Northwestern football players won the right to unionize on Wednesday, but the potential tax implications alone could immediately kill the idea.
Much of what was argued in the National Labor Relations Board testimony is in direct opposition to why scholarships aren't being taxed today.
"It appears like the case brought forward by the players focused on things other than the potential tax implications," said Garrett Higgins, a partner at O'Connor Davies in the firm's Exempt Organization Tax and Advisory Services group. "The fact that the players were not considered employees in the past is essentially the reason why their scholarship or parts of it weren't taxed before. The IRS may be able to make the argument that the scholarship is really payment for services, and therefore compensation, and is now taxable to the athlete."
Taxable income has been defined in the courts, and by the IRS, as compensation received through services that resulted in a time commitment that required a certain number of hours per week. Higgins said the time commitment put forth by former Northwestern quarterback Kain Colter, and backed by the National College Players Association, that resulted in the NLRB qualifying the Northwestern players as employees could serve to be the exact reason that the IRS would say the players must pay taxes if they unionize.
If Northwestern players did form a union and they were taxed, it's not clear exactly what they would be paying tax on. If, for example, their entire scholarship was deemed taxable, the athletes would be paying at least $15,000 in federal tax alone on the $61,000-a-year scholarship. One athletic director in a major conference, who requested anonymity, speculated that the value the players received from the training table, travel and even coaching could be taxed.
Section 117 of the Internal Revenue Service code provides that "gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization" as long as that money goes towards educational expenses. An IRS rule that was established in 1986 stated athletic scholarships are no different than financial aid or academic scholarships with respect to the tax code.
But if the players are defined as employees, the limitation of the code could come into play. The code notes that the exclusion "shall not apply to that portion of any amounts received which represents payment for ... services by the student required as a condition for receiving the qualified scholarship."
IRS spokesman Anthony Burke wouldn't speculate on how being employees would affect previous IRS rulings, but the leading case that defines exclusions doesn't seem to bode well if the players form a union.
The 45-year-old case is Bingler v. Johnson and focuses on Richard Johnson, who received a scholarship to go back to school by his employer, Westinghouse, based on the condition that he returned to the company. Johnson argued that the scholarship money was not taxable, but the IRS successfully countered and prevailed all the way up to the Supreme Court, maintaining that any amount related to employment services were not exempt. The ruling specifically mentions that compensation that is bargained for, which is what the Northwestern players would be seeking to do by forming a union, is excluded from scholarship funds and is to be reported as income.