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Copyright 2014 Albuquerque Journal
Albuquerque Journal (New Mexico)
JAMES HAMILL For the Journal

On March 26 the National Labor Relations Board (NLRB) in Chicago held that Northwestern University scholarship football players are employees within the definition of the National Labor Relations Act. This decision, which is subject to appeal, could allow the players to unionize.

Northwestern players claim they want to unionize to get better medical benefits, concussion testing, and perhaps to be paid for their services. Players also say they want four-year scholarships, although a recent change in policy at Northwestern already provides football players with four-year scholarship "tenders."

Section 117 of the tax law provides that gross income shall not include a qualified scholarship. The scholarship must be used for tuition, room and board, and related expenses required for attendance at the institution.

There is no clear definition of the term "scholarship." Instead, whether something is a scholarship is based on a facts-and-circumstances review of each case. This analysis is usually not a difficult one. A scholarship must be paid to someone who is pursuing studies to meet the requirements for an academic degree. In principle, the payment is a scholarship when made to allow the recipient to pursue academic studies, and not a disguised payment for services rendered to the payor.

The IRS National Office has held that something called a scholarship will still be taxable to the recipient if it is in fact a payment for services rendered to the payor.

Case law almost always finds the award to be taxable wages when it is provided by the recipient's employer. If there is an employer-employee relationship between the payor and the recipient, it is difficult to argue that the payment is not really wages.

The Supreme Court, in Bingler, adopted a quid pro quo test; if the grant was bargained-for payment for services it is taxable wages, even if called a scholarship.

In Revenue Ruling 77-263 the IRS held that athletic scholarships are not taxable wages provided certain conditions were satisfied. One was that the scholarship must be reduced by any wages paid to the recipient for employment. Those wages would be taxable.

Northwestern awards the NCAA allowed maximum of 85 "head count" scholarships to football players. These awards are valued at $61,000 per year, or $76,000 per year if the player also attends summer school.

Based on Revenue Ruling 77-263, the 85 scholarship players at Northwestern have surely reported no income from their scholarships. But this ruling found no income conditioned on recipient players not receiving wages for employment. The ruling implicitly assumed the payments were made to students to allow them to pursue academic studies.

Well, the NLRB in Chicago says that Northwestern football players are not primarily students. They are required to spend 40 to 50 hours per week in season on team activities and travel, and generally only about 20 hours on academic pursuits.

Several players testified that they had to drop classes that conflicted with practice because they were not allowed to miss practice for a class. A senior quarterback said he changed his major from pre-med to psychology to keep a class schedule that fit football activities.

Players had to provide information on cars they drove, were restricted on movements prior to games, had social-media posting restrictions, mandatory drug tests, restrictions on hazing, drug or alcohol use, and gambling, restrictions that did not apply to regular Northwestern students.

Northwestern and the Big 10 Conference could use player names and images for any purpose, but players could not profit from their image or reputation.

The varied restrictions imposed on players led the NLRB to find a common law employer-employee relationship existed between Northwestern and its football players. That's what the players wanted. But do they want as much as $76,000 of annual compensation income? The NLRB decision will be appealed, and regardless of its outcome it is not clear that the IRS will follow the NLRB definition of the Northwestern scholarship tender.

Other athletes in sports requiring less time may not meet the employee definition, even if football players are eventually, after all appeals, found to be employees.

But Pandora's box has been opened. A former Northwestern president said that the school might even change its athletic model to that adopted by the Ivy League.

James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at


April 7, 2014




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