Last week the Director of the National Labor Relations Board’s Chicago region ruled that Northwestern University football players who receive scholarships from the university are “employees” under the terms of the National Labor Relations Act and as such have the legal right to form a union. The Seattle Times story is here; ruling itself is here.

At the TaxProf Blog, Paul Caron notes that the classification of scholarship athletes as employees could result in a big tax bill as the value of the scholarships would arguably be subject to income, Social Security and Medicare taxes.

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.”

The potential tax obligation is large; This year a scholarship covering tuition, fees, room and board at Northwestern is worth nearly $60,000.

And if football player scholarships are taxable, what about the scholarships of the kids who play in the band? Perhaps we’ll be hearing a lot more of this song at halftime.