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NFL Is No Charity: Different 501(c) Exempt Organizations Play by Different Rules
May 1st, 2013 in Tax-Exempt Status

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Football1For most people, the terms “nonprofit” or “exempt organization” evoke images of the 501(c)(3) public charity. However, there are actually 29 different types of exempt organizations under Section 501(c) of the Internal Revenue Code, each of them with a different fundamental purpose to serve. An organization like a 501(c)(6) trade association is not treated the same as a 501(c)(3)— and for good reason.  It is a vastly different animal.

Controversy can erupt, however, when there is misunderstanding about what an exempt organization’s purposes are, and what it is allowed to do. Recently, legislation was introduced by Senator Tom Coburn (R-Oklahoma) that would strictly limit the ability of  professional sports leagues to qualify for exemption under 501(c)(6). Challenges to the exemption of sports leagues have bubbled up before, and are often focused on concerns around inurement or enrichment through high executive compensation.

We’re puzzled, with everything else that Congress has (or should have) on its plate these days, that there is an effort to rally support around  this particular issue. If excessive compensation is really the problem, it can be addressed through the prohibition on private inurement that already exists in the law for 501(c)(6) organizations. And often, publications discussing  this issue state that team membership dues paid to the NFL are deductible charitable contributions, which is absolutely not the case. Such dues potentially may be deductible as trade or business expenses if they are ordinary and necessary in the conduct of the member’s business—as are dues paid to many other organizations (exempt or not), including bar associations.

As background, a professional sports league like the NFL can qualify under exemption under 501(c)(6), which also encompasses trade associations, chambers of commerce, and business leagues. In order to qualify as a 501(c)(6) organization, it must:

  •  be an association of persons have a common business interest, and have a purpose to promote this common business interest;
  • not be organized for profit, nor engage in a regular business of a kind ordinarily carried on for profit;
  • be a membership organization, with a meaningful level of support coming from members;
  • not have any of its net earnings inure to private shareholder or individual;
  • have activities directed to the improvement of business conditions of one or more lines of business, as distinguished from the performance of particular services for individuals; and
  • primarily engage in activities constituting its basis for exemption and not have as its primary activity the performance of services for members.

However, a 501(c)(6) organization is not eligible to receive tax-deductible donations, and also does not qualify for many state and local tax benefits enjoyed by 501(c)(3)s such as sales or property tax exemption.