The issue of the NFL’s tax-exempt status—and whether it is warranted—has been bubbling up over the last few years. We’ve blogged about this topic before, but recent controversies around players and domestic violence, as well as the name of the Washington Redskins team, have brought new voices into the fray. Here’s a fresh look at some important points to keep in mind on this issue:
The NFL as a whole isn’t exempt. While many may see the entire NFL enterprise (e.g., teams, ticket sales, product licensing) as one entity, only one facet is exempt under section 501(c)(6): the league office. This is the organizing entity that sets the rules of play; administers the college draft; and trains and pays game referees.
The NFL teams themselves are for-profit entities. They are partners in the taxable NFL Ventures organization, which owns subsidiaries that carry out revenue-generating activities like the NFL Network channel and marketing/sponsorship activities. However, the teams are voting members of the tax-exempt entity, which gives them the right to vote on certain matters, and means that the dues they pay to the tax-exempt entity are deductible to them (and reduce their taxable income), assuming they meet the general business expense requirements under the tax code.
The NFL is a 501(c)(6), not a charity. While the term “exempt organization” evoke images of the 501(c)(3) public charity, 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. A professional sports league like the NFL currently 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 charitable 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.
Private inurement could be a concern. As discussed above, 501(c)(6) organizations must not allow their assets to inure to insiders. This issue comes up frequently in the area of executive compensation, which must be reasonable in order to avoid violating this rule. Looking at the NFL’s Form 990 for the tax year ending March 31, 2013, the organization paid Commissioner Roger Goodell $44 million. While many people may have a visceral reaction to an exempt organization employee making that much money, the standard for establishing reasonable compensation is the amount that would be paid by a like organization under like circumstances. For an organization like the NFL, there are more limited comparables than for other organizations. However, as this recent article points out, “Goodell’s so-called nonprofit salary is about four times that of the next best paid nonprofit chief executive and more than twice that of the average for-profit CEO on Standard and Poor’s 500 stock index.”
The tax-exempt NFL also operated loan program that helped member teams fund stadium renovation and new construction projects. There is room for debate about whether this program impermissibly provides particular services for members (which could give rise to an inurement issue), as opposed to improving business conditions of one or more lines of business (which is permissible).
It is important to note that the NFL was audited by the IRS for the tax years between 2007 and 2009, which concluded with a letter saying that the NFL’s returns were accepted as filed. This doesn’t mean that the NFL is absolutely in the clear as far as inurement is concerned, but the fact that the IRS has considered this issue and didn’t find a problem shouldn’t be overlooked in this larger discussion.
An interesting related point is that 501(c)(6) organizations aren’t subject to the excess benefit transaction rules (as 501(c)(3) and 501(c)(4) organizations are). These rules put in place a penalty structure for transactions that violate the inurement rules; without this system, the only remedy available to the IRS for private inurement violations is revocation of exempt status. It is worth discussing whether these rules should apply to other exempts like 501(c)(6) organizations, and whether such an extension could be a more viable way of monitoring and cracking down on violations where the IRS may be hesitant to revoke status outright.
Public policy violations could be problematic. Some other exempt organizations have clear limitations around policy violations. In the 501(c)(3) area, it has long been established that violations of public policy, such as racial discrimination, are a basis for revocation of exemption. And 501(c)(7) social clubs such as fraternities are statutorily prohibited from such discrimination. While the law isn’t as clear around 501(c)(6) organizations, continued exempt status for an organization that is found violate public policy in areas like domestic violence is questionable, at best.
Government may not be losing out totally on revenue. The NFL’s most recent tax returns show it is operating at a loss. This could mean that, even if exempt status was revoked and the NFL had to file returns as a for-profit entity, it would not owe any taxes. However, the dues that teams pay to the exempt entity are likely currently deductible, which could change if the NFL league office shifted to for-profit status.