Do we really need to revoke the NFL's tax exempt status?

As more and more enemies of the NFL line up in the wake of domestic abuse stories and worries about head trauma injuries, a growing tide of critics has been calling for the revocation of the league’s tax exempt status. Such calls have been picked up in the halls of Congress, with Tom Coburn raising the issue recently. It’s not that the issue is completely out of the question, because nothing in our convoluted, broken tax code should be above scrutiny. But this specific question isn’t exactly as it’s frequently portrayed in the media, and as Politico notes, it’s rather complicated.

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“The questions about the way the NFL operates are worthy of discussion, but the tax issue isn’t nearly as meaningful,” said Michael McCann, director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law.

That’s because the only part of the NFL that falls under the exemption is the League Office. The IRS has blessed the setup, a complicated structure in which much of the league’s profits are taxed, while more mundane expenses are exempt.

“Congress long ago made a choice that the NFL would be tax exempt, and the NFL is a powerful customer that lobbied and continues to make sure it has it,” said Philip Hackney, professor of law at Louisiana State University and a former chief tax counsel to the tax-exempt arm of the Internal Revenue Service.

I was reading about this in a piece that Doug Mataconis published, and I think he makes a few good points. For one thing, we’re really not talking about a lot of money in terms of the government’s revenue streams, and the net difference could actually be worse for Uncle Sam than the league.

On principle at least, I am sympathetic to the idea that tax exemptions such as this should be scrutinized and perhaps even eliminated as part of a broader effort at comprehensive tax reform. That sympathy comes not from animus toward the N.F.L., or the N.H.L. or P.G.A. for that matter, but due to general opposition to the use of the tax code for things other than raising revenue. Thanks to that fact, the Congress has used the tax code as an instrument of social engineering, or to promote the interests of specific businesses. Because of that, the tax code itself, and the regulations that accompany it, has become voluminous, nearly impossible even for lawyers and accountants to fully understand, and the source of frustration for everyone impacted by it. ..

That being said, there is a rationale to the 501(c)(6) exemption that shouldn’t be dismissed out of hand. In essence, it is meant to apply to what essentially amount to the collective voice of a group of business owners who operate their own, separate, taxable businesses. When you look at what the league office actually does — whether its organizing the draft, marketing, negotiating broadcasting and advertising contracts, organizing the Super Bowl and other events that are meant to benefit the league as a whole, or serving as the government and rule enforcement body for the league — that is exactly what is going on.

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This has been a bit of a learning experience for me, so it seems worthwhile to bring it up. The first item is that the tax exempt status does not apply to the teams (except the Packers, who are community owned), but only to the league office itself. Even if you taxed the money going through the NFL offices, it would amount at most to about ten million per year. To be clear, that’s not peanuts, so – again – I’m not ruling it out, but it’s different than thinking we’d suddenly be taxing the billions going through the teams. That revenue is already taxed.

Perhaps a better question is whether or not the league should be placed into this tax status to begin with. The NFL falls under the 501(c)(6) tax code for “business leagues and boards of trade… which are not organized for profit and no part of the net earnings goes to the benefit of any private shareholder or individual.” This is different than the more commonly known 501(c)(3) class for charities or the 501(c)(4) classification used by political advocacy groups.

It may come as no surprise that the forerunner to the 501(c)(6) classification was first lobbied for and put in place largely for the US Chamber of Commerce as part of the Revenue Act of 1913. In addition to the NFL, the NHL and the PGA, other examples of groups receiving this beneficial status are the Edison Electric Institute and the Security Industry Association. Since these groups exist to advance the interests – and by definition, the profits – of their member groups, I’m not sure why they qualify for tax exempt status in the first place except for the fact that they have really good lobbyists. They do not exist to perform charity (thought the NFL does some of that on the side) nor are they there to educate the public in some sort of civic service function.

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So maybe it is worth looking at whether the league should have this status. But would it really bring in any more revenue? That’s the prickly question which James Joyner previously dug into and found that the net effect could turn out to be a loser.

The NFL had expenses in excess of revenue of $77,628,857 for the year ended 3/31/2012 and $52,195,407 for the prior year. Apparently, that is nothing new. The liabilities of the NFL exceeded its assets by $316,642,454 at 3/31/2012. Superficially, my reasoning would be that if the NFL was organized as an LLC, instead of as an exempt organization, the member teams would have had nearly a third of a billion more in deductions since inception…

Superficially, it appears that, if the NFL were not an exempt organization, it would not owe federal income taxes, because it has not been making money. If you view the NFL in conjunctions with its member teams, it appears that it has the effect of increasing aggregate taxable income.

Due to my own personal appreciation of the NFL, I’m generally opposed to attacks on the organization to begin with. When you combine that with the facts outlined above and the potential futility of changing their status, I just don’t see what the point would be in going after them.

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Karen Townsend 2:00 PM | April 25, 2024
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