Common Sense On The N.F.L.’s Tax Exempt Status
The idea that the N.F.L. "doesn't pay taxes" is largely false.
With a season that has, so far, started out being as much about the failures of the National Football League off the field on issues like domestic violence and concussions as it is about what’s happening on the field, the N.F.L.’s League Office, which serves as the entity that effective runs the league for the owners of the thirty-two N.F.L. franchises, has come under attack from all corners on a wide variety of issues that have little to do with the stories that have dominated the headlines. One issue that has come up before which is find its way back into the public consciousness is the fact that the N.F.L., meaning specifically the entity that speaks for the owners, has a tax exemption under Section 501(c)(6) of the Internal Revenue Code. To the average person, this exemption seems to make no sense whatsoever. After all, professional football is the most popular sport in the country and it brings in revenues from ticket sales, broadcast revenue, advertising, and other ventures that are as high as some of the country’s largest corporations. Roger Goodell, the embattled Commissioner of the League makes nearly $40 million per year. And, even with the recent controversies it is clear that league revenues are just going to continue to increase into the foreseeable future. Given all of that, some wonder, why should they have a tax exemption? On Capitol Hill, Senator Tom Coburn has talked about repealing the exemption, which would also affect the National Hockey League and the Professional Golf Association and allegedly bring in an additional, albeit relatively small, $109 million of tax revenue over the next ten years. Regardless of that detail, though, the idea of repealing the league’s tax exemption is the kind of populist issue that is perfect for politicians.
As Politico’s Kelsey Snell points out, however, the issue regarding the league’s tax status are complicated, and the arguments in favor of changing the law are far less persuasive once you look at the facts and the evidence:
The break may seem unfair to some, but it is perfectly legal and accounts for a only small slice of the NFL’s revenue. Taking it away won’t change anything about the way the league, its billion-dollar franchises, or their millionaire players and owners behave, experts said.
“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.
The 501(c)(6) designation isn’t like those for political organizations that file as 501(c)(4) groups, or charities that file as 501(c)(3) groups. It is intended for business leagues whose members pay dues to have a central organizing body.
That’s essentially what the league office does for the 32 NFL franchises. It manages issues that they face collectively, like securing broadcast rights and negotiating with the players union.
The majority of the business of the NFL happens outside the league office. Every franchise — except for the nonprofit, fan-owned Green Bay Packers — is a separate, taxable business.
The NFL does not get to avoid taxes on income from all the hats, jerseys, fantasy leagues, video games and highlight reels that rake in billions.
Most of “the billions of dollars of revenue that are earned in the NFL are subject to tax,” said Jeremy Spector, outside tax counsel for the NFL at Covington & Burling, in an interview last year. Spector was not available to comment for this story, though little has changed about the NFL’s earnings or tax status.
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 the fact that 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. These special tax favors also tend to distort the economy by diverting money from other, more viable, areas of investment, and toward those that are politically favored. Additionally, the costs that business and individual have to pay to comply with the law end up sucking money out of the economy and, again, causing economic distortion. Given all of that, getting rid of the exemption as part of an overall tax reform package would probably be a good idea.
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. The league office isn’t really a separate entity of any kind, it exists to advance the interests of its member teams and to maximize the overall brand of N.F.L. football. Additionally, the league office cannot do anything that the owners have not authorized it to do, and with respect to many decisions must consult with the owners and obtain their approval before acting at all. The head of the office can only be removed by the owners, for example, and the league office could not do something like authorize expansion rules changes without the owner’s consent. Nearly every sports league operates like this, of course, but the N.F.L. is different from, say, Major League Baseball in that there is much more integration and collective action carried out through the league office of the N.F.L. than there is through the office of the Commissioner of Baseball. Finally, it’s important to point out that the vast majority of the revenue that the N.F.L. as an entity earns ends up getting distributing to the individual teams after expenses are paid and, with the exception of the not-for-profit Packers, all of those teams are taxed in the same way that any other American business entity is. So, ultimately, it is simply untrue to say that the N.F.L. doesn’t pay taxes. Indeed, given that getting rid of the exemption would bring in an average of merely $10.9 million dollars a year in additional revenue over the course of ten years this hardly seems like a high priority issue. Instead, it appears to be mostly a whipping boy for people to pile on the league at a time when it is, rightfully, taking hits for things ranging from the Ray Rice story to the issue of how concussion injuries are handled.
As a final note, and as James Joyner noted last year, there a study published in Forbes that looked at the leagues 2012 revenues seems to suggest that the exemption results in the league as a whole paying more in taxes than it would otherwise:
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. I’m sure it is more complicated than that, but I suspect that the motivation for the way it operaties may be to keep liabilities off the balance sheets of the member organizations. It appears to me that if there is a game there, it is a GAAP (generally accepted accounting principles) game, not a tax game.
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.
If this analysis pans out, then eliminating the exemption would actually result in less revenue to the Federal Government. At the very least, this is an issue that ought to be looked at before going forward with a policy proposal that seems rooted more in populism than rational thought.