Recently, you may have heard that the Internal Revenue Service came under some considerable fire for targeting certain groups seeking tax-exempt status while green-lighting others (such as one run by the brother of President Obama), but did you know that the National Football league, an organization that currently rakes in about $10 billion per year in revenue, is also a non-profit organization in the eyes of the government? While you're trying to figure that one out, we've got another one for you. Did you know that the league has been a non-profit organization since 1966, when the NFL merged with the American Football League, and then-commissioner Pete Rozelle folded in the request for an exemption with the request for an anti-trust exemption?
Yes, it's all true. Technically, the NFL is a 501(c)(6) non-profit organization. That part of the Internal Revenue Code "provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual."
It's an interesting wrinkle, because while the NFL's member teams essentially act as a group of individual entities with an overarching partnership governed by the league, the league itself has not always argued so when it was against its benefit. In the Los Angeles Memorial Coliseum Commission vs. National Football League et al dispute argued in the Ninth Circuit Court of Appeals in 1983, the league argued that it was a single entity, thus exempting it from certain antitrust statutes. The Coliseum Commission (and the Raiders franchise on whose behalf the Commission was responding) said that the league was instead a group of legal entities that act independently. The Court agreed with the Commission and the Raiders, finding that Rozelle had acted in bad faith in Al Davis' attempted move out of Oakland.
When Supreme Court Justice John Paul Stevens ruled against the NFL in the American Needle case in 2010, he more specifically outlined how NFL teams actually operate in practice, as opposed to pure theory.
NFL teams do not possess either the unitary decision-making quality or the single aggregation of economic power characteristic of independent action. Each of them is a substantial, independently owned, independently managed business, whose "general corporate actions are guided or determined" by "separate corporate consciousnesses," and whose "objectives are" not "common." Copperweld, 467 U. S., at 771. They compete with one another, not only on the playing field, but to attract fans, for gate receipts, and for contracts with managerial and playing personnel ...
[...] The fact that the NFL teams share an interest in making the entire league successful and profitable, and that they must cooperate to produce games, provides a perfectly sensible justification for making a host of collective decisions. Because some of these restraints on competition are necessary to produce the NFL's product, the Rule of Reason generally should apply, and teams' cooperation is likely to be permissible. And depending upon the activity in question, the Rule of Reason can at times be applied without detailed analysis. But the activity at issue in this case is still concerted activity covered for [the ruling's] purposes.
While member teams obviously operate for profit, the interesting wrinkle here is that the league itself claims not to. And one way to avoid profitability is to pay your current and former executives up the wazoo, which the NFL has done. In 2012 alone, the league paid approximately $53.8 million to its big -ticket execs, including $11.6 million to Commissioner Roger Goodell and $8.5 million to former Commissioner Paul Tagliabue, who replaced Rozelle in 1989 and ran the league until Goodell replaced him in 2006. In 2011, Goodell received a $22.3 million bonus after negotiating several enormously lucrative extensions with the television networks that provide the predominant percentage of the league's revenues.
Nothing about the league is non-profit, with the possible exception of its charities. How is the NFL able to pull this off? Well, the definitions of acceptable 501(c)(6) organizations are pretty broad, and one in particular may be the best match.
According to the Revenue Code, "A trust established for the purpose of monitoring and coordinating business league activities of its member business leagues and collecting, administering, and disbursing funds to the member business leagues for business league purposes qualifies for exempt status under IRC 501(c)(6). The trust was created pursuant to collective bargaining agreements between a labor union and several business leagues that promote the home building industry in a particular geographic area."
Dave D'Alessandro of NJ.com recently wrote about one way in which the league sets this up.
The league collects $6 million in annual membership dues from each team, the teams write off those dues as "charitable donations," and the NFL in turn takes that $192 million and puts it into a stadium fund that gives owners interest-free loans as long as they secure public financing for their new or renovated stadiums. That means we’re left with two bills: Not only do taxpayers lose out on federal tax revenue, we pay for new stadiums that generate profits which enrich only the owners.
As Andrew Delaney pointed out in the Vermont Law Review in 2010, those stadium funds don't do much to benefit the cities that house the structures.
Technically, the city owns the stadium. Personal seat licenses or PSLs are sold through a public agency, tax-free. Profits are then used to pay down the owner’s share of the NFL loan. The money from the PSLs never goes directly to the teams, though the teams save millions of dollars in taxes and the loan from the NFL is paid down significantly, providing a very significant benefit to the owners.
Now, it would appear that the government is reviewing how this all came about. On April 24, Oklahoma Senator Tom Coburn (R.) introduced an amendment to the Marketplace Fairness Act that would end the practice that allows professional sports leagues to qualify for tax-exempt status.
In his 2012 "Waste Book" tome, which chronicles government waste, Coburn outlined his theory.
The National Football League (NFL), the National Hockey League (NHL), and the Professional Golfers’ Association (PGA) classify themselves as non-profit organizations to exempt themselves from federal income taxes on earnings. Smaller sports leagues, such as the National Lacrosse League, are also using the tax status. Taxpayers may be losing at least $91 million subsidizing these tax loopholes for professional sports leagues that generate billions of dollars annually in profits. Taxpayers should not be asked to subsidize sports organizations already benefiting widely from willing fans and turning a profit, while claiming to be non-profit organizations.
Teams in the NFL especially would have a hard time meeting the standards of organizations that, per the Revenue Code, have a setup in which “[n]o part of a business league’s net earnings may inure to the benefit of any private shareholder or individual and it may not be organized for profit to engage in an activity ordinarily carried on for profit.”
Coburn's amendment makes an important delineation -- professional sports leagues are not out for the betterment of their sports as a whole; they're out for the betterment of their own leagues. Anyone familiar with the NFL's battles with the AFL and USFL, or Major League Baseball's fights with the Federal League and other rogue organizations, or any number of other antitrust-related bullyings in the last 100 years, could tell you that. By the way, Major League Baseball surrendered its own tax-exempt status in 2007, in part because it didn't want to reveal the salaries of its top executives.
It's also worth mentioning, as D'Alessandro reported, that NFL employees don't have to pay taxes on hotel stays and restaurants at the Super Bowl. Keep that in mind the next time you're asked to vote on a hotel/restaurant tax to fund an NFL-related mega-building in your municipality.
Would taxing the NFL in line with its actual profitable purpose impact America in a major way? Most likely not -- even if Coburn's estimates are correct, "at least $91 million" can be carved up rather quickly by any government. But fair is fair, and the NFL's claim that it operates as anything but a near-bulletproof money machine is ludicrous as best, and near-criminal at worst.