Tax Exemption Case Study

The NFL, as a “professional football league,” is listed under the code section §501(c)(6) statute, in the same class as business leagues. The forerunner to code section §501(c)(6) “business leagues” was enacted as part of the Tariff Act of 1913. It’s assumed the U.S. Chamber of Commerce request for an exemption for nonprofit civic and commercial organizations from this passage. There were only seven hundred and fifty business leagues when the code section §501(c)(6) exemption was first enacted as part of the Tariff Act of 1913 with collective revenues of $60 million. By 1995, that number had increased to more than twenty-five thousand business leagues and collective revenues of $19.5 billion. Providing tax exemption status to companies generating
an estimated $20 billion in revenue was likely not predictable to Congress when it passed the Tariff Act of 1913. (20) Section §501(c)(6) of the IRC provides for the exemption of business leagues, as well as chambers of commerce, real estate boards, boards of trade and professional football leagues. To qualify for an exemption under this statute as a business league, an organization must meet certain requirements contained in the Regulations §1.501(c)(6)-1. (21) To satisfy the requirements of the Regulation the court in Bluetooth SIG Inc. vs. United States formulated a 6-prong test. An organization must be an association of persons having a common business interest; whose purpose is to improve the common business interest; not organized for profit; that does not engage in a regular business of a kind ordinarily conducted for profit; whose activities are directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons; and of the same general class as a chamber of commerce or a board of trade. Currently, it is unclear whether all §501(c)(6) organizations must meet the requirements set forth in Bluetooth to maintain a tax exemption as the language in that case seems only to apply to business leagues. (22) In Canton, Ohio is where the NFL was founded on September 17, 1920 and where the NFL hall of fame presides. Originally, the league was called the American Professional Football Association (APFA) but was renamed the NFL in 1922. From the time of its inception until 1942, the NFL was an actual taxable entity. In its twenty-third season the NFL was struggling financially. The League desired to discover ways to save money and to safeguard its employees, the players. In 1942, with many of its players off fighting in World War II, the NFL filed for tax-exempt status from the IRS. The NFL’s application was accepted and was done so to prevent the League from financially collapsing. This would sustain the players would have a place to play and could return to their jobs when they came home from the war. Through this action the League, which was then based in New York, became categorized as a trade association and therefore was qualified to be tax-exempt. This categorization would become progressively more important as the League became more successful and more profitable. (23) In 1966, Commissioner Pete Rozelle lobbied Congress to make sure the League would continue to maintain its tax-exempt status. At the same time the NFL was about to merge with the American Football League (AFL). During the lobbying efforts Rozelle received support from a pair of Louisiana lawmakers to put language into an unrelated bill that explicitly categorized football leagues as tax-exempt. In exchange, the NFL would add a football team to New Orleans, hence the creation of the New Orleans Saints. Senator Russell Long was infamous for his influence over the tax code. The tax exemption was located fittingly in an unrelated session law that was mostly concerned with collecting taxes on real estate and the language of “professional football leagues” is inserted at the bottom of the Act. As it related to professional football leagues, the Act, had both antitrust and tax provisions. The antitrust provision was enacted to permit the NFL and AFL to merge without being in violation of the Clayton Antitrust Act or the Federal Trade Commission Act. The language was amended in the IRC to guarantee that the football league’s exemption would not be in danger if the League administered a players’ pension fund. This was significant for tax-exemption purposes as the managing of players’ pension funds could be a form of inurement, as the players would be profiting from revenue that the tax-exempt organization had produced that was then placed in the pension funds. (24) As recently as 2009, the IRS conducted an extensive audit of the league office and determined that it was entirely in compliance with the laws governing tax-exempt entities. This exemption saved the NFL millions in taxes over the years. The NFL enjoyed this tax shelter until April 2015. The NFL has voluntarily forgone its tax exemption and begins paying income taxes. One would think the question should be raised, is the NFL allowed to do this? A discrete issue arises when an organization chooses to go from “tax-exempt” to “taxable” status. Should there be a penalty for an organization that forgoes the requirements of the exemption and begins paying income taxes. Surprisingly, the IRS does not provide any guidelines for an organization to comply with when it decides to make this transition. An organization organized not-for-profit, and one that is granted an exemption because of a public good or service that it provides, should face a penalty if it chooses to become taxable. The NFL should not be allowed to abuse the tax exemption process by abiding by an exemption’s requirements only for as long as the exemption is economically beneficial to the NFL and then foregoing the requirements when it no longer needs it. The IRS should consider preventing this from occurring in the future with the main requirement being an exit tax paid by the organization to the IRS for the time it spent being income tax-free. The IRS will be able to avoid future tax-exempt organizations from playing the system by using an exemption strictly for economic purposes by imposing an exit tax on transitioning. The main reason for permitting a tax-exemption is to support the activities of an organization that is providing a benefit to the public.
Some may doubt that a tax exemption is approved solely for the economic benefit of an organization, to pick and choose when to use the exemption in a way that is beneficial to its activities. This seems exactly what the NFL has done with their tax exemption status. It is casting aside the requirement of disclosing its financial information to the public and is looking out for its own self-interest. The Commissioner Roger Goodell even stated that the NFL decided to forgo its exemption because it was a public relations headache. With Commissioner Goodell disclosure of $44 million-dollar salary, the NFL has been scrutinized for years for its tax exemption status and this disclosure will not be required by the NFL once they are a taxable entity. An important issue to those commenting on the NFL’s tax exemption are failing to discuss is the likelihood that the League could use the money it saves from being tax-exempt and to reinvest that money back into the organization, or to use it for other non-tax purposes. Since the NFL was not required to pay income taxes, they were able to get a head start on other sports leagues that were required to pay income taxes. The NFL is now playing the system and foregoing the exemption and its requirements; because the NFL no longer wishes to be tax-exempt to survive. It is estimated that the NFL had tax
breaks worth more than $100 million since first receiving their tax-exempt status. However, the NFL office usually spends all the money it receives each year on legitimate business expenses and at the end of a normal year there’s no income left to tax. (25) The NFL abused the tax exemption status in the following manner.
First, in 1942 when struggling financially, after receiving the exemption, the NFL would have been able to build and expand the organization using money that it would have spent on taxes. Either through acquisition from a rival league, or through expansion on its own, the NFL has admitted twenty-seven different teams and franchises since 1942. Not all of these franchises are still in the league currently, but this figure supports the fact the NFL has indeed been able to grow since 1942. The NFL has decided that it no longer wants to abide by the requirements or deal with the public relations headache that comes along with being tax-exempt after seventy-three years. This should not be how the tax exemption status should work. An exemption is granted because the organization is providing a public good; a good that society does not provide for itself. An exemption is not granted merely to help an organization survive economically challenging times and then be cast aside when the exemption is no longer beneficial. Some critics may argue that there is nothing wrong with the decision the NFL wants to start paying income taxes. The NFL complied by the rules during its time of being exempt and it will now be paying income taxes for it has voluntarily given up the exemption. The point that is missed is that the League may not have survived if it was not granted the exemption. It has been stated the NFL was
struggling financially therefore it is possible to speculate that the permission of the exemption was crucial for the League survival. By allowing the NFL to continue, the granting of the tax exemption has indebted the NFL to society. Therefore, an amendment needs to be made to the Tax Code, to ensure that an organization in the future will not be able to abuse the tax exemption system in the same way the NFL has.
For the benefits received by being tax exempt, an organization should be required to pay the IRS an exit tax. Some estimate the NFL will pay $10 million per year of income taxes for foregoing their tax-exempt status. After seventy-three years of tax exemption, the NFL has benefited well more than enough from the burden of paying taxes. Just imagine if the NFL paid half of the $10 million for those seventy-three years, the total would come to $365 million paid in taxes to the IRS. The United States taxpayers have been footing the tax burden of $365 million avoided by the NFL. (26) With an exit tax the NFL should have to pay to make up for all the years that it was exempt and received taxpayer subsidies. If the League no longer wants to adhere to the requirements that are expected of a tax-exempt organization, then the NFL owes taxpayers something in return for carrying its weight these years. By allowing the NFL to make this transition and abuse its tax exemption without penalty, a dangerous precedent will be set for organizations to follow in the future. The addition of an exit tax will act as a deterrent, both before an organization is granted an exemption and while the organization has the exemption. If an organization has notice of an exit tax before applying for an exemption, it will not be able to play the system and only use the exemption for as long as it is useful for it. Subsequently, once an organization has a tax exemption, it will be on notice that it faces a stiff penalty if it chooses to become for profit.