So the NFL is going to relinquish its 501(c)(6) status, meaning that it will start filing as a regular, tax-paying corporation.
And I doubt it means much, unless someone simply has simply lost the plot when it comes to the NFL.
Let’s talk about it.
The gold-plate among tax-exempts is a 501(c)(3), which would include the March of Dimes, Doctors Without Borders and organizations of that type. The (c)(3) offers two key benefits:
(1) Donations made are deductible, which is especially important to individuals.
(2) Donations received are not taxable.
Point (1) is important because individuals are allowed only a limited plate of deductions, unless the individual is conducting a business activity. Point (1) is probably less important to a business, as the business could consider the donation to also be advertising, marketing, promotion or some other category of allowable deduction. An individual unfortunately does not have that liberty.
Point (2) represents the promised land. We would all like our income to be nontaxable.
The NFL is a (c)(6), which means that it does not receive benefit (1). It does not need benefit (1), however, as no one is trying to claim a donation.
Here is how the tax Code describes a (c)(6):
Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.
By the way, are you curious how the words “professional football leagues” got in there?
The NFL had been a nonprofit going back into the 1940s. During the 1960s it faced a challenge from the Al Davis and American Football League. An easy way to defuse an enemy is to recruit the enemy, and the NFL was talking to the AFL about merging. There was an issue, however, and that issue was antitrust. There were two leagues playing professional football, and there was a proposal on the table to combine them.
This made the proposed merger political.
It also meant that one had to go through Senator Russell Long, an extremely powerful senator from Louisiana.
Pete Rozelle, the then NFL commissioner, had an idea. What if the NFL “expanded” the league to include a team in Louisiana? Senator Long was quite interested in that turn of events.
And that is how we got the New Orleans Saints.
And, around that time, Congress amended the Code to include the words “professional football leagues.”
Back to our story.
So the NFL does not care about benefit (1). The reason is that the NFL does not receive monies from individuals like you and me. It receives money from its business members, which are the 32 NFL teams. Each team is a corporation, and payments by them to the NFL may be deducted a hundred ways, but none of those ways can be called a “donation.”
Notice that the “NFL” that is giving up its tax exempt status is NOT the individual teams. The “NFL” under discussion is the league office, the same office that organizes the draft, reviews and revises game rules, hires referees, and negotiates labor agreements with the players union. Each individual team in turn is a separate corporation and pays tax on its separate profits.
So is the league office a money-making machine, committing banditry by being tax-exempt?
Here I believe is the real reason for the NFL’s decision to relinquish its (c)(6): the NFL is tired of explaining itself. The NFL is an easy target, and the issue brings bad press when the NFL is trying to create good press, especially after recent issues with domestic violence and player concussions.
But to give up the promised land of taxation…?!
Why would they do that?
What if there was no profit left once the league paid everything? You have to have a profit before there can be a tax.
That is, by the way, (c)(6)’s are supposed to work. They are not a piggybank. They are intended to promote the interests of their members, whatever that means in context. Years ago, for example, I worked on the tax filings for the Cincinnati Board of Realtors, a classic (c)(6). You can readily presume that its interests are to promote the recognition, status and earning power of realtors in the Cincinnati real estate market.
The same way the NFL promotes its teams in a sports universe including Major League Baseball, the NHL, NBA, NCAA sports, MMA and so on.
Outrage is a tricky thing. Someone might be outraged that a tag-a-long politician has become rich by having her ex-President husband steer – and then drain – donations to a family foundation while she was serving as secretary of state.
Let’s replace “outrage” with something less explosive: is it reasonable for the NFL to pay Goodell $44 million?
Well, let’s consider an alternative: each team pays Goodell 1/32nd of his salary directly.
The financial and tax effect is the same, although this structure may be more acceptable to some people.
So the NFL league office is going to be taxable.
And I am looking at the NFL’s Form 990 for its tax year ended March 31, 2013. For that year, the excess of its revenues over expenses was almost $9 million.
How I wish that were me. I would be blogging as the Travelling-Around-The-World Tax Guy.
Nine million dollars would trigger some serious tax, right?
I also see on the Form 990 that the year before there was a loss of more than $77 million.
Ouch. That, in the lingo of a tax-paying corporation, is a net operating loss (NOL). It can be carried forward and deducted against profits for the next 20 years.
Let’s assume that $9 million or so profit for the NFL is a reasonably repetitive number.
Have we eliminated any tax payable by the NFL for the next eight or more years?
No, it will not work that way. The NOL incurred while the NFL was tax-exempt will not be allowed as a deduction when it becomes tax-paying. However, if it happened once, it can happen again – especially if the tax planners REALLY want it to happen.
Even if it doesn’t happen, the federal tax would be around $3 million, which is inconsequential money to billionaire team owners who are trying to maximize their good press and minimize their bad.
And remember: tax returns filed by a tax-paying corporation are confidential. There will be no more public disclosure of Goodell’s salary.
Although if I made $44 million, I would post my W-2 on Facebook.
About the author
Steven D. Hamilton is a career CPA, with extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.