Ed note: You may have just finished paying a tax bill for 2014, but you know who didn’t? The National Football League. However, Mike Slack (one of our Tax Institute experts) explains how that changed this week.
When most people think about tax-exempt organizations, churches, schools and charities often come to mind. These fall under section 501(c)(3) of the Internal Revenue Code.
However, there are numerous other types of tax-exempt organizations, everything from social clubs to cemeteries. My particular favorite is section 501(c)(6), which, for the most part, grants exemptions to certain business leagues including the National Football League (NFL).
On April 28, the NFL announced it was voluntarily revoking its tax-exempt status. So … ARE YOU READY FOR SOME FOOTBALL… tax-exempt entity questions and answers?
The NFL was exempt from taxes? Really?
Yes. In the 1940s football wasn’t as popular or financially lucrative as it is today (professional bowling was probably more popular), and the NFL needed to save money. So in 1942 the NFL became exempt from taxation as a trade association under section 501(c)(6) of the Internal Revenue Code.
Note: One key distinction between this type of tax-exempt organization and section 501(c)(3) charitable organizations is that amounts paid/donated to section 501(c)(6) organizations are never tax deductible as charitable contributions. Sorry to break it to you Packers fans, but the amount you paid to acquire a share in the team’s common stock is not deductible.
In 1966, the language of section 501(c)(6) was even rewritten to further specify the NFL’s exemption status with the following revision:
“Business leagues, chambers of commerce, real-state boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit…”
How did that language get into the actual tax law?
Louisiana Senator Russell Long, who was notorious for his influence over the tax code, got the new language for section 501(c)(6) into tax legislation along with approval for the NFL and AFL (American Football League) to merge. In late October 1966 the House approved the legislation and, not so mysteriously, the creation of the New Orleans Saints was announced on November 1, 1966.
So the NFL hasn’t been paying taxes?
The individual teams that make up the NFL are fully taxable entities and have been paying taxes since inception. Only the league, which administers those individual teams, is tax exempt.
Are any other professional sports leagues exempt from tax?
Currently, the National Hockey League, the PGA Tour and the Association of Tennis Professionals World Tour are tax-exempt. Major League Baseball was tax-exempt until it voluntarily revoked its status in 2007. The NBA never sought tax-exempt status.
Why did the NFL choose to revoke its exempt status?
The most likely reason is public scrutiny. Over the past few years, bills have been proposed in Congress that would prevent organizations like the NFL from being tax-exempt. However, the theory most experts agree upon is that being tax-exempt required too much public transparency.
The primary reason for this is IRS Form 990.
With few exceptions, organizations that are tax-exempt under one of the provisions of section 501(c) are required to file an annual information return with the IRS that details the organization’s income and activities for the year and is made publicly viewable to anyone.
Back in the day, the public would either have to visit an organization’s office to review this document or request a copy through a tedious process. With the accessibility of the Internet, most organizations’ returns can be found through a simple search. For example, the NFL’s 2013 Form 990 can be viewed here.
Though many find details of the NFL’s income interesting ($327 million in revenue and a net profit of only $9 million for 2013), the information most critics look at is on page 7 of Form 990, where organizations list the compensation paid to their officers and key employees. Many critics feel the revocation of exempt status may be based on the fact that, as Commissioner of the NFL, Roger Goodell’s $44 million salary is public knowledge. As a comparison, Peyton Manning only made $35 million in 2014.
It almost doesn’t come as surprise the NFL would choose to revoke its status just a few days before the 2015 NFL Draft.
What happens now to the NFL and taxes?
As of April 28, the NFL is a taxable entity, but the league will not be paying that much in taxes when compared to its revenues. For example, had the league been a taxable entity in 2013, it would have only paid $3,148,614 in corporate income taxes.
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