As mind-boggling as this sounds, the NFL has a non-profit status. What does that mean? Below, I detail more about the law and what can be expected to occur in the future of the NFL holding such a status.
What is the Law?
The IRC, Internal Revenue Code, 501 (c), which details which organizations are exempt from Federal income tax, in rule (6) states that:
“IRC 501(c)(6) provides for exemption of business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues (whether or not administering a pension fund for football players), 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.” (emphasis added)
This means that the NFL does not make a profit and therefore cannot be taxed by the federal government. Although individual teams make money, the league itself does not.
In even simpler terms what does this mean?
- If NFL employees, like Commissioner Roger Goodell, stay at a hotel Saturday night before a Sunday morning game–they cannot be charged tax.
- Even though the NFL has a revenue stream of an estimated $20 billion, it makes no profit. After paying the executives, lawyers and donating money to other charities there are no profits. Yes, The NFL’s commissioner was paid $44.2 million in 2012. But, no business income taxes were paid on that money.
- The $35.9 million for the NFL headquarter office in Manhattan was paid for from league revenues and that money was never taxed.
To be clear, the NFL is not the only beneficiary from the professional sports clause of the non-profit law. The NHL and some pro-golfers also enjoy the benefits of no federal income taxes. The NBA never had non-profit status and the MLB gave it up in 2007 in what they claim was a tax-neutral move. I highlight the NFL here due to its increasing popularity.
Background behind the Law
Without the legal jargon, the IRC 501(c) code further states that the professional football league was added to the described non-profit organizations on November 8, 1966 and the NFL should not fear an antitrust challenge by the Clayton Antitrust Act or the Federal Trade Commissions Act.
These two acts prohibit business practices that deprive consumers of the benefits of competition, often resulting in higher prices for products and services. When the American Football League and National Football League combined to form what is now known as the NFL, in 1966 (note the year), lawyers for the NFL feared that the Clayton Act would prohibit them from merging to form one league. More specifically, the Clayton Act prohibits mergers and acquisitions that lessen competition and increase prices to consumers. To successfully avoid this law, the NFL filed for non-profit status, which exempt them from any antitrust challenges by the Clayton Act. They were allowed to file under non-profit status since the NFL serves more as a “trade association”, which means it promotes the interests of clubs. For example, they create industry standards, develop benchmarks for companies to use, lobby the government etc.
Therefore, the NFL not only avoided (and still avoids) paying federal income tax, while also being allowed to merge together with the AFL to form one powerhouse organization.
Why the General Public should be Upset
If the AFL and NFL still existed, they would compete for good football players (and more importantly, fans/consumers). Assuming that both leagues had the same product (i.e. equally good football players and football operations), teams would have to compete for the same fans based upon the prices of tickets. If there are the same products being offered by two different companies, where would you chose to buy from? Usually, if not always, you would choose the cheaper product.
In other words, the non-profit law allowed the merger between the AFL and NFL to occur, which exempt them from antitrust regulations, thus eliminating the incentive for firms to keep costs (including ticket prices) down.
Further, most of the revenue of the NFL comes from annual dues each team pays to cover operating expenses and salaries. The money is generated by teams who benefit from playing in the NFL framework. Without the NFL stamp of approval, a stand-alone professional football team stands little chance to make money, today. But, it gets even worse. The teams write off these dues as “charitable donations.” Although each individual NFL team pays taxes, their tax burden is greatly reduced by paying their parent organization, the NFL, dues.
Not to mention, most of these “dues” that the 32 NFL teams pay to the NFL organization are given back to teams through low-interest loans (lower than what a private bank would give) for stadium improvement. So, this untaxed money is not for “profit”, yet it certainly helps private individuals (NFL team owners). Doesn’t that violate the non-profit law? Lastly, the public pays for stadium improvements through local taxes that are earmarked for professional sports or through additional tax breaks.
Why the NFL believes it should have non-profit status
Alternatively, a point that the NFL’s team of intelligent and skillful lawyers make is that the 32 teams in the league are all competitive and that the team markets overlap, therefore the NFL does not violate antitrust laws. For example, the New York Giants and New York Jets play in the same stadium and therefore, have the same fans to compete for. Competing for consumers will bid down the prices of tickets and merchandise. This is one unique part of the New York market, but one can even imagine Charlotte and Atlanta, although four hours apart, compete for the fan base that is directly two hours away. (Not only do firms compete for fans in the immediate geographic region, but with Internet and cable expansion firms compete across regional boundaries as well.)
Further, the NFL believes that it does function as a trade association—it creates intellectual property, licensing logos and merchandise as well as negotiation for television contracts. However, don’t all private businesses that make “profit” create intellectual property, logos or merchandise as well as negotiate successful media contracts?
What is the future for this law?
Senator Coburn from Oklahoma first brought the PRO Sports Act, which is the Property Reducing Overexemptions for Sports Act, to Congress in September 2013. His report suggests that this tax loophole is worth $10 million a year and over $109 a decade. There is a simultaneous bill on the table from January 2014 in the House of Representatives by Representative Chaffetz from Utah. However, the NFL pays major money each year to lobby Congress on the non-profit status of the NFL and thus this bill has been stalled.
Phillip Hackney, a former IRS lawyer and now LSU law professor believes that pro sports leagues violate the tax code:
“If there is a justification for providing tax exemption to business leagues, it would be they operate for the public purpose of aiding commerce for all within a broad segment of some type of business or business in general. Commerce is important to our country, and we should encourage those who are working on it in a rather publicly minded manner. These (sports) organizations, in my opinion, are anything but public-minded in their profit interest. They are focused on the profits of their franchises.” (emphasis added)
However, I believe that Ken Berger, the president and CEO of Charity Navigator, a company that evaluates charities, sums the NFL non-profit status up perfect:
“Nonprofit status is typically given to groups that deliver services that private-sector companies are unwilling or unable to provide. The NFL stretches that definition.”
So, is it a stretch to say that the NFL is a charity?