Originally published on Forbes.com Feb 1st. 2014
Senators Angus King, and Senator Tom Coburn, a Republican are co-sponsoring a bill that would strip the National Football League of its tax-exempt status. I suppose my delight that a Republican and an Independent would sit down and talk to one another about tax policy should be so overwhelming that I should ignore the fact that, as far as I can discern, the bill they are proposing is pointless and may not bring in any money at all, almost certainly none from the National Football League.
The Bill
The bill has the euphonious title Properly Reducing Overexemptions For Sports Act, but it says you can call it the PRO Sports Act for short – clever. In the findings section, it notes that the National Football League, the National Hockey League, the PGA Tour, and the Ladies Professional Golf Association are all classified as exempt organizations under Code Section 501(c)(6). It proposes language that would exclude professional sports leagues grossing more than $10,000,000 from the 501(c)(6) definition.
Thank God for that $10,000,000 threshold. The United States Curling Association is safe for now.The United States Chess Federation would be safe on that basis also even though chess grosses a million more than curling. Oddly, enough the curling group has managed to be exempt under 501(c)(3), which means you can make tax-deductible contributions to it. The chess group, which I have belonged to a couple of times, is exempt under 501(c)(4), the status that the Tea Party groups were lusting after when they were frustrated by the Cincinnati IRS gang that couldn’t sort straight
Will The NFL Care?
It seems like it would be a big deal for an organization that handles billions of dollars to lose its exempt status, but when you look at the numbers, you get a different story. Being an exempt organization that is not a church, despite the religious awe that many have for the sport, the National Football League is required to file Form 990, which is a public record easily accessible on guidestar.org.
The most recent numbers available are for the years ending March 31, 2012, and March 31, 2011. There are losses in both years – $77,628,857 and $52,195,047 respectively. Those years are not anomalous. The National Football League has liabilities in excess of assets of $316,642,454 Superficially, it would appear that the 32 member teams of the NFL have increased their aggregate cumulative tax liability by over $100,000,000 due to the method of organization that they have chosen.
Is The NFL Exemption Really Lousy Tax Planning?
Paying more taxes than you have to is considered irresponsible, if not outright sinful, in most business circles that I am familiar with. It does happen, though. As a partner in a CPA firm, I would sometimes point things out about the way our firm was operating that were sub-optimal from a tax viewpoint, but fixing them might rock somebody’s boat. Anytime you have a group of people who get together to make money for themselves, it is very challenging to balance the interest of the group against the interests of each individual, particularly when the culture sometimes favors putting sociopathic egoists in command.
I tried to figure out what the NFL was up to with those persistent losses. (Remember the losses are of the association, not the member teams). Somebody posted an audited financial statement for the year ended March 31, 2010. The title on the statement is National League Football League League Office, but the balance sheet numbers tie to the National Football League Form 990 for the same period, so I am fairly confident it is the same entity. The organization runs mostly on assessments to the member teams. Most of the increase in liabilities seems to be related to something called the G-3 Stadium Program. I dug into the notes to the financial statements, which are pretty much boiler-plate until you get to page 13 and the note on Debt and the G-3 Stadium Program.
Under the G-3 Stadium Program the NFL has borrowed money to help build or spiff up stadiums. The loans are paid back with a piece of the visiting team’s share of the stadium revenue. Here we have gone from tax planning to creative finance. At least I now understand how the NFL is able to keep increasing liabilities over assets. The discounted present value of the visiting team’s share of stadium revenue is not an asset under GAAP, but that does not mean that it cannot be borrowed against.
Being a tax blogger and all, I have not dug further into exactly why they are doing things this way. Presumably, each individual NFL owner can’t care that much whether a rival’s stadium kind of sucks, but in general it would be bad for the sport if any of them sucked. On the other hand, there might be a temptation to cut corners on your own stadium, since most of the money is coming from TV.
Turning the money-losing exempt organization into a taxable entity does not look like it will cost anybody any additional taxes. Conceivably if they organized it as an LLC, they might save a few dollars.
What About The Other Sports?
The National Hockey League posted losses in the last two years, but cumulatively it has operated at a break-even, with its assets exactly matching its liabilities. Interestingly the PGA Tour and the LPGA seemed to be consistently profitable and yanking their exemption would bring in some money, although not very much. Maybe $10,000,000 a year or so.
Why Have 501(c)(6) At All?
If the Senators were really serious about this, they might want to take a serious look at 501(c) as a whole. Do we really need 29 varieties? 501(c)(6) could be scrapped entirely without doing much harm. 501(c)(6) organizations are not charities. They are not for profit because the members are trying to make money for themselves and are not really that interested in the organization making money.
I don’t care whether the American Institute of Certified Public Accountants makes money. In principle, if it does, it should pay taxes, since the members get to deduct their dues. The members would probably just as soon have the dues, which are pretty stiff as I contemplate actually paying them myself this year, reduced to keep it at a break-even.
The American Bar Association netted about $10,000,000 per year in the last two years, significantly less than the gentlemen golfers, but quite a bit more than the ladies. Why should that profit, funded mainly by deductible dues go untaxed?
Where The Real 501(c) Money Is
Of course, if you really wanted to go after big exempt money, you need to target the large 501(c)(3) organizations. There is this operation in Cambridge Massachusetts. Used to be a seminary for Congregational ministers. According to its 990, it netted nearly a billion dollars in the year ended June 30, 2011, although it did lose a third of that in the subsequent year, but still, Harvard could probably afford to pay some taxes.
You can follow me on twitter @peterreillycpa.
Correction
In my initial version of this post, I identified Senator King as a Democrat.
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