Guest-writer Dave Myerson is back for his second appearance on The Meat Locker. Time for some in-depth analysis on the shady operations the lie behind America’s favorite game.
Why Stripping The NFL Of Their Tax-Exempt Status Is A Pipe Dream
By: Dave Myerson
There has been some recent pressure from the public and congress to strip the NFL of their tax-exempt status. This is a futile effort, and a colossal waste of time. The NFL, through a series of extremely clever maneuvers, has ensured that this won’t ever happen. They continually operate in a grey area, which allows them to take advantage of how the tax code is written. Quite simply put, the way the NFL runs its business could be considered shady. However, they don’t break any laws, but call into question how a tax-exempt organization is supposed to act.
One thing about the NFL’s tax exempt status needs to be clarified right off the bat. They are not a 501(c)(3). In other words, they are not a public charity. The IRS actually has over 29 designations for category 501(c), which is their tax-exempt category. The NFL falls under section 501(c)(6), which:
Provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, which are not organized for profit and no part of the net earnings of which insures to the benefit of any private shareholder or individual.
What’s interesting is just professional football leagues are mentioned. Nothing about other professional sports leagues, which are also tax-exempt. The NHL, PGA, ATP, WTA, are all tax-exempt organizations. Why is just football listed? In 1966, then NFL commissioner, Pete Rozelle, used his lobbying power to obtain an antitrust exemption for the NFL-AFL merger. The antitrust and tax exemption were shrewdly attached to a bill whose purpose was to “suspend the investment credit and the allowance of accelerated depreciation in the case of certain real property.” The NFL-AFL merger language was incorporated into the bill at the very end, which had nothing else to do with football.
According to the IRS, the purpose of a 501(c)(6) is:
A business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. Trade associations and professional associations are business leagues. To be exempt, a business league’s activities must be devoted to improving business conditions of one or more lines of business as distinguished from performing particular services for individual persons. No part of a business league’s net earnings may inure to the benefit of any private shareholder or individual and it may not be organized for profit to engage in an activity ordinarily carried on for profit (even if the business is operated on a cooperative basis or produces only enough income to be self-sustaining). The term line of business generally refers either to an entire industry or to all components of an industry within a geographic area. It does not include a group composed of businesses that market a particular brand within an industry.
After reading through this definition from the IRS, the NFL doesn’t break any rules to be stripped of their tax-exempt status, but we can start to see where the NFL takes advantage of the way the laws are written. Let’s take a look inside the numbers to see just how the NFL is doing this.
Looking over the NFL’s form 990, the first thing that pops out is the low revenue totals. In their last fiscal year, they brought in $254,564,343. The majority of this being dues paid by the member organizations (all 32 teams), and about 500 thousand dollars in player/coaches fines (thank you James Harrison). Why such low numbers? All you hear about is how the NFL is a 9 billion dollar organization. Where is the TV contracts, sponsorships, merchandise, and intellectual property? Technically the NFL doesn’t own any of that. There is a separate, for profit company, that takes in that money and distributes it evenly to all 32 teams, which many of you know as revenue sharing. The teams then pay back a portion of this cash in the form of dues to the NFL, which by the way are tax-deductible for the teams. Don’t be mistaken, somewhere along the line, teams are paying taxes on all this revenue, but being able to clear millions of dollars off their balance sheets, and taking a deduction at the same time is a huge break. Is this illegal? No. Is this questionable? Hells yes it is!
Digging deeper into the NFL’s expenses, and we discover that they operate at a loss every single year! How is this possible? The NFL pays an extraordinary amount of money to their top 8 executives. In fact, they pay over 55 million dollars to their top 8 employees, which is about 52% of their total salary. The remaining 1538 employees for the NFL make 48% of the total salaries. Interestingly enough, this seems eerily similar to the salary structure of a large for profit company…
The NFL gets away with this because there is no law against extravagant salaries for top executives. However, the industry standard is to look at the average of other tax-exempt companies with similar sized budgets, and pay your executives “fair and reasonable” salaries based off what the rest of the industry is doing. According to Guidestar’s 2012 tax-exempt compensation report the average salary for a CEO with a budget similar to the NFL’s is 650 thousand dollars. Roger Goodell, the CEO for the NFL had total compensation of nearly 30 million dollars last year. That’s over 46 times the average!
When looking at Part II of schedule J, we can see that the executive’s salaries are not as high as everyone is making them out to be. Goodell’s salary is actually 3.1 million dollars, which is high, but not 46 times the average. What the NFL does is ingenious. They give their executives enormous amounts of compensation in the form of bonuses, to operate at a loss. Companies that don’t make money aren’t taxed, so even if the NFL loses their tax-exempt status, they wouldn’t be taxed! It’s a brilliant maneuver by the NFL’s lead council, who ironically makes over 8 million dollars a year, about 6 million of which is bonus money.
Here’s a mind-boggling statistic, the NFL spends only $2,363,515 on gifting and grants to help promote the game of football, which comes out to being .9% of their total revenue. They have tax-exempt status because they are supposed to help promote football as a whole, not just their brand and 32 members. Of that $2,363,515, 89% of it went to the NFL Hall of Fame for a new Super Bowl exhibit. So in essence the NFL is spending around .1% of their revenues on programs to promote football. I find this to be disgraceful. The NFL could do so much good for the game at all levels with their vast resources, but instead they choose to pad the pockets of their executives.
Recently Senator Tom Coburn from Oklahoma introduced legislation to strip the NFL of their tax-exempt status, based on this issue. He has no co-signers on his legislation, and the NFL spends more than any other sports league on lobbying efforts (i.e. Rozelle, Pete in 1966). At a time when the government is facing serious budget issues, and currently in the mist of a shutdown, why is Senator Coburn wasting his, and everyone else’s time on this? The only thing anyone can do is stop watching the NFL on TV, and stop attending the games. This would force the NFL to change the way they do business. Unfortunately, everyone, including the NFL knows this won’t ever happen, which gives them all the leverage to continue exactly what they have been doing.