To tax or not? The NFL's relationship with the IRS

Brent Schrotenboer | USA TODAY Sports

With a pay package last year of $29.4 million, NFL Commissioner Roger Goodell earned more money than the chief executives of Wal-Mart, Coca-Cola, AT&T and several large banks.

Goodell's employers — NFL team owners — think he's worth it. He operates a league so flush with revenue that the NFL also recently spent $36million to construct new league offices in New York, according to the NFL's most recent tax form.

It's the cost of doing business as the most powerful sports league in America. And now some think it's time to add another expense to the NFL — federal income taxes. For decades, the NFL and other big-time sports leagues such as the PGA Tour and NHL haven't been required to pay any.

"This is one of the things in the tax code that just doesn't make any sense," John Hart, a spokesman for Sen. Tom Coburn, R-Okla., told USA TODAY Sports. "It's one of the striking examples in the tax code where middle- and lower-income Americans are essentially subsidizing salaries for multimillionaires."

The sports leagues are exempt from paying federal income taxes — a free pass that has been subject to recent debate amid a swirl of related controversies about the fairness of the tax code and questions about whether some groups are worthy of tax exemptions. Decisions about who pays taxes — and how much — affect everything from weekly paychecks and public roads to NFL stadium construction and Goodell's salary.

Coburn wants to change the equation for sports leagues classified as tax-exempt, not-for-profit organizations. He has proposed removing such exemptions — a move that could mean $109million in new tax revenue over the next 10 years, according to an estimate this month by Congress' Joint Committee on Taxation.

On the surface, the tax exemptions might seem outrageous. Big-time professional sports leagues help enrich millionaire athletes. The NFL even acts like a bank, loaning money to teams at bargain rates to help build stadiums for private team owners. Shouldn't the league pay taxes like giant for-profit corporations?

It depends on the point of view. The leagues say they qualify for their tax exemptions and their not-for-profit status based on their business structure and purpose. The NFL also notes that while its league office is tax-exempt, its 32 franchises are not.

The league's most recent tax form said that it distributed $4.3billion to clubs, where such money is subject to tax. That includes TV rights fees, postseason revenue and shared ticket revenue from visiting teams.

Coburn "has it wrong," NFL spokesman Brian McCarthy told USA TODAY Sports. "Every dollar of income generated in the NFL — such as tickets, TV rights fees, merchandise sales, etc. — is subject to federal income tax."

Coburn anticipates opposition in Congress. He tried to attach the amendment to the Marketplace Fairness Act recently passed by the Senate, but it wasn't even considered. The NFL has friends on Capitol Hill and spent $1.5million last year on lobbying, its last tax form says. Hart said it's "only a matter of time" before Coburn attaches it to a bill.

"We're just trying to raise the issue and force a vote on it as soon as we can," Hart said.

Focused on profits?

The NFL has been classified as not-for-profit since about 1942. Then in 1966, lest there be any question, Congress amended the law to specifically list professional football leagues as 501 (c) 6 organizations — along with chambers of commerce and boards of trade. It happened as a result of horse trading with Congress that included an antitrust exemption for the NFL that helped it merge with the AFL, a rival league. In exchange, Congress received pledges from the NFL, including a promise to add a franchise in New Orleans.

Philip Hackney, a former attorney for the IRS, said he thinks such tax exemptions for pro sports leagues are improper because they violate the spirit of 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," said Hackney, an LSU law professor who previously worked as an IRS attorney litigating exempt-organization tax issues. "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."

According to the IRS, 501 (c) 6 organizations are supposed to be business leagues that promote a common business interest but do not to engage in "a regular business of a kind ordinarily carried on for profit." The IRS says the activities of such organizations should be "directed to the improvement of business conditions of one or more lines of business rather than the performance of particular services for individual persons."

On its tax form, the NFL calls itself a "trade association promoting interests of its 32 member clubs." The league's tax form also lists $621million in receivable loans — part of the lending program to member teams for stadiums.

Such loans are made at below-market rates, helping for-profit NFL teams save money and build better revenue-producing stadiums. This raises questions with tax experts, because such bargain loans could be considered private benefits for NFL "insiders" — the private team owners who govern the NFL and employ Goodell. Private insider benefits generally are not allowed for tax-exempt not-for-profits.

"Tax-exempt organization's revenue and other resources are not supposed to be used for private ends," said Bruce Hopkins, an attorney in Kansas City, Mo., and author of the bookThe Law of Tax-Exempt Organizations. "On the face of it, below-market loans to insiders would seem to be use of the NFL's income for non-exempt ends. By definition, the NFL could invest the funds commercially and have a better rate of return, which is what non-profits are supposed to do as a matter of prudent investing."

Asked about these concerns, the NFL's McCarthy said the IRS has audited the league and affirmed its tax exemption. "Not-for-profits, like other organizations, are allowed to make financing decisions, with the approval of its members or stakeholders, that it feels are in the best interests of the membership," he said.

Public interest?

The NFL and other leagues say they also do more than serve the interests of their members. They say they help promote and grow their sports.

PGA Tour spokesman Ty Votaw said the Tour raised more than $130million last year for charity along with its not-for-profit tournaments. If the PGA Tour weren't tax-exempt, Votaw said it might not be able to contribute as much to charity. If it weren't tax-exempt, he also said the Tour still could deduct golfers' prize money as a business expense, reducing the amount of money that could be taxed.

Likewise, McCarthy points out that if the NFL weren't tax-exempt, its teams could still deduct its membership dues to the NFL as a business expense. Almost all of the league office's $255million in revenue last year came from such team membership dues. The net effect of removing the tax exemption on this revenue might be a "wash," he said, because the league also could deduct nearly as much in business expenses.

About five years ago, Major League Baseball gave up its tax-exempt status and became a for-profit entity, calling the move "tax-neutral." The NBA says it has never been a not-for-profit.

"There are some entities that pay less tax if they're taxable than if they're (tax-exempt) because of the rules of what can be deducted as a business expense," said Alan P. Dye, an attorney in Washington, D.C., who specializes in representing trade associations.

Hart, Coburn's spokesman, said if the tax-exempt status doesn't matter much financially, then why doesn't the NFL surrender it? Because they don't have to pay income taxes, he said the exemption helps these leagues free up other money for golfer's prize money and bigger employee salaries — such as Goodell's.

In the end, it boils down to a tax policy decision for Congress.

"Just because it's making a lot of money doesn't mean it should necessarily lose its exemption, but it's a legitimate question," Hopkins said. "It's a pure policy decision."

Follow sports writer Brent Schrotenboer on Twitter @Schrotenboer. E-mail: bschrotenb@usatoday.com