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November 25, 2013
NFL's Tax Exemption Faces Scrutiny
by David van den Berg

Full Text Published by Tax Analysts®

The NFL will serve fans three games this Thanksgiving, and for decades it has had something on its plate that not everyone agrees with: tax-exempt status.

The NFL has been a tax-exempt organization since the 1940s, said Jeremy Spector of Covington & Burling LLP, the NFL's tax counsel. Congress confirmed the league's tax-exempt status in the 1960s when it amended section 501(c)(6) to add professional football leagues, said Spector, adding that the league's determination letter was unavailable.

The NFL that fans interact with isn't the same as the league office itself, and that can be confusing, said Spector. The league office -- which is tax exempt -- is the organizing entity and sets the rules of play; schedules games; administers the annual college player draft; hires, trains, and pays game officials; funds research on player health and safety; and makes charitable contributions, Spector said.

"It can't be that all of these jerseys, that all of these game tickets for Sunday afternoons, are all escaping tax -- and they don't," Spector said. "And that's because they are outside the league office."

Legislation has been introduced in the Senate to revoke the NFL's and all other exempt professional sports leagues' 501(c)(6) tax-exempt status. Some practitioners, in interviews with Tax Analysts, questioned why the NFL has it.

"The burden should consistently be on the favored entity to justify that ongoing exemption, not on the government that seeks to implement a tax policy that at least seeks to achieve horizontal equity," Georgia State University professor Jack Williams said.

Major League Baseball and the NBA are not tax-exempt organizations. When asked about the potential effect of revoking exempt status from entities that have it, arguments that the organizations and their brands would suffer are not persuasive, Williams said. However, he hasn't heard the NFL or PGA Tour Inc. make those claims directly, he said.

If Congress revoked the NFL's tax-exempt status, the league would do business the same way, Spector said. However, taking away that status would expose the NFL to an unfair tax liability relating to a loan program for teams that helps them fund stadium construction, he said.

Stadium Loan Whipsaw

In 1999 the NFL launched a loan program for teams to help them fund stadium renovation and new construction projects. Loans made through the program carried a 15-year term, Spector said, adding that the loans were made at the market interest rate. The teams either repay the loans or the league can forgive a prorated portion of a team's loan each year in exchange for the team not moving to another city or being sold to other owners, he said. To collect an amount equal to the debt on the forgiven portion of the loan, the NFL takes a portion (or assessment) of the teams' share of television revenues and gate receipts for away games, said Spector.

To fund those loans, the NFL borrowed money from third parties in the form of issuing bonds to them in the same way another institutional borrower might. The league has to pay those bonds back over 25 years, Spector said.

No new loans are being made through that program, although hundreds of millions of dollars remain outstanding from it. According to the NFL's 2011 Form 990, "Return of Organization Exempt From Income Tax," teams owed the league almost $621 million at the end of that year, $73 million less than they owed at the beginning of that year. Spector said that if the NFL's tax-exempt status were revoked, the league would deduct that $73 million or the equivalent amount in later years under section 162 as a trade or business expense because that is the loan amount for stadium projects forgiven in 2011.

While revoking the NFL's tax-exempt status would enable the league to take that deduction, the revocation would still pose a problem for the league absent a transition rule related to the loans, Spector said. That's because the NFL would collect the assessments to cover forgiven loans as a taxable entity and would be taxed on them, he said. Over the entire length of the loan program, income from the assessments would theoretically be offset by the deductions for loan forgiveness, he said. However, if the NFL's tax-exempt status were revoked, the loan forgiveness would occur mostly when the league was tax exempt, and the assessments would be received mostly when it was not, Spector said.

As a result, "the league would suffer a whipsaw: It would not receive the benefit of the deductions in the early years, but it would have to include the taxable income in the later years, all on the same set of transactions," Spector said. "You're flipping the switch in the middle of a transaction."

The NFL risked its tax-exempt status by making those loans in the first place. Rev. Rul. 67-176, 1967-1 C.B. 140, distinguishes between 501(c)(6) organizations improving business conditions of one or more lines of business -- which is acceptable -- and providing particular services such as loans to their members -- which is not, said Marcus Owens, an attorney with Caplin & Drysdale in Washington who formerly led the IRS exempt organizations function.

"It's hard to see how those loans would not constitute the provision of particular services" to individual members, said Owens. "I think if there's a market for the services, the trade association will do it through some taxable structure in order to protect the exempt status of the (c)(6)."

Spector, however, told Tax Analysts that Rev. Rul. 82-15, 1982-1 C.B. 29, and GCM 38559 explicitly acknowledge that a tax-exempt league may maintain "a special loan program for its members" without providing a particular service or jeopardizing its tax-exempt status.

New Loans and High Compensation

Four IRS agents who were specialists in tax-exempt law and in auditing exempt organizations examined the NFL for two years from 2007 to 2009, including the stadium loan program, Spector said. That audit found the operation of the loan program consistent with the NFL's tax-exempt status, and the IRS did not require, request, or suggest that the stadium loan program be moved out of the league office, he said.

The audit led to the NFL receiving a letter saying its returns were accepted as filed, said Spector, although he acknowledged that the IRS suggested the league make three changes in its information reporting. Those included listing additional employees on its Form 990 and reporting revenues and expenses from the stadium loan program on separate lines, he said.

Spector said the stadium loan program does not depend on the league office's tax-exempt status and would function the same way if the league office were not tax exempt. But while the NFL did nothing wrong in administering the loan program, and although the IRS validated it through its extensive audit and issuing a no-change letter, now there is a new loan procedure, said Spector. NFL Ventures LP, a for-profit, taxable partnership owned by the league's 32 teams, operates the G-4 program. Through that program, NFL Ventures makes loans to teams. NFL Ventures funds those loans by some form of borrowing in the capital markets, Spector said. Levi's Stadium, the new home of the San Francisco 49ers, scheduled to open in 2014, received a $200 million loan through the G-4 program, according to a financial report ( prepared for the Santa Clara Stadium Authority.

The decision to house the G-4 program in the taxable NFL Ventures entity was entirely the NFL's, Spector said. The league decided to have NFL Ventures run the new loan program to avoid any question of impropriety.

The stadium loan program isn't the only challenge Owens raised regarding the NFL's tax-exempt status. When told of NFL Commissioner Roger Goodell's nearly $30 million in reportable compensation shown on the 2011 Form 990, he called that salary and others "handsome," especially because section 501(c)(6) has an inurement provision.

Owens said, "$30 million is extraordinarily large compensation for a tax-exempt organization" to be providing, adding, "That begins to sound like an entrepreneurial return, not something one earns by lifting bricks in the hot sun or something."

Spector said that the NFL has a compensation committee whose members include several team owners. That committee sets Goodell's salary after evaluating his performance and consulting market data, he said. As part of its audit, the IRS analyzed the compensation of all NFL employees, including Goodell, he said.

"At the end of its investigation, the IRS did not propose any changes to these amounts of compensation, nor did it suggest that any amount or type of compensation paid to league office employees, including the commissioner, was inappropriate or inconsistent with the league office's status as a tax-exempt organization," Spector said.

How the NFL Works

The NFL's 32 teams are members of the 501(c)(6) league and are limited partners in the taxable NFL Ventures, which owns numerous subsidiary partnerships and other entities, Spector said. The 32 teams pay taxes on the income that NFL Ventures and its businesses earn, he said. One of NFL Ventures' subsidiaries is NFL Enterprises LLC, which in part runs the NFL Network cable channel, and another is NFL Properties LLC, the marketing and sponsorship arm of the teams, he said. The rights fees for contracts that CBS, FOX, NBC, and ESPN have to broadcast NFL games are taxable to the teams, but the league collects that money as an agent for its teams and distributes the money to them, Spector said.

Owens said that the league acting as an agent for teams in negotiating broadcast rights, like the loans for stadiums, seems to be an example of the league providing services, and thus another violation of Rev. Rul. 67-176. He mentioned an organization formed to sell advertising in its members' publications as an example of how the NFL's arrangement for television contracts could pose a problem.

Spector, however, said LTR 8325001 states that a tax-exempt sports league may collect television rights fees as the agent of its teams without jeopardizing its tax-exempt status or paying tax on the fees, and that the rights fees are taxable to the teams.

According to a 2003 IRS continuing professional education (CPE) document (, the predecessor of section 501(c)(6) was enacted as part of the Tariff Act of 1913. That document says it is generally assumed the law passed because of a U.S. Chamber of Commerce request for a tax exemption for nonprofit civic and commercial organizations, which led to the enactment of section 501(c)(4) and (c)(6). The Revenue Act of 1928 amended the law to include professional football leagues and 501(c)(6) changes that would ensure that a league's tax-exempt status would not be risked by its operation of a player pension fund, the CPE document says.

The CPE document says regulations define 501(c)(6) organizations as groups of people with a common business interest whose purpose is to promote that interest and not "engage in a regular business of a kind ordinarily carried on for profit."

The NFL isn't the only football league in the country -- multiple indoor leagues, including the Arena Football League, exist. But Spector said the NFL works to promote the interests of "first-tier professional football" in the country and that its membership is the group of 32 NFL teams. The NFL's work, including coaching clinics and funding research on concussions, promotes the sport generally, and Spector said that's more than sufficient for the league office to maintain its tax-exempt status.

Philip Hackney, a professor at Louisiana State University said he doesn't think it makes sense to allow the NFL to be tax exempt and that the league's promotion of a line of business is the significant question for him. If there is a rationale for allowing the league to remain tax exempt, it has to be that it is similar to an organization like the U.S. Chamber of Commerce in that it acts in a public-minded and broad way to promote business interests, he said.

In LTR 201321026, the IRS referenced National Muffler Dealers Association v. United States, 440 U.S. 472 (1979), in which it characterized the Supreme Court as holding that an organization whose membership consisted of the franchisees of one brand of muffler did not constitute a line of business within the meaning of section 501(c)(6) because a single brand represented only a segment of an industry.

"The Supreme Court really I think in National Muffler gave about the best description of that question as you can give," Hackney said. "To me, that's it in a nutshell -- that it's focused on this one specific league in the way National Muffler was focused on supporting Midas as a brand. It's focused on the brand of the NFL. [The] U.S. Chamber of Commerce is focused on what brand? Business."

Ofer Lion of Hunton & Williams LLP said business and professional football leagues are listed separately among entities eligible for 501(c)(6) exempt status. While a business league does not include a collection of businesses that market a specific brand within an industry, "apparently a professional football league can do just that -- market a particular brand, like NFL football," Lion said.

The NFL showed year-end losses of $77.8 million and $52.6 million, respectively, on its 2011 and 2010 Forms 990. Lion said that conceptually, the NFL doesn't look like a tax avoidance mechanism. One could imagine the NFL as a cost-sharing agreement among teams, he said. Each team takes a business expense deduction for dues paid -- either under the cost-sharing agreement or as membership fees paid to a tax-exempt league, he said.

"If the NFL was a joint venture taxable as a partnership, for at least the past couple of years the teams would be allocated losses that they could use to offset their own income," Lion said. "As a tax-exempt entity with no unrelated business income to offset, it looks like the NFL's losses go unutilized."

Broader Effect on 501(c)(6)?

In September Sen. Tom Coburn, R-Okla., introduced S. 1524, the Properly Reducing Overexemptions for Sports Act. The measure would revoke the tax-exempt status under section 501(c)(6) of the NFL and a host of other organizations, including the NHL, PGA Tour, United States Tennis Association, and the National Hot Rod Association. According to a fact sheet about the bill, the Joint Committee on Taxation "estimates this tax loophole is worth about $10 million a year to major pro sports leagues, and $109 million over a decade."

"All I want is fairness," Coburn told Tax Analysts.

House Ways and Means Committee member David G. Reichert, R-Wash., said he hasn't seen Coburn's legislation but said the issue it raises is under consideration.

Jeffrey Tenenbaum of Venable LLP said the question whether the NFL properly qualifies as a 501(c)(6) organization is legitimate. But he said the amount of money at stake is "pennies" by Washington standards. Noting that the league showed losses on its recent Forms 990, he said its tax-exempt status isn't costing taxpayers anything.

"Because if they're running a loss anyway, they're not being exempted from any taxes they would otherwise pay as a tax-paying corporation," Tenenbaum said. "The rationale of the legislation is purely political."

Large bills like a potential tax reform bill can become a vehicle for proposals like Coburn's, and the taxwriting committees in Congress are committed to moving a reform package, Tenenbaum said. He said he is concerned about the potential broader effect the scrutiny of the NFL's tax-exempt status could have.

"One of my bigger concerns about this whole issue is that it ends up putting 501(c)(6) exemption in jeopardy altogether or leads to other significant diminutions of the benefits of (c)(6) exemption," Tenenbaum said. "As a big proponent of 501(c)(6) status for trade and professional associations and knowing how invaluable it is to our country, that very much concerns me."

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