Examining NFL's tax-exempt status

U.S. Senator Tom Coburn of Oklahoma has challenged the NFL's nonprofit status. Alex Wong/Getty Images

Sen. Tom Coburn has proposed an amendment to the Marketplace Fairness Act that would end the NFL's exemption from taxation. That's right -- the $10 billion-a-year NFL is a tax-exempt organization, as is the NHL and the PGA Tour.

Before you start comparing the NFL to the American Red Cross, it's important to know how and why the NFL is a tax-exempt organization. According to league spokesman Brian McCarthy, the NFL is organized as a trade or industry association that is exempt from taxation under Section 501(c)(6) of the Internal Revenue Code, not Section 501(c)(3), which exempts charitable organizations. In no way is the NFL claiming to be a charity.

Instead, Section 501(c)(6) exempts from taxation "business leagues, chambers of commerce, real estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit … ."

Jeffrey Tenenbaum, a Washington D.C. attorney who chairs the nonprofit organizations group at Venable LLP, says Section 501(c)(6) essentially exempts from taxation, "an organization whose primary purpose is to further the industry or profession it represents."

In response to a request for comment from the league following Coburn's proposal, McCarthy said the league has been exempt since before the NFL-AFL merger and pointed out that Section 501(c)(6) specifically mentions professional football. He also explained the league's business activities and why it mirrors that of a trade or industry organization.

"The NFL League Office is a not-for-profit organization. The NFL League Office receives funding from the 32 member clubs to cover its non-revenue overhead activities such as office rent, League Office salaries and game officiating. In addition, the NFL League Office collects revenues on behalf of the 32 member clubs and distributes those revenues to the clubs. All national revenues (e.g. broadcast TV payments) collected and paid to the member clubs, as well as local revenues earned individually by the clubs, are subject to tax at the club level."

Money generated from sources like NFL Network, national sponsorship deals and merchandise fall under the umbrella of a for-profit company called NFL Ventures, which is owned by the 32 teams, not by the league office. Accordingly, this money is already subject to taxation.

No doubt the league office does further the interests of the 32 teams it calls members. However, Tenenbaum says questions arise as to whether the NFL is furthering the entire football industry.

"To be a 501(c)(6) organization, anyone who meets your requirements for who's part of the industry has to be allowed to join the association as a member. With professional sporting leagues, that's not the case; it's a very closed circle," Tenenbaum said. "You can't start a professional football team and join the NFL. As a result, many people have wondered out loud if the NFL should even qualify under [Section] 501(c)(6) since it's only furthering a segment of the industry and functions more like an exclusive club."

Coburn, a Republican from Oklahoma, touches on the same argument in the 2012 installment of his annual "Waste Book" report. In his report, he asserts, "These organizations are taking advantage of the provision of the tax code that allows industry and trade groups, such as the U.S. Chamber of Commerce or the Natural Resources Defense Council, to qualify as non-profit and tax-exempt. None of these groups can promote a specific brand within an industry but each may promote an industry as a whole."

The NFL's exemption has a long history. Section 501(c)(6) was amended following the AFL-NFL merger in 1966 to include "professional football leagues (whether or not administering a pension fund for football players)," language to make clear that the league was still qualified under the section, despite paying pension benefits to individuals. However, professional sports leagues were already qualified under that section prior to the additional language. Major League Baseball has since given up its exemption, in 2007, reportedly because of changes to the code that required disclosure of executive salaries. The NBA has never been tax exempt.

In addition to depriving the federal government of tax revenue with its exemption, Coburn points out in his report the NFL is also able to use the exemption to avoid some city and state taxes.

"[T]he NFL may have lived every taxpayer's dream at this year's Super Bowl in Indianapolis. According to the Indianapolis Business Journal, 'Hotels and restaurants [did not tax] National Football League employees. … The NFL [used] its tax-exempt status as a 501(c)(6) to avoid paying taxes, in addition to fuel, auto rental and admissions taxes.'"

Coburn's report says the NFL and NHL alone "may" generate an additional $91 million annually for the federal government if his amendment passes and the leagues are no longer tax-exempt. However, Congress' Joint Committee on Taxation recently estimated it at $109 million over the next 10 years.

In addition to the numbers that are just about as clear as mud, another unknown is whether revenue distributed to the teams, such as that generated by television contracts, would be taxed twice -- once as revenue of the league and again as team revenue. Tenenbaum says there may be ways to structure the relationship between the league and teams to avoid such double taxation.

What the league won't be able to avoid is being taxed on the $6 million in annual dues each team currently pays to the league office. Currently, those dues are used to fund interest-free loans to teams building new stadiums. There are various ways the league could restructure, however, to continue to provide those interest-free loans while minimizing the tax liability. For example, the league could hold back a portion of revenue instead of distributing it to the teams and then have the teams pay back into the league in the form of taxable dues.

If the NFL were to lose its tax exemption, it would then be eligible for a host of business-related tax deductions that would offset some of the league's taxable income.

For now, the threat is not immediate.

Coburn is still working to attach the amendment to a bill in order to get it passed through the Senate. No doubt the NFL has already geared up its lobbying efforts, an activity it devoted $1.9 million to last year, according to OpenSecrets.org.