Demystifying the NCAA and NFL’s Tax Exemptions

The NCAA and NFL are — to no one’s surprise — gigantic businesses. These seven letters combine for more than $1.5 billion in tax-free assets. The fact that the NCAA and NFL are tax exempt organizations infuriates sports reporters and politicians like clockwork each time a financial statement comes out.

Last week, USA Today reported on how the NCAA has amassed more than $500 million in net assets. The author even suggests that the NCAA built up this wealth to provide a cushion in the face of a federal anti-trust lawsuit filed in May 2009 and now set for trial in 2014 in which former and current football and men’s basketball players are seeking damages from the NCAA; video-game maker Electronic Arts and the nation’s leading collegiate trademark licensing and marketing firm, Collegiate Licensing Co., for what they say is illegal use of the athletes’ images, names and likenesses.

Just a few days later the Atlanta Journal Constitution’s Jay Bookman posted a blog entry in which he is seemingly flabbergasted that the NFL can hold more than $1 billion in assets and pay its executives eight-figure salaries and still avoid taxes. Most Americans probably share the same sentiment. These organizations look, feel, smell (and probably taste) like for-profit, money-hungry corporations posting huge profits. So why isn’t the federal government taxing them?

Fortunately, University of Illinois College of Law Professor John D. Colombo is here to help.

Prof. Colombo penned an awesome tax smack-down at Nonprofit Law Prof Blog explaining the misconceptions about the NFL’s tax-exempt status, which he allowed us to share below.

“I spend a fair amount of my working life talking with reporters about tax exemption issues. I do this not because I think I’ll get quoted correctly (I almost never do; nuance, which is part of the stock in trade of an academic, is almost always lost in the translation), nor because I think I’ll get famous from the occasional quote in a story, but rather because I hope to influence at the margin the competence of the stories that are written. And I will say that most of the time (not nearly all), the reporters I talk to write stories that by and large “get it right.” I hope some of that is attributable to their discussions with me, but I think it is more attributable to the fact that reporters who seek out experts in the areas they are writing stories on really are trying to do a good job, and that tends to get reflected in the accuracy of what they write.

Contrast this to stories like [the one in the Atlanta Journal Constitution described above] about the tax-exempt status of the NFL. Most of the basic facts are correct – the NFL is, in fact, a tax-exempt entity under 501(c)(6). But the reporter who wrote this story makes no effort to place this status in context, and therefore leaves the impression that this is a huge scandal. I hate stories like this.

Prof. John D. Colombo

I’ve talked many times with sports reporters across the country about this issue, and I invariably find that the reporter in question starts with no understanding about the differences between 501(c)(6) status and “charitable” status under 501(c)(3). Most of them don’t realize that trade associations don’t benefit from the Section 170 charitable contributions deduction; to them, “exempt” means the same thing whether you are the NFL or the Red Cross. When reporters leave this critical difference out, readers come away with the same confused impression: that the NFL enjoys the same tax benefits as the Salavation Army or the local church. It doesn’t.

Second, the reporters invariably fail to distinguish the NFL league entity from the individual teams. The individual teams are taxpaying, for-profit enterprises (the Green Bay Packers do have a unique ownership structure, in which the corporation is owned by citizens of Green Bay, but it is organized as a for-profit corporation under Wisconsin law). They are not owned by the league. Again, notice that the quote used by the reporter from Tom Coburn talks about the value of the individual teams, juxtaposed against the very vague statement that “many” of the NFL’s “subsidiaries and teams” are tax-paying entities. This is classic obfuscation, in which the reader is left with the impression that the NFL is a monolithic nonprofit, classified in the same way as the Salvation Army, with teams that may themselves be exempt.

Finally, the story doesn’t point out that 501(c)(6) status doesn’t get you very much in the tax world. In most states (actually, I think all), trade associations aren’t considered charities, and their property would not be tax-exempt under general state property tax exemption rules. So the quote in the story about the NFL having “$1 billion in assets” again leaves the mis-impression that somehow these assets are escaping taxation. Even the value of the income tax exemption is questionable. If you look at the NFL’s 2011 Form 990, you will see that its expenses for the year exceeded its revenue. While I can’t conduct an audit from afar, it sure looks like virtually everything reported by the NFL as an expense would be deductible if the NFL were a taxpaying entity. The result: even if the NFL weren’t tax-exempt, it probably could easily arrange its affairs to pay no income tax.

Now that’s not to say that exempt status is worthless; it must be worth something to the NFL, or else it would have abandoned that status, like Major League Baseball did years ago. But this whole “shock and awe” tinge to the story makes me want to throw up. In the overall policy world of exempt organizations, I just don’t find the NFL’s “trade association” status all that bothersome. After all, all sorts of local, state and even national business organizations qualify under that same status (e.g., the American Bar Association; the American Medical Association, etc.). There’s plenty of stuff in the exempt organizations world to get worked up over (political expenditures by (c)(4)’s, for example); the NFL’s status just doesn’t hit my hot button.”

However, it is important to note that the NCAA is a charitable organization under 501(c)(3) and is NOT the same as the NFL’s 501(c)(6). Prof. Colombo wrote a very informative article about this entitled “The NCAA, Tax Exemption, and College Athletics” for the Illinois Law Review, which you can check out here. In the article, Prof. Colombo argues that “under the current laws, it would be nearly impossible for the Internal Revenue Service (IRS) to withdraw the NCAA’s tax exemption and the tax exemptions of its member institutions. A more feasible alternative would be to tax Division I athletics revenues using the Unrelated Business Income Tax (UBIT). This option, however, presents its own legal obstacles and, if successful, would likely be a “paper tiger,” as the NCAA and universities would possess little or no taxable net income after applying cost accounting. Further, the disclosures that universities would be required to make under Form 990-T would not approach the level of disclosure desired by reform advocates.”

So the next time you see a story clamoring for the NCAA or NFL to pay taxes, now you’ll know what is really going on . . . and knowing is half the battle.

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