The NFL’s announcement on Tuesday that it will no longer claim tax-exempt status under federal tax law is of far greater importance to other professional sports leagues than the NFL. Despite considerable debate surrounding the NFL’s tax-exempt status, the league has already been paying income taxes on almost all of the revenue it generates. Other associations, such as the United States Tennis Association (USTA) and the PGA Tour, have more effectively taken advantage of this same tax-exempt status and are likely relieved to see the controversial NFL leave the club of tax-exempt sports leagues.
How the NFL’s tax-exempt status has worked
Since 1966 the NFL has taken advantage of Section 501(c)(6) of the Internal Revenue Code. Section 501(c)(6) lists “professional football leagues” alongside other trade associations that represent members in some common purpose. The inclusion of “professional football leagues” in federal tax law was part of a multi-step process that facilitated the NFL’s merger with the AFL. While many critics of the NFL’s tax-exempt status have argued that it is unjust or unfair, it is not implausible given how 501(c)(6) works for other organizations. The NFL’s common purpose is to organize and manage football games and related transactions between 32 NFL teams. This is an analogous pursuit to goals of trade associations that act on behalf of a common purpose for their members.
To be sure, the NFL generates a massive amount of revenue for a professional sports organization. While the precise number of NFL revenue is not publicly available, sources tell SI.com the league generates about $9.5 billion a year in revenue. Yet virtually all of the NFL’s revenue is generated by a quartet of for-profit (and thus tax-paying) subsidiaries: NFL Enterprises, NFL Properties, NFL Productions and NFL International. These subsidiaries conduct various business operations for the league. Relevant operations include league contracts for broadcasts, merchandise and sponsorships. The 32 NFL teams also pay taxes when they report a profit.
The NFL’s tax-exempt status has only benefited a tiny portion of NFL income. Each year the league receives about $6 million per team in membership dues. This money pays the rent for the league’s headquarters in New York City and the salaries of NFL officials, who separately pay federal and state personal income taxes. Some of those officials earn considerable salaries. Robert Raiola, senior manager in the Sports & Entertainment Group of the accounting firm O'Connor Davies, LLP, has studied the most-recently available NFL’s tax returns and found that NFL commissioner Roger Goodell earned $85 million in compensation from 2010 to 2012.
After paying expenses, the league often finds itself in the red rather than in the black. In 2010, the NFL reported a loss of $52 million—which means the tax-exemption had no impact since there was no income to exempt. The same was true in 2011 when the league posted a $78 million loss. The NFL became “profitable” in 2012 when it posted income of $9 million. While that $9 million income was tax exempt, remember that the league and its teams paid taxes on income generated by the “other” $9.5 billion in revenue.
With a very modest benefit from the tax-exempt status, it’s a wonder why the NFL hasn’t already dropped it. This is particularly true because of disclosure requirements for 501(c)(6) entities. Each year organizations that claim 501(c)(6) status must make various disclosures to the Internal Revenue Service in Form 990s. These forms are publicly available and key disclosures include the compensation paid to an organization’s five highest-paid employees.
The reason why we know how much Goodell earns but don’t know how much NBA commissioner Adam Silver and MLB commissioner Rob Manfred earn is because the NBA and MLB are run as for-profit businesses and are thus not obligated to publicly disclose commissioners’ salaries. Going forward, the same will be true of Goodell’s salary: it will be a source of speculation and conjecture rather than of public fact. Only the salary of the NHL commissioner will be public among the four major pro sports leagues in the U.S., assuming the NHL continues to invoke 501(c)(6) status.
The real winners today: the USTA, PGA Tour and other tax-exempt sports associations that turn a profit
In 2013 and 2014, several members of Congress from both political parties introduced bills or made statements that constituted threats to revoke the NFL’s tax-exempt status. These members, frustrated by skyrocketing NFL revenue amid domestic violence and concussion controversies, proposed amending 501(c)(6) so that the NFL and nine other sports associations would no longer qualify as tax-exempt entities under federal law.
As explained above, the NFL would not have been meaningfully impacted by such a change to federal law. Instead, other leagues without scandals would have faced more substantial change. The USTA and PGA Tour, for instance, are 501(c)(6) organizations, but unlike the NFL, they have often generated millions of dollars in income (the USTA reported income of $36M in 2013 and $13M in 2012 while the PGA Tour reported income of $35M in both 2012 and 2013). Revoking their 501(c)(6) status would have cost them far more money than the NFL, even though the NFL was the target of federal legislation.
With the NFL voluntarily dropping its 501(c)(6) status, it is likely that Congressional impulse to reform the federal tax code as a means of punishing the NFL is over and done.
Michael McCann is a Massachusetts attorney and the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law. He is also the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law.