Tuesday evening, a few hours after the NFL announced it was shedding its controversial tax-exempt status, a league spokesman sent The Washington Post an interesting email.
If the NFL had filed taxes as a for-profit company last year, according to spokesman Brian McCarthy, it wouldn’t have made a difference on its tax bill. In 2014, McCarthy wrote, the league would have owed the IRS a grand total of $0.
Could this be right? Could the NFL really not owe Uncle Sam one Yankee dime in taxes? And if the league’s oft-pilloried nonprofit status really didn’t save it much money, why did the NFL keep it through years of criticism? The answers to these questions, according to tax experts and those familiar with the league’s thinking, are 1) Yes, 2) Yes, and 3) No one knows for certain, but there are a few theories.
A bit of background: The NFL’s tax-exempt status, which for years has drawn the ire of taxpayer advocates and some members of Congress, has regularly been misunderstood.
The nonprofit status applies only to the league office, which oversees the administrative duties of running a professional football league, like hiring and paying league officials and referees, running events like this week’s NFL draft, and paying the league’s lawyers and lobbyists. Since 1942, the NFL’s league office has filed with the IRS as a 501(c)6 nonprofit, the same designation afforded business organizations, trade associations and chambers of commerce. The league office’s main source of revenue is dues assessed to each of its teams. Some years these dues exceed expenses, some years they don’t. In 2013, according to its most recent financial disclosure form, the NFL earned about $294 million and spent about $308 million, for a year-end deficit of more than $13 million. In 2012, the league’s finances showed a profit of $9 million. In 2011, the NFL ended the year in the red, with a deficit of $78 million.
But what about the estimated $10 billion spent on NFL football in this country, where does that go? To the league’s 32 teams, which are all taxed, for-profit entities, and NFL Ventures, a for-profit company the league created to handle its business operations, like merchandising.
This complicated separation of responsibilities, and income sources, has routinely escaped the notice of lawmakers and members of the media discussing the issue.
It happened again Tuesday, when Sen. Maria Cantwell (D-Wash.), who called for stripping the league’s nonprofit status over its refusal to change the name of the Washington Redskins, released this statement:
“Today’s announcement by the National Football League is a victory for taxpayers, and a long overdue step forward for the nation’s largest sports league, with estimated tax breaks worth more than $100 million. However, giving up a tax break on $9.5 billion in revenue doesn’t mean you can ignore the need for the NFL to abandon a racial slur as a team name.”
Cantwell is far from the only person to mistakenly think the entire NFL is tax-exempt. But even lawmakers fully aware of the league’s business setup and the intricacies of nonprofit tax law thought this change would force the NFL to cough up more in taxes.
“It’s an issue of basic fairness,” Rep. Jason Chaffetz (R-Utah) said earlier this year. “The National Football League should have to pay taxes like everybody else.”
So would the NFL’s tax bill really have been $0 last year? Probably, according to nonprofit tax experts, who cautioned it’s impossible to know for certain without getting a look at the league’s books. The NFL’s league office usually spends all the money it receives each year on legitimate business expenses, often running up deficits, and doesn’t keep large amounts as savings or investments. So, at the end of a normal year for the NFL, experts said, there’s no income left to tax.
“I’ve been saying this for years, there’s really very minimal tax benefit here for the league, if at all,” said John Colombo, a tax law professor and interim dean of the University of Illinois College of Law.
Jeffrey Tenenbaum, chair of the nonprofit organizations practice at Venable Law Firm, agreed. If the NFL had been a for-profit all these years, Tenenbaum said, the league still would have rarely paid much in taxes.
“I’m actually surprised it took them this long for them to make this change,” Tenenbaum said.
Why did it take so long? Inertia could be one reason. Just because the nonprofit status wasn’t saving the NFL a ton of money, that doesn’t mean something wouldn’t happen in the future to change that.
“It may have been nothing more than, well, we’ve always been tax-exempt, so we should remain tax-exempt,” said Colombo. “Nobody wants to be responsible for that decision, because who knows what will happen. If you’re the one who says change it, and things go bad, your life is over.”
Tenenbaum pointed to another possible reason. For years, the NFL ran a lending program out of the league office, to help teams pay for stadium renovation and new construction. Switching from nonprofit to for-profit could subject some of that loan income to taxes, Tenenbaum speculated. In a 2013 interview, one of the league’s outside tax lawyers mentioned this lending program as a possible complication in the event the NFL lost its nonprofit status. The league has since moved that lending program from the league office to NFL Ventures.
So was outrage over the NFL’s nonprofit status overblown? Probably, but even tax experts who agree with that statement said the exemption never quite made sense, no matter how much money it really cost taxpayers.
Lumping the NFL in the same tax classification as the American Beverage Association, the Alliance of Automobile Manufacturers and similar trade groups and chambers of commerce always seemed like a grown-up version of the old Sesame Street game “One Of These Things Is Not Like The Others.”
The other organizations work for the benefit of entire industries, or regions. The NFL does not work for the benefit of all professional football, experts said. Just ask anyone who used to work for the USFL or the XFL.
“The NFL didn’t really neatly fit into the 501(c)6 category,” said Tenenbaum. “They don’t promote the sport of football broadly, that’s not their purpose. They promote the 32 teams of that league.”
The other issue with the NFL’s continued existence as a nonprofit was probably a big part of the reason the league decided to make the change – Goodell’s pay, which made headlines in 2014 when the league’s financial disclosure form revealed he made $44 million two years before. Goodell made $35 million in 2013, according to the most recent financial form available, which will now likely be the last one the NFL ever files.
“Find a tax-exempt organization that pays its chief executive that much. There’s not many,” said Tenenbaum. “You’re just inviting an IRS audit … and then if you get your status revoked, that’s a bad news day.”
Whatever financial benefit the nonprofit status provided, the NFL apparently decided it was no longer worth the criticism it inspired. Goodell said as much in his statement Tuesday, in which he called the status a “distraction” that has “been mischaracterized repeatedly.”
In terms of how much money the NFL’s nonprofit status actually cost taxpayers, Goodell was right, experts said.
“This issue has always been about politics, not taxes,” said Tenenbaum.