Battle over NFL's Tax-Exempt Status Focuses Attention on Sports Crony Capitalism

The National Football League, which Forbes Magazine recently called "the most lucrative sports league in the world" has enjoyed federal tax-exempt status since 1966. In September, Senator Tom Coburn (R-OK) introduced the PRO Sports Act (S. 1524), which is designed to end the tax-exempt status of the NFL, along with several other sports leagues and organizations, including the NHL, the PGA, and the LPGA.

Despite a petition to Congress signed by over 300,000 fans requesting an end to the NFL's tax-exempt status and a recent pair of dueling op-eds between Senator Coburn and Jeremy Spector, an attorney with Covington and Burling and outside tax counsel to the NFL, that publicly debated the merits of the NFL's tax-exempt status, Coburn's legislation is going nowhere.

In a Senate filled with colleagues who eagerly rush to co-sponsor popular bills, Coburn has failed to find a single co-sponsor. On September 18, when Coburn introduced the bill in the Senate, it was read twice on the floor, as is the custom, and was sent to the Senate Finance Committee on the same day. Nothing has been heard of it since.

The reasons why the bill is going nowhere sheds light on the intricate connection between the major players in the sports world and our national problem of special-interest crony capitalism.

Though the 32 teams that comprise the NFL and several valuable league subsidiaries, such as NFL Ventures LLC, are for-profit tax paying organizations, the NFL League office itself is a not-for-profit organization. It is not an IRS Code Section 501 (c) (3) charitable non-profit, like the American Red Cross, but is instead an IRS Code Section 501 (c) (6) non-profit, which independent tax attorney Jeffrey Tenenbaum points out is "an organization whose primary purpose is to further the industry or profession it represents."

According to Forbes, the NFL's 32 teams combined to bring in a total of more than $9 billion in revenue and earned more than $1.4 billion in operating income from broadcast television payments, merchandising, ticket sales, and stadium concessions in 2012. From these profits, each club paid dues to the NFL League offices, which is the 501 (c) (6).

Guidestar, the non-profit monitoring organization, reported that those dues exceeded $255 million in 2012, and were used to pay Commissioner Roger Goodell's $30 million annual salary, the salaries of the other 1,500 or so NFL League employees, including the officiating crews, the overhead and rent of the NFL's offices in New York City, and the operation of the annual draft.

It is this $255 million annual budget that is exempt from taxation. Among other major sports leagues, only the NHL enjoys a similar tax-exempt status. The National Basketball Association, formed in 1946, has never enjoyed tax-exempt status. Major League Baseball gave up its tax-exempt status in 2007.

The NFL's outside tax counsel, Jeremy Spector, argues that "[c]laims that the NFL is using a tax exemption to avoid paying the tax due on these revenues are simply misinformed. The confusion arises from the fact that there is one small part of the NFL, unrelated to all this business activity, that is tax-exempt: the NFL League Office." 

But while this tax-exempt portion of NFL revenues amounts to a mere 3% of the NFL's annual $9 billion in revenues, the unfairness of such special treatment strikes many as a symbolic and unapologetic kind of crony capitalism. 

Independent tax attorney Tenenbaum, for instance,  notes that "[t]o 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 . . .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."

The NFL has not acted to promote the sport of professional football in general. Instead, it has exclusively promoted the interests of its own league. Three failed competitors--the World Football League (1975-1976), the United States Football League (1983-1987), and the United Football League (2009-2012), can attest to the fact that the NFL has done little to promote their version of professional football. Indeed, the USFL sued the NFL for antitrust law violations in 1986. Though it won the case, the minimal $1 in damages awarded the startup professional football league by the jury ended its viability.

While there appears to be widespread grassroots support for eliminating the NFL's tax-exempt status, Coburn's inability to generate any support for his proposal from his political colleagues can best be explained by the "inside-the-beltway" insider dealing that many Tea Party activists find so objectionable.

To begin with, many members of Congress like their Washington Redskins tickets, which lobbyists for all sorts of industries distribute generously to Congressmen, Senators, and staffers alike. In addition, the NFL has an effective lobbying effort, estimated to run well over $1 million annually.

Equally important, each local NFL team can have significant influence on senators from its home state. With the exception of the Green Bay Packers, which are municipally owned, almost all of the NFL's other 31 teams are owned by extremely wealthy individuals, all of whom leverage local and state tax benefits to the maximum in the financing of their team's football stadium.

Many members of the Senate Finance Committee, where Coburn's bill now lies dormant, hail from states where the local NFL team owners have significant political influence. 

Among the Democrats on the committee, nine senators represent states which are home to fifteen NFL teams: Charles Schumer (D-NY) (Buffalo Bills, New York Giants, New York Jets), Debbie Stabenow (D-MI) (Detroit Lions), Maria Cantwell (D-WA) (Seattle Seahawks), Bill Nelson (D-FL) (Miami Dolphins, Jacksonville Jaguars, Tampa Bay Buccaneers), Robert Menendez (D-NJ) (Both the New York Jets and the New York Giants play their games in New Jersey), Benjamin L. Cardin (D-MD) (Baltimore Ravens, and the Washington Redskins play their games in Maryland), Sherrod Brown (D-OH) (Cincinnati Bengals, Cleveland Browns), Michael F. Bennet (D-CO) (Denver Broncos), and Robert P. Casey, Jr. (D-PA) (Pittsburgh Steelers, Philadelphia Eagles).

Among the Republicans members of the committee, five senators represent states that are home to eight NFL teams: John Cornyn (R-TX) (Dallas Cowboys, Houston Texans), Richard Burr (R-NC) (Carolina Panthers), Johnny Isakson (R-GA) (Atlanta Falcons), Rob Portman (R-OH) (Cleveland Browns, Cincinatti Bengals), and Pat Toomey (R-PA), (Philadelphia Eagles, Pittsburgh Steelers).

The Joint Committee on Taxation scoring of Coburn's bill suggests that the potential financial savings from removing the tax-exempt status of the NFL and other tax-exempt sports leagues and organizations are not particularly large ($10 million a year for $109 million over ten years). Nonetheless, the symbolic nature of Senator Coburn's proposal may well be "the canary in the coal mine" when it comes to public dissatisfaction with the widespread crony capitalism that has characterized the big business of sports for the past half century.


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