Should Congress Reconsider the Tax Exemption of Pro Sports Organizations?

July 20, 2018

The Properly Reducing Overexemptions for Sports Act (S. 3086) (PRO Sports Act) is a bill to eliminate the nonprofit status for the league offices of professional sports organizations. Amending the tax code in this area would end a provision that gives millions away to sports leagues simply for being sports leagues. Making a profit does not disqualify an organization from being a nonprofit; rather, the distinction is based on motive. But here the motive of the leagues appears clear, raising the question: Should Congress eliminate the exemption for professional sports leagues?

The PRO Sports Act specifically mentions the National Hockey League (NHL), Professional Golfers Association (PGA) Tour, and the Ladies Professional Golf Association (LPGA) as these are the three most well-known exempt leagues. According to the legislation, the league-wide operations of these three organizations combined generate $1 billion in total revenue, and if they were no longer considered tax-exempt the government would take in $100 million over 10 years.

The new legislation is not targeting one organization as some have tried in the past; it is structured to eliminate the provision for any organization. Under the new legislation, an organization would not qualify it is…

…a professional sports league, organization, or association, a substantial activity of which is to foster national or international professional sports competitions (including by managing league business affairs, officiating or providing referees, coordinating schedules, managing sponsorships or broadcast sales, operating loan programs for competition facilities, or overseeing player conduct), and…has annual gross receipts in excess of $10,000,000.

Sports organization offices’ nonprofit status started with football in 1942 as the National Football League (NFL) was suffering from the effects of the war. Simply being in financial distress does not qualify a business for nonprofit status, so the NFL’s original mission as a nonprofit is unknown, because neither the NFL nor the Internal Revenue Service (IRS) have copies of the original application. A further change occurred in 1966 during the NFL’s merger with the American Football League. The IRS intervened again and grouped football leagues in with trade associations that act on behalf their members under section 501(c)(6) of the Internal Revenue Code.

Most popular leagues that joined the 501(c)(6) group have given up their status. Most recently the NFL dropped its status in 2015, while Major League Baseball (MLB) relinquished its status in 2007. The National Basketball Association (NBA) was never tax-exempt.

While the individual sports teams and most other sections of the sports organizations are taxable entities, the organizations’ offices, which are usually responsible for administrative duties, qualified for tax-exempt status. Those offices generate little in revenue, and in many cases can actually lose money. The NHL’s league office is consistently in the red much like the NFL was for many years.

Some offices, like that of the PGA Tour, however, encapsulate more activity, providing more benefit from 501(c)(6) status. In 2016, the PGA Tour reported over $1.2 billion in revenue in its 990 form, its version of a tax return. For comparison, in 2015 (its last year exempt), the NFL league office reported $82 million.

Both the NFL and PGA Tour were 501(c)(6) organizations at the time, and this disparity clearly shows the underlying problem in the code. In the 2014-2015 NFL season the league brought in $12 billion. The NFL brings in the most revenue of any league in the world, yet the PGA Tour was reporting more exempt income. The NFL’s exemption was tied to the league office, whereas for the PGA Tour most of the organization has encompassed the 501(c)(6) status.

While this change is small in the context of the federal budget, Congress should reconsider whether professional sports organizations should receive tax-exempt status.

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