Every dollar of income that is earned in the National Football League – from game tickets, television rights fees, jersey sales and national sponsorships – is subject to tax. None of this income is shielded in a tax-exempt entity. Instead, the NFL’s 32 clubs pay tax on all of these revenues.
Claims 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. The league office is the administrative and organizational arm of the NFL and does things like write the rules of the game, hire referees, run the college draft, negotiate the collective bargaining agreement with the players, conduct player safety research, and run youth football programs.
The league office acts as a trade association for the NFL clubs. In the same way that other trade associations support companies in other lines of business, it establishes rules and standard practices for its members, develops programs to help them run their operations more efficiently and profitably, and promotes the business in the broader community. Trade associations are nonprofit organizations. They don’t engage in any business activity. As a result, they are exempt from being taxed under section 501(c)(6) of the federal tax code. (Charities are exempt under section 501(c)(3); the NFL League Office has never claimed to be a charity.)
Because the league office does not receive income from game tickets, television contracts and the like, its tax exemption does not apply to any of the profits earned in the NFL overall. All the money-making activity is conducted by the for-profit, taxable teams. The NFL has never contended that its business activity is a nonprofit endeavor. Similarly, and contrary to what some have asserted, the NFL’s stadium financing program does not depend on the league office’s tax-exempt status, and the bonds issued in connection with that program are not tax-exempt bonds.
Some have suggested that the league office’s tax-exempt status is the result of a “loophole” in the tax code. This is incorrect. While section 501(c)(6) does mention professional football leagues as exempt organizations, the NFL League Office and other professional sports leagues were exempt from taxes long before this provision was enacted. This provision was inserted in the tax code when the NFL and the AFL merged, simply to ensure that professional football players could continue to receive their pensions from the newly merged league without jeopardizing its existing tax status.
The IRS first determined that the NFL League Office qualified as a tax-exempt trade association in 1942. And as recently as 2009, the IRS conducted an extensive audit of the league office and concluded that it was fully in compliance with the laws governing tax-exempt entities. If the federal agency responsible for raising tax revenues had instead thought that there was money being earned by the league office that should be subject to tax, or that the tax exemption was improperly protecting other NFL revenue from tax, or that the league office should not be tax-exempt at all, it would not have hesitated to reach any of those conclusions. However, the IRS gave the league office a clean bill of health – in part because it acknowledged that all the profits in the NFL were already being taxed at the team level.
Given the fundamental distinction between the for-profit, taxable teams and the nonprofit, tax-exempt league office, recent press articles, online petitions, and statements from politicians that criticize the NFL for trying to escape tax on its revenue are misleading because they ignore the crucial fact that all of this revenue is already subject to tax. None of the NFL’s profits escape tax by virtue of the league office’s tax exemption.
Jeremy Spector is outside tax counsel for the NFL and a partner at Covington & Burling LLP.