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NJ Senator Aims to Tackle Football Tax Break

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Sep 24th 2014
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Sen. Cory Booker's (D-NJ) newly proposed legislation that would remove the NFL's tax-exempt status may not be the touchdown one would think. But it's sure kicked off numerous discussions and press coverage—just in time for football season, too.

The Securing Assistance for Victims' Empowerment (SAVE) Act (S.2816) seeks to amend section 501(c)(6) of the IRC by removing the tax-exempt status of professional sports leagues or associations that foster national or international professional sports competitions. That includes managing league business, providing referees, managing sponsorships, overseeing player conduct, and other tasks. This would apply to leagues with annual gross receipts of more than $10 million. It would take effect in 2015. The bill has been referred to the Committee on Finance.

The intent is to take the money reaped from the amendment and fund shelter and services for victims of domestic or dating violence.

According to an announcement on Booker's website, 10 sports leagues, including the NFL, National Hockey League, Professional Golf Association, and U.S. Tennis Association, are tax-exempt. Individual teams pay taxes, but the dues they pay to support leagues' front offices are not taxed.

There's no mention of how much those dues are. But Booker figures that closing the tax loophole would increase funding for domestic violence prevention programs by more than $100 million over the next decade.

"Stopping domestic violence is a national priority that requires long-term, meaningful investment", he said in a prepared statement. "This commonsense update to our tax laws would save more than $100 million over 10 years—money that can instead be used to pay for vital support programs that have seen their funding slashed in recent years due to sequestration and gridlock."

Now, particularly in the wake of the Baltimore Ravens' release of Ray Rice after an elevator video of the running back hitting his future wife came to light, the issue seems to be raising more questions than answers. And, despite Booker's announcement, a key question is just what the teams' tax bite actually is. After all, the legislation only makes sense if they aren't paying taxes, says former IRS attorney Julian Block in New York.

Fred Slater, CPA and partner at MS 1040 in New York, says in an email that Booker's claim that the teams pay taxes is "totally unsupported or misleading. Sports teams are most probably either corporations or [limited liability companies]."

As those entities, the teams pay franchise taxes, which really are fees. Except for the Green Bay Packers, the teams are privately held, Slater says. "I cannot see where they pay taxes in reality", he says. "The dues are expenses of the entities. They would be expenses if the league was for-profit—no change. It's not an 'exemption' that matters."

The NFL uses the same model as the PGA, Slater says. That is, a percentage of funds are paid to charities in the locations of games—or tournaments, in the PGA's case. But the individual teams pay payroll taxes and collect sales taxes. "This can be used to construe that 'individual sports teams pay taxes' but it is misleading", Slater says.

Last week, ABC News cited an op-ed written by NFL outside tax counsel Jeremy Spector, a partner at Covington & Burling's Washington, D.C. office: "The league office acts as a trade association for the NFL clubs. 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."

But the teams pay taxes on their $10 billion in annual revenue, including tickets, television rights and jersey sales, according to ABC News.

Though Slater doubts the tax code will be changed, he says that approval of Booker's legislation would change the structure between the league and teams, and the government ultimately will collect little if any additional taxes.

According to U.S. News & World Report, Major League Baseball gave up its non-profit status in 2007 rather than report executives' salaries. The National Basketball Association has never been tax-exempt, according to the report.

"Suppose you are from another planet and just descended to Earth to become aware that there is an exemption for the NFL, an organization that has revenues of several billion a year", says Block, the former IRS attorney. "There was a time when someone like Babe Ruth would drop by the hospital bed of an ailing youngster and promise to hit a home run. Now, you have these serial women abusers, and these are not nickel-and-dime operations."

The economic climate for the sports leagues has changed, says Ellen Minkow, a CPA at MS 1040 in New York. "What does this 'front office' do? Are they really a profit or not-for-profit entity?" she says. "When these sports organizations were originally set up, it was not about profit. In today's world, sports is big business. And their charter should be revoked", she says.

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