NFL’s Nonprofit Status, Drug Testing Policies Under Fire From Congress

If the 2005 congressional hearings on steroids are an example, there is much to be lost for the NFL.
By @FrederickReese |
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    The NFL and its legendary political sway are on the receiving end of new scrutiny from lawmakers on both sides of the aisle — sparked by the league’s unique status as a not-for-profit organization, its antitrust exemption, its position on human growth hormone, and concerns about players’ health and safety.

    In April, Rep. Elijah Cummings (D-Md.) threatened to call the NFL to testify before the House Oversight and Government Reform Committee if the league did not implement testing for HGH by July. Cummings is the ranking Democrat on the committee headed by Rep. Darrell Issa (R-Calif.).

    The committee has been active in negotiations between the NFL and the NFL Players Association aimed at clearing the way for HGH testing, which was agreed upon in an August 2011 labor deal. The players’ union has stalled on testing, fearing the ramifications to some of its members.

    “It’s either put up or shut up,” Cummings said during an interview with USA Today. “They’ll have to explain to the American public, why there’s no testing. I don’t think that it would be a pretty picture.”

    “They are pushing our committee into a corner,” Cummings continued, “where we won’t have any choice but for them to come to Washington.”

    If the 2005 congressional hearings on steroids are an example, there is much to be lost for the NFL. A 2008 follow-up to those hearings resulted in two counts of perjury, three counts of making false statements and one count of obstruction of Congress for Roger Clemens, a former all-star pitcher for the Boston Red Sox, Toronto Blue Jays, New York Yankees and Houston Astros.

    “We shone a light on something that wasn’t very pretty, and it got cleaned up,” said former Rep. Tom Davis (R-Va.), who chaired the committee during the hearings. “But it’s a lot harder and the risks are higher now” for the NFL.

    The NFL on the Hill

    The NFL has used its outside lobbying firms to target the legislators most interested in the issue — Issa, Cummings, Rep. Henry Waxman (D-Calif.) and Sen. John McCain (R-Ariz.). The league’s goal is to find a resolution to the drug issue without congressional intervention.

    “We have been clear in our belief that HGH testing is necessary — we’ve been clear about that for several years,” said Adolpho Birch, the NFL’s senior vice president of labor policy and government affairs. “We understand that the committee has an interest and we are making every effort to cooperate with them.”

    But “hearings are not something that should be taken lightly by anyone,” Birch said.


    The NFL as a not-for-profit

    Washington and the NFL have had an unusual relationship, which — in light of the ongoing IRS scandal — seems oddly unfair and inappropriate. Legislation has been introduced to deal with the favoritism the NFL seems to enjoy.

    In April, Sen. Tom Coburn (R-Okla.) introduced an amendment to the Internet sales tax bill that would strip the NFL of its tax-exempt status. While the member teams are tax-paying corporate entities, the NFL itself is a section 501(c)(6) organization, which is defined as an “exemption of business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues (whether or not administering a pension fund for football players),

    which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.”

    It is clear that this exemption was created with the NFL in mind.

    While, according to the NFL’s 2011 IRS tax filings, the NFL had total assets of about $822 million and total liabilities greater than $1.1 trillion, the documents note that the “NFL administers bank funds owned jointly by all 32 member clubs on their behalf. Additions during the year totaled $3,488,096,000 and distributions totaled $4,318,135,000.  Beginning balance totaled $1,036,335,168 and ending balance totaled $206,296,207.”

    This seems weird when you actually look at the nature of the numbers involved. The NFL received at least $5.1 billion from NBC, CBS, Fox and ESPN for 2013. While the NFL’s not-for-profit status does not exempt the league from taxes altogether, it shields a large part of the NFL’s income — television rights — from taxation.

    This is how it works: The NFL negotiates television rights on behalf of the whole league. The proceeds belong to the league in its entirety, and therefore, the league holds the money in trust for the member teams. The league is not liable for taxes on this money, as it is not part of its assets. The league releases these “banked” funds to the member clubs, who pay a share back to the NFL in membership fees. It is this membership fee that the NFL actually pays taxes on; the television fees are only taxable as assets of the individual teams.

    In 2010, Vermont Law School student Andrew Delaney assessed the situation this way:

    “Through for-profit companies, the NFL sells licenses to use NFL intellectual property, broadcast games, etc, making a ton of money. That money is then distributed to the individual teams. The individual teams, in turn, pay their ‘dues and assessments’ to the NFL. I don’t intend to mislead — some taxes certainly get paid here. The teams are considered for-profit and pay regular taxes. The teams’ tax liability is significantly reduced, however, when they pay their tax-deductible ‘dues and assessments.’ How much and what gets taxed is just not publicly available. And it should be if the NFL is going to enjoy tax-exempt status.”

    The NFL argues that it is rightly a non-profit because it serves as a de facto trade organization for its 32 member teams and is not actively engaged in profiting on its own behalf. However, Coburn argues that the NFL — through licensing of its brand, merchandising and television rights — is, indeed, a for-profit organization.

    Not everyone agrees with Coburn. Sam Morgan, a Michigan-based lawyer, told Mint Press News, “The NFL is a ‘business league’ that was purposely written into the 501(c)(6) non-profit exemption in the 1960’s. The NFL, as an entity, is merely a representative of the collective group of owners, and functions very much like a union does for its members. Labor unions fall under the 501(c)(5) exemption. To qualify for this tax exempt status, the organization must affirm that no part of its net earnings will inure to the benefit of any member and that it has the purpose of a labor organization. This means that the organization must demonstrate that it is organized to better the conditions of workers, improve the grade of their products, and develop a higher degree of efficiency in their respective occupations.“

    “Contributions to labor unions are not deductible as charitable contributions on the donor’s federal income tax return.” Morgan continued. “They may be deductible as business expenses if they are ordinary and necessary in the conduct of the taxpayer’s’ trade or business. So, a union member’s initiation fees and dues are deductible as business expenses.”

    The NFL has held not-for-profit status since 1942. In 1966, Congress introduced the section 501(c)(6) exemption to protect the NFL, as well as chambers of commerce and boards of trade. This was done as part of a deal with Congress that granted the NFL antitrust exemptions that ultimately allowed the NFL to merge with the American Football League. In exchange, the NFL made a number of pledges, including the promise of a team in New Orleans.

    “If there is a justification for providing tax exemption to business leagues, it would be they operate for the public purpose of aiding commerce for all within a broad segment of some type of business or business in general,” said Philip Hackney, a Louisiana State University law professor who previously worked as an IRS attorney litigating exempt-organization tax issues. “Commerce is important to our country, and we should encourage those who are working on it in a rather publicly minded manner. These (sports) organizations, in my opinion, are anything but public-minded in their profit interest. They are focused on the profits of their franchises.”

    Coburn has announced he will seek to strip the NFL of its tax-exempt status again.

    “This is one of the things in the tax code that just doesn’t make any sense,” John Hart, a spokesman for Coburn, told USA Today. “It’s one of the striking examples in the tax code where middle- and lower-income Americans are essentially subsidizing salaries for multimillionaires.”

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