Why the NFL just gave up its nonprofit status: to escape scrutiny

For years, the NFL’s tax-exempt status has been the subject of scrutiny and ridicule. To many people, the fact that a league headed by a commissioner making $44 million a year was categorized as a nonprofit was absurd.

On Tuesday, Richard Rubin at Bloomberg reports, the NFL has finally decided to shed its tax-exempt status. As a result, it will pay an estimated $10 million or so per year in taxes.

But it’s important to put this number in the proper context: the league’s teams pull in about $9.5 billion per year, which they pay taxes on. And since 2000, US taxpayers have spent an estimated $3.9 billion on stadiums for these teams. The central league offices basically work as a distribution system, taking in just enough TV money to cover salaries and giving the rest out to teams.

The NFL’s decision to give up its tax-exempt status isn’t some noble recognition of the tax burden it’s unfairly been shirking. It’s a calculated move to pay a relatively small fee to avoid scrutiny and preempt possible Congressional action.

In 1942, the NFL — which was financially struggling, with many of its players off to fight in World War II — successfully filed for tax-exempt status from the IRS. The individual teams (which took in most of the income) still had to pay taxes. But the league itself, based in New York, became categorized as a trade association, which made it exempt.

As the league became more profitable, this categorization grew increasingly important. Though the vast majority of profits continued to go to the teams, a bit did go to the league itself, and its tax-exempt categorization saved it some money.

The tax status was important enough that in 1966, when the NFL was about to merge with the American Football League (which would become the AFC), then–Commissioner Pete Rozelle lobbied Congress to make sure it’d stay that way. In exchange for putting a team in New Orleans, he got support from a pair of Louisiana lawmakers to put language into an unrelated bill that explicitly categorized football leagues as tax-exempt. (The bill also granted the new league antitrust protection.)

As a result, here’s how the section 501(c)6 of the tax code still reads today (bold emphasis is mine):

IRC 501(c)(6) provides for 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.

This was a good deal for the league and saved it millions in taxes over the years. But recently it’s attracted a lot of scrutiny, especially as the NFL’s image has suffered and people have become more aware of the billions of dollars municipalities have spent on stadiums.

In 2013, Oklahoma Senator Tom Coburn introduced a bill that would have stripped the NFL of its tax-exempt status. It didn’t succeed, but it’s been followed by similar efforts in the House. And other lawmakers have used the tax-exempt status as a point of leverage in investigating the NFL’s mishandling of concussions, among other issues.

Apparently, NFL Commissioner Roger Goodell and team owners decided the tax-exempt status was no longer worth it. In a Tuesday letter to Congress, Goodell called the issue a “distraction” and said that in March, the 32 team owners had voted to shed the league’s tax-exempt status.

This will cost them a bit of money: about $10 million or so per year. But at the same time, total revenues for all teams have risen to nearly $10 billion (because all but one of those teams are privately held, they don’t have to publish their operating expenses and income). The teams pay a great deal in taxes, but the new taxes to be paid by the league offices are negligible.

In exchange, the NFL will get a few big benefits. For one, lawmakers can no longer hold the league’s tax-exempt status over it during hearings about unrelated issues. And it preempts a possible future move by Congress to strip the league of this status, which would have looked much worse to the public.

But more important, filing as a taxable, privately held entity will mean that the NFL no longer has to disclose its income — or the oft-criticized salary of its commissioner, Goodell. As Andrew Brandt, an ESPN business analyst, told Bloomberg, “It seems like Congress has been making a big deal out of it. Without this status there’s no requirement to disclose, which helps in the PR battle.”