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Original Issue

The Case for ... The NFL's Tax Exemption

THE NFL GENERATES approximately $9.5 billion a year in revenue. In return it provides an entertaining diversion, in which millionaire coaches direct millionaire players as billionaire owners cheer in stadiums often financed by taxpayers. Yet Section 501(c)(6) of the Internal Revenue Code lists "professional football leagues" as worthy of tax-exempt status, a lingering result of legislative maneuverings that facilitated the NFL-AFL merger in 1966.

U.S. senator Cory Booker, Democrat of New Jersey—a tight end at Stanford—would like to change that. He is the latest member of Congress to propose amending 501(c)(6) so that the NFL and nine other professional sports leagues, including the NHL, USTA and PGA Tour, no longer qualify. Booker's bill, the Securing Assistance for Victims' Empowerment Act, introduced on Sept. 16, would take the money earned from taxing these leagues and use it to fund domestic violence prevention programs. Last year senators Tom Coburn (R., Okla.) and Angus King (Ind., Maine) proposed a similar bill ending sports leagues' tax exemptions.

Booker's idea is laudable, but it may not be the best way to make the NFL pay for its poor performance on domestic violence. The NFL—the league office, not the teams—as a tax-exempt entity is not as crazy as it sounds. A 501(c)(6) isn't required to be a charity but can be a trade association that helps its members cooperate and achieve a common purpose, like a chamber of commerce that promotes local businesses or a guild that advocates for plumbers or accountants. The NFL is similar in that it acts on behalf of its members—the 32 NFL teams and owners—by organizing games and setting rules of play. The league represents those engaged in commercial activity but does not itself seek profits.

Also, the NFL actually does pay taxes on almost 100% of its income. The league's revenue is mainly generated by a quartet of for-profit subsidiaries. NFL Enterprises, NFL Properties, NFL Productions and NFL International control licensing, sponsorships, marketing, publicity, promotion, broadcast, merchandise and distribution. They generate the cash and share it with Uncle Sam.

Individual teams also pay up. Each franchise receives equal amounts of shared revenue (from television, radio, league apparel), plus unequal revenues for concessions, parking, pro shop sales and gate receipts. If any team has a profit remaining after expenses, it pays taxes.

Taxing the league office would lead to modest tax income at best. In the last three tax filings that are publicly available, the NFL reported income of $9 million in 2012, and losses of $77.6 million in 2011 and $52.2 million in 2010. How could the NFL lose money? Because the NFL doesn't make money. The NFL's main source of revenue is the membership dues paid by the teams, approximately $6 million each. This revenue is used to pay the hefty salaries of league executives, including commissioner Roger Goodell, who earned $85 million in compensation from 2010 through '12 (on which he paid personal income tax). The dues also pay rent for the NFL's New York City offices.

Booker's bill would have a greater impact on the USTA and the PGA Tour, tax-exempt organizations that generate revenue through tournaments rather than through taxpaying teams. Each has recorded significantly higher income than the NFL over the last few years. If outrage over domestic violence is the justification for removing the NFL's exemption, should these other leagues be forced to pay?

The NFL actually does pay taxes on almost 100% of its income.