Earlier this week, the National Football League (NFL) announced that it would voluntarily give up its tax-exempt status.
The NFL has been tax-exempt since 1942 under section 501(c)(6) of the Internal Revenue Code which grants tax-exempt status to organizations with a goal “to promote the common business interest” with activities “directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons.” That applies not only to professional sports leagues but to chambers of commerce (including the U.S. Chamber of Commerce), real estate boards (including National Association of REALTORS) and other professional organizations (such the American Library Association – Allied Professional Association, American Medical Association, and the Academy of Motion Picture Arts & Sciences.)
Reactions to the NFL’s announcement have been mixed with some taxpayers believing that it sets a bad precedent while others think it’s a good first step towards shrinking the pool of organizations that are exempt from tax.
It’s been suggested that professional sports leagues should not be exempt from tax (the National Hockey League (NHL), the Professional Golfers’ Association (PGA) and Ladies Professional Golf Association (LPGA) are all examples of sports leagues which remain tax-exempt).
The reasoning? Because those companies (or related companies) turn a profit. They also tend to have significant assets. That’s where things get tricky. Turning a profit doesn’t disqualify you as a tax-exempt organization but having a profit as a primary motive is a deal-breaker. Neither does having significant assets.
If some of that sounds subjective, you’re right. Motive can be difficult to define. Whether an organization wants to make money may be hard to extrapolate: on some level, even tax-exempt organizations want to make money if, for no other reason, than to further their tax-exempt purpose. That’s how Harvard University – a tax-exempt organization – justifies its $36.4 billion endowment, a fund that grew – tax-free – by 15% last year. Overall, Harvard reports about $36.4 billion in assets (even more than the NFL).
Red Cross reported nearly $4 billion in assets (before liabilities) in 2013 (form 990 downloads as a pdf). Revenues topped $3 billion and investment income alone was nearly $54 million.
In 2012, The Children’s Hospital of Philadelphia reported $1.7 billion in revenues (form 990 downloads as a pdf). Reportable assets totaled $2.3 billion.
In total, section 527 tax-exempt organizations (those that raise money for political activities and campaigns) reported receipts of more than $700 million in donations in 2014 alone.
In simple terms, not all tax-exempt organizations are cash or asset poor. Not all of them struggle to pay the bills. Many of them are thriving with revenues and balance sheets that many for-profit companies would envy.
So today’s Fix The Tax Code Friday question is:
How should we determine tax exempt status? Mission of the organization? Size of the organization? Income threshold? Asset level? If we don’t like the current criteria, where do we draw the line?
