Two NFL Entities Dropping Exempt Status - Details Maybe Never

This post was originally published on Forbes Apr 28, 2015

The National Football League will drop its tax-exempt status.  According to the New York Times, Robert McNair, owner of the Houston Texans and chairman of the league's finance committee said

The owners have decided to eliminate the distraction associated with misunderstanding of the league office’s status, so the league office will in the future file returns as a taxable entity

That "distraction" thing is probably the static that they were getting from Congress about repealing the provision that allowed them to be exempt under Section 501(c)(6) (Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues).

Exemption For NFL Not Much Of A Tax Benefit

Of course, it was the league that was a tax-exempt organization not the member teams, which are for-profit.  I thought it was one of the silliest controversies ever, because as it turns out the league had actually been accumulating losses. As of March 31, 2013, the end of the last fiscal year for which numbers are public, National Football League had liabilities in excess of assets of over $300 million.  It showed a profit of almost  $9 million, but every year prior to that they I have seen was a loss including over $77 million in the year ended March 31, 2012.

Who Needs 501(c)(6)?

I think there could be a good case for eliminating 501(c)(6) entirely.  I don't get why trade associations need to operate at much over break-even.  So what's the big deal?  The American Institute of Certified Public Accountants had revenue in excess of expenses of over $15 million for the year ended July 31, 2013.  Better they should cut the dues.  One of these days I'm taking that enrolled agent exam.  Then they'll be sorry.

A Little More Detail

Despite my assiduous coverage of this issue, I didn't get a copy of the press release, but one of my sources did and read it to me over the phone.  It had some details that I have not seen in other coverage.  Goodell in his letter to the owners told them that the finance committee had concluded that giving up exempt status for both the "league office" and the management council would not have a material effect.  According to its Form 990, the NFL Management Council's purpose is "Labor negotiations on behalf of the National Football League member clubs".  For the year ended March 31, 2013 NFLMC posted a loss of nearly $8 million and has liabilities in excess of assets of almost $9 million.

The frustrating thing about the release is that it indicated that the entities are making this move for their "2015 fiscal year".  So does that mean the year ended March 31, 2015 or the year beginning April 1, 2015?  I'm thinking the former, because of the timing of the announcement.

How Does The Exempt Egg Get Unscrambled?

The other thing that has been troubling me about this is precisely how it is accomplished.  I know how to revoke an S election, but it is not clear to me how to revoke your exempt status.  I was thinking some sort of dissolution. The wording of the press release seemed to imply that they are just going to file an 1120 this year instead of a 990 and that is all there is to it, but my inquiring tax mind is deeply unsatisfied.

What happens with that $300 excess of liabilities over assets?  The league will need after tax dollars to pay them, if it has carryover basis in the assets from its exempt days.  It is better to have loved and lost than never to have loved at all.  Here though, at least at first blush, it is worse to have been exempt and dropped it than to have never been exempt at all.   If the NFL had been taxable all along it might have a $300 million net operating loss to carry forward.

Another County Heard From

I spoke with Brent Lipschultz of EisnerAmper, which ranks 18 among US CPA firms (That's out of about 88,000 firms. I don't know where my firm ranks, but we may be in the top 50,000 soaking wet after a full meal). EisnerAmper has a significant sports practice.  We were unable to dope out exactly how the transaction will be accomplished.  Brent did point me to Schedule N which may have to be attached to the final Form 990, depending exactly on how the transition is handled.  Maybe we will get to see that.

Transparency 

It's really none of my business that Roger Goodell's salary was over $44 million for the year ended March 31, 2013, but I'm nosy enough to go look.  So it looks like we'll only be getting one or two more Roger Goodell salary numbers (The 3/31/2014 From 990 is not up on guidestar.org  yet.)  Brent thinks the transparency may have been the biggest factor.  Many commentators have speculated that avoiding that level of transparency was another motivation to drop the exempt status.

Did Anybody Tell The Preparer?

I did manage to find something that purports to be the governing document  of the National Football League as revised through 2006.  I could not find a dissolution provision in the document. I thought a really slick way of handling this would be for NFL Enterprises LP, which was formed in 1994 to assume all that debt and take over the league function which might yield a big deduction for the next 15 years, but the issues that raises give me a headache.

The rest of my brain trust has not been able to help me on this.  I'm wondering if all the implications were thought through or if a manager in some large firm, perhaps Big 4, is going to be told "Oh by the way, it's an 112o this year not a 990".  The larger the firm, the less likely that whoever does 990s will know much if anything about corporate tax.  And in large firm culture it can be professional suicide to tell upper management that things haven't been thought through.  If we're lucky we might get to read all about it in a Tax Court decision in a couple of years.