The NFL's Nonprofit Status Challenge

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There are too many petitions to count on Change.org, but one in particular has sports fans blowing the whistle on the National Football League’s status as a nonprofit.

Petition author Lynda Woolard told NBC News that even though she was a religious fan of the New Orleans Saints, she was still a firm opponent of the 32-team league handling more than $250 million in annual membership dues left untouchable by the Internal Revenue Service.

“This doesn’t pass the basic fairness test,” she told NBC News. “I was getting frustrated with what I saw from the NFL. We had the (2011) lockout, the (2012) replacement refs, [and] the concussion issue. We’ve got cities subsidizing stadiums then having TV blackouts so fans can’t even see the games. What I saw happening was the fans being left out of the loop.”

Even U.S. Sen. Tom Coburn has signed onto the cause, proposing his own amendment to the Marketplace Fairness Act that would end the NFL's exemption from taxation.

But NFL officials argued that Woolard’s petition only told part of the story.

The NFL and the IRS

The NFL became a tax-exempt entity under the IRS in 1966 when Congress enacted Public Law 89-800 under the Sports Broadcasting Act, essentially giving the NFL a monopoly regarding television rights and classifying it as business league and therefore eligible for nonprofit status with the Internal Revenue Service.

League spokesman Brian McCarthy told ESPN that it was important people understood why the NFL was a tax-exempt organization before jumping to any abrupt conclusions or comparing it to other organizations like the American Red Cross. According to McCarthy, the football league is set up as a trade or industry association exempt from taxation under 501(c)(6) of the Internal Revenue Code—not Section 501(c)(3), which applies to charitable organizations, like the Red Cross.

But the league does not claim to be a charity.

Jeffrey Tenenbaum, a Washington D.C. attorney who chairs the nonprofit organizations group at Venable LLP, told ESPN that Section 501(c)(6) exempts from taxation, "an organization whose primary purpose is to further the industry or profession it represents."

McCarthy said the NFL was exempt from taxation as it is classified by the IRS as "business leagues, chambers of commerce, real estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit…,” according to an interview with ESPN.

By the Numbers

NFL tax attorney Jeremy Spector told NBC News that those who were up in arms over the league’s nonprofit status only knew part of the story.

“The NFL, those 32 teams who are making $9 billion, they’re not tax exempt. I think that’s what’s driving a lot of the confusion,” Spector said. “People hear that the NFL is tax exempt, and they think: ‘You’ve got to be kidding me. I just paid $200 for a ticket. The television networks are paying a billion dollars a year. Are you telling me they’re escaping tax on all that?’ And the answer is: No, they’re not escaping tax on any of that. The teams are paying tax on all of that money.”

Spector said the only slice of the entire football league that was classified as tax-exempt was the league office, while all the other billions acquired through network TV contracts, jersey and ticket sales and other sources get funneled to the 32 teams, where all money is subject to taxation.

Nonprofit watchdog site GuideStar posted the NFL’s 990 federal tax form, filed to the IRS in 2012, and showed the league received $255.3 million in revenue the previous year (almost all of it via annual dues paid by the teams), while it spent a total of $332.9 million, including $2.3 million in grants given to community groups like United Way ($15,898) and March of Dimes ($10,000), NBC News reported.

The league also used its tax-exempt status to pay Commissioner Roger Goodell’s salary, for which he owed income taxes, as well as $35.9 million to the New York City construction firm J.T. Magen & Company to build a new office space for the NFL bosses and their 1,546 employees after their previous lease expired and they opted to relocate to another part of Manhattan. 

"Whatever benefit they’re getting from the exemption, they’re losing in not claiming a deduction," Spector said. "The system stays in balance."

The NFL is Not Alone

The NFL has not been the only major sports empire to utilize tax-exempt status. The National Hockey League’s front office as well as the PGA Tour were also classified the same way and have filed a 990 form with the IRS as a 501(c)(6).

The senator also argued that the NFL and NHL alone could generate an additional $91 million annually for the federal government if his proposed amendment passed and stripped the leagues of nonprofit status. However, Congress' Joint Committee on Taxation recently estimated it at $109 million over the next 10 years, ESPN said.

Coburn’s bill was referred to the Senate’s Finance Committee. If passed, it would strip the tax-exempt status from not only the NFL, but the NHL and PGA Tour as well. But those entities would still be eligible for several other business-related tax deductions that would offset some of the league's taxable income, ESPN reported.

Is the NFL Safe?

Whether it is the proposed Sen. Coburn federal bill or another piece of legislation, the NFL’s tax-exempt status has certainly fallen under the microscope. But the attention might only be the flavor of the month because of its buzz worthy nature, Spector told NBC News.

"You can imagine, it’s extremely frustrating to see the Change.org petition and it’s really frustrating to see (news) articles that say $9 billion is tax exempt,” he said. “It just means that nobody has asked the question yet.”

The ultimate fate of the NFL, however, seemed to be safe—for now, ESPN said. The league has since been gearing up a fight against Sen. Coburn’s legislative efforts by funneling $1.9 million to lobbying efforts last year alone, according to OpenSecrets.org. The final call would be a bit of a Hail Mary if Congress were to pass the bill into law, reports said, keeping the sports conglomerate safe for the time being.