Since 1942, professional sports organizations have been able to elect tax-exempt status as 501(c)(6) nonprofit organizations. Given the profitability of groups like the PGA Tour which reported 1.2 billion dollars in revenue in 2016, the tax savings afforded by Section 501(c)(6) of the Internal Revenue Code, in particular, have been contested. Like most controversial topics, there are two sides to the story.
When most people think of nonprofit organizations, names like “The American Red Cross” or “UNICEF” usually come to mind. What most people don’t realize is that nonprofit organizations encapsulate several different areas, including professional sports. The PGA Tour and the National Hockey League are examples of organizations that are currently organized as nonprofits. Other professional sports organizations, like Major League Baseball and the National Football League, reorganized as for-profit entities as recently as 2015. The major reason for the reorganizations was due to public scrutiny of their nonprofit status. Today, regulators have their sights set on the remaining professional sports organizations that continue to operate as nonprofits. This article will focus on the PGA Tour as it continually operates at a net profit while other organizations often only break-even or report losses.
Although it seems strange that a professional sports organization like the PGA Tour would be classified as a nonprofit, there is an argument to be made in their favor. The PGA Tour hosts six different tournaments throughout the year and any profit left over after paying all necessary tournament expenses is required to be given to charity. In 2017 alone, the PGA Tour donated 180 million dollars to local charities. If the organization was not required to donate the leftover money, it would likely be paid out to executives or shareholders. The tax incentives involved in donating to a nonprofit allow for an abundance of excess profits to be donated back to the community. It is reported that the PGA Tour has donated over 2.65 billion dollars to charity since its inception.
The most common argument made against the PGA Tour’s exempt status is that it doesn’t pay any federal or state income tax. Interestingly, the Tax Cuts and Jobs Act included a provision in the original Senate bill to eliminate professional sports organizations’ tax exempt status. This provision was eventually dropped due to the coordinated effort from not only the commissioner of the PGA Tour, but golf legends Jack Nicklaus and Davis Love III who met with several Senators in a lobbying effort that ended up costing $500,000. Another argument against the PGA Tour is that only a small portion of the funds contributed to the PGA Tour goes to charitable causes. This argument was confirmed when a report from “Outside the Lines” outlined that only 16% of tournament funds went to charities. Skeptics argue that promoting the sport and giving to charity can still be accomplished without its current tax-exempt status.
Professional sports organizations will continue to be scrutinized, and although several organizations have willingly restructured, it is unlikely the PGA Tour will follow suit. After failing to pass legislation to be included in the Tax Cuts and Jobs Act, the PRO Sports Act was introduced to the Senate in 2018 to prohibit professional sports organizations from organizing as nonprofit entities. If the bill becomes a law in 2020, it would drastically change how the PGA Tour and other organizations conduct their business. The bill is currently with the Committee on Finance as of February 1st 2020 and has failed to make any significant developments towards becoming a law. If you have any questions regarding the developments of the PRO Sports Act or want additional information on tax-exempt professional sports organizations, please do not hesitate to contact our office at (858) 558-9200.