Did you catch the surprising news about the National Football League (NFL) last week?
No, we’re not referring to any of the results of the college draft. There weren’t any surprises there at all. The top two marquee quarterbacks in the college game, as expected, were selected #1 and #2.
And no, we’re not referring to any announcement about the NFL’s Deflate Gate scandal. No announcement whatsoever was made. Apparently, the League is no rush to release any information about its investigation into that affair.
Instead, we’re referring to the NFL’s announcement that it has decided to start paying income taxes on its earnings. Before last week, it had always opted to avoid any such taxation liability.
But hold on! Wait a minute. Huh? How can that possibly be true?
Why hasn’t the most profitable professional sports league on earth been paying income taxes on its earnings? And why has it been given a choice to “opt in” or “opt out” of the tax system throughout its existence?
Perhaps surprisingly, the American regulatory system permits various types of nonprofit organizations to declare themselves exempt from income taxation, even though they may not serve any social charitable purpose. Under Section 527 of the federal tax code, for instance, political organizations that accept financial contributions on behalf of candidates can file for exemption from income taxes.
Although such organizations may be “profitable” enterprises in a colloquial sense, they (in theory, at least) pass all of their available funds to their favored candidates. Thus, the tax code treats them as pass-through entities, and not as entities that are seeking to earn taxable profits on an independent basis.
Likewise, the NFL has always been treated as a “trade association” entity that exists to help its member teams optimize their profits, and not as an entity that is seeking to optimize its own independent earnings. That’s why the League, for instance, distributes its television revenues to its 32 professional teams.
But why did the NFL agree to start paying taxes on its profits at all? Why didn’t it simply continue its status quo tax exempt arrangement with the Internal Revenue Service? Apparently, because the League has always passed through so much of its revenue to its member teams, its potential tax liability in any given year can be characterized as “a pittance,” and is expected to remain so in the future.
More importantly, by electing to pay annual income taxes, the League can avoid disclosing certain sensitive information to the public. For instance, the salaries of the NFL’s senior officers will no longer be available for public inspection, now that the League is foregoing its tax exempt status.
So although we might be surprised that the NFL will now start paying income taxes, its motivation for doing so should be no surprise at all. After all, it’s not as if the League is acting upon an altruistic desire to contribute more resources to society. Instead, it appears to have chosen to pay taxes as the result of a sober business assessment that the benefit of keeping sensitive information confidential exceeds the cost of any annual tax liability.