For NFL, nonprofit status reaps big savings

The heightened scrutiny on the National Football League following allegations of domestic violence by players could lead to a serious financial blow: losing its nonprofit status. Lawmakers and tax experts say NFL team owners have saved many millions of dollars because of the the league's favorable tax treatment.

"But for the fact that there is literally in the Internal Revenue code a specific exemption for professional sports leagues as a trade organization, it would not be a tax-exempt trade organization," said Christine Reuther, a tax attorney with experience representing nonprofits and partner at the law firm McCausland Keen & Buckman.

The league's operating as a nonprofit will cost the federal government $5 million in tax revenue this year, $9 million in 2015 and $12 million by 2020, according to a letter Coburn sent last year to the Joint Committee on Taxation.

The recent controversy has given fresh impetus to legislation on Capitol Hill that would eliminate the NFL's favorable tax treatment. That includes one bill backed by Sen. Maria Cantwell, D-Wash. and Senate Majority Leader Harry Reid, D-Nev., aimed at forcing the Washington Redskins to change their name, which many consider offensive to Native Americans. Separately, Sens. Cory Booker, D-N.J., and Tom Coburn, R-Okla., each have introduced legislation to make most professional sports leagues for-profit, while other lawmakers are promising additional action that would strip the NFL of its special tax privileges.

The not-for-profit status goes back to the 1940s, when the NFL and the American Football League were recognized as nonprofit trade organizations. In the 1960s, Congress passed legislation that let each organization collectively negotiate broadcast rights for its teams.

"It allowed them to do things like negotiate all the TV contracts, even though they are 32 different businesses, as one group," said Bill Smith, managing director of the national tax office at public accounting firm CBIZ. "They don't have to compete with each other."

NFL franchises are independent businesses, so without the federally granted collective bargaining rights the teams could be accused of collusion and price-fixing. Meanwhile, further legislation along the way cemented the NFL's nonprofit designation, which otherwise could have been challenged by the IRS.

The NFL declined to speak with CBS MoneyWatch.

Understanding just how much operating as a nonprofit benefits the NFL requires understanding something about the structure of professional football. It consists of three interconnected entities. First, there are the teams themselves. Each franchise is an independent corporation with separate owners who have their own business interests.

The next layer is NFL Ventures, a for-profit limited partnership made up of the 32 teams. NFL Ventures licenses the individual team logos, trademarks and other intellectual property from the separate teams and then conducts negotiations with everyone who wants to license any of the material. It collects the money and passes it through to the teams, so the structure avoids potential double-taxation of both the overall flow of money into Ventures and then the payments going to the teams.

Finally, we have the NFL -- the league itself. It is a nonprofit and is responsible for delivering a number of services to the teams and owners. The NFL negotiates the collective bargaining agreement with the players, hires referees, and produces the Super Bowl.

In addition, there are two important activities the NFL undertakes: negotiating all television rights, and managing and lending money to teams that are building stadiums in public-private partnerships. Having a single entity perform both of those functions is vital for the team owners. Because the NFL's collective bargaining rights shields it from antitrust law, it can push for the best revenue deals from radio and TV broadcasters. If team owners negotiated individually, the broadcast industry could play one against the other as a negotiation tactic, and likely lower the fees it pays for airing games.

Operating as a single entity, rather than multiple franchises, also gives the NFL more leverage with lenders and helps the league lower its borrowing costs. Those savings are passed on to team owners.

And this is where the league's collectively assigned nonprofit status is especially vital. An independent for-profit company would expect to make a profit on top of all expenses, including overhead, legal costs and other aspects of doing business. The teams already pay those costs, along with handsome pay for team executives.

That profit would ultimately be paid by the teams, just as a portion of the money a consumer pays to a store or service provider goes to that company's profits. So the teams would pay more and make less money. And with TV rights alone generating billions in annual revenue, that could mean an additional tax burden running into the hundreds of millions of dollars.

The NFL's tax benefits don't end there. Congress passed special legislation in 2004 that allows teams to depreciate 100 percent of a franchise's purchase price over a 15-year period, said Dennis Howard, a professor of business at the University of Oregon and an expert in sports economics. By allowing the full price to be treated as a cost over 15 years, this so-called 100/15 rules gives team owner gets a big annual tax credit.

The rule "provides teams with the ability to reduce their annual tax obligations by millions of dollars," Howard said. "When you extend this massive tax shelter across all of the major leagues, the hit on the federal treasury is infinitely more impactful than the estimated $10 million or so the NFL league office might have to pay in annual taxes if it were classified as a for-profit entity."

Boston tax lawyer Travis Blais calls the rule a "blatant giveaway" for NFL team owners. "If I go out and buy a company -- buy that stock -- I don't get to recover that cost until I sell it," he said.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.