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Sports league tax-exempt status questioned again thanks to proposed pro golf merger

Golf

U.S. Senators today grilled professional golf representatives in connection with the planned merger of the PGA Tour and LIV Golf, the upstart league backed by Saudi Arabia.

Critics, including many in the sports world as well as Congress, of the deal say it's a thinly disguised effort by the Mideastern country to sportswash its stained human rights reputation. Others add that it's an attempt to bolster its economic influence in the United States.

The Senate Homeland Security Committee's Permanent Subcommittee on Investigations hearing ran around three hours, but apparently didn't resolve much. (Insert your own Capitol Hill dog and pony show joke here.)

Part of the reason the hearing was inconclusive was because two key players, PGA Tour Commissioner Jay Monahan and Yasir Al-Rumayyan, head of the Saudi sovereign wealth (aka investment) fund that's covering LIV's operations, were no-shows.

"We need to learn more," said committee chair Sen. Richard Blumenthal (D-Connecticut) at the conclusion of the hearing. "We're going to ask the other potential witnesses who we invited to actually come to share their perspective and information. … The more we know, the more we can support the values and freedoms that we have espoused here today."

Tax status questions, too: Another area of concern to lawmakers is the PGA Tour's federal tax status. It, like several other professional sports leagues, has been granted tax-exempt status under section 501(c)(6) of the Internal Revenue Code.

Currently joining the PGA Tour as a nonprofits are the Ladies Professional Golf Association (LPGA); the Professional Golfers Association (PGA), which is separate from the PGA Tour; the National Hockey League (NHL); and various professional tennis groups.

As for the big three U.S. sports leagues, none are tax-exempt. Major League Baseball (MLB), facing Congressional scrutiny, gave up its nonprofit status in 2007. The National Football League (NFL) did the same in 2015 when it, too, found itself in Congressional crosshairs. The National Basketball Association (NBA) never operated as a nonprofit.

The professional golfing group's tax-exempt status came up last month in a letter sent by Senate Finance Committee Chairman Ron Wyden (D-Oregon) to PGA Tour leaders. He wrote then that the PGA Tour-LIV merger "raises significant questions about whether organizations that tie themselves to an authoritarian regime that has continually undermined the rule of law should continue to enjoy tax-exempt status" under U.S. law.

Nonprofit tax status rules: So how does the Internal Revenue Service decide which organizations get tax-exempt status? As noted, they rely on the tax code, specifically section 501(c).

That part of Title 26, which is the official name of the tax segment of the U.S. Code, spells out seven different and wide-ranging categories under which a group may qualify.

These so-called 501(c) organizations are —

  • 501(c)(3) for religious, educational, charitable, scientific, or literary organizations; testing for public safety organizations; as well as organizations dedicated to preventing cruelty to children or animals, or fostering national or international amateur sports competition (which technically is how the U.S. Olympic & Paralympic Committee is classified);
  • 501(c)(4) for civic leagues, social welfare organizations, and local associations of employees;
  • 501(c)(5) for labor, agriculture, and horticultural organizations;
  • 501(c)(6) for business leagues (including those in the sports business), chambers of commerce, and real estate boards;
  • 501(c)(7) for social and recreational clubs;
  • 501(c)(8) for fraternal beneficiary societies and associations; and
  • 501(c)(9) for voluntary employee beneficiary associations.

Sports, as usual, get more attention: The tax-exempt status of professional sports leagues have gotten the most attention because in most cases their franchises are money-making operations.

But, as the sports leagues note, the profitability comes from the member teams, which are not tax-exempt. The individual teams must pay taxes on their profits, although they have friends on Capitol Hill and good attorneys to help reduce that amount.

The tax exemption applies only to the league offices, which coordinate and manage the affairs of the entire operation. As such, they argue, they are not profit-making operations. They are pass-through entities that pay salaries for their personnel, cover other operating expenses, and distribute any surplus to the teams.

And that means they meet the guidelines of a 501(c)(6) group. They promote the common interest of its members and don't engage in a regular business of a kind ordinarily carried on for profit.

Technically, tax true. But from a public perception and public relations standpoint, it's still not a good look.

Will the PGA Tour follow MLB and NFL and surrender its tax-exempt status, if only to take a legislative weapon out of Congress' hands? Maybe.

Time to tighten nonprofit entry: Personally, as long-time readers know, I think section 501(c) is one part of the Internal Revenue Code that needs simplifying.

Specifically, I'd do away with every tax-exempt status except 501(c)(3). Groups in this category are those to which you and I typically donate goods or cash and then, if we itemize, claim a charitable deduction.

I would, however, narrow it a bit. I would allow the tax designation only for groups that do demonstrable work for the public good.

Yep, all my veteran readers, you know where I'm going here. Separation of church and state. My tweak would mean that religious groups wouldn't qualify just for espousing a particular philosophy or dogma.

If, however, a church or other place of worship had a specific foundation that funded, for example, food kitchens or shelters or transportation for those in need of ways to get to medical appointments or job interviews or work itself, that foundation could be a nonprofit. But the religious organization itself would not be granted tax-exempt status.

I know. My idea is a nonstarter, particularly with the political, social, and culture wars being waged today.

But as the PGA Tour/LIV deal demonstrates, the idea of how to deal with profitable entities that legally avoid taxation by virtue of some malleable tax code language isn't going to go away.

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