Thursday, October 18, 2012
The Tax Status of the NFL: Why Reporters Ought Not to Write About Nonprofits Until They Talk To An Expert
I spend a fair amount of my working life talking with reporters about tax exemption issues. I do this not because I think I'll get quoted correctly (I almost never do; nuance, which is part of the stock in trade of an academic, is almost always lost in the translation), nor because I think I'll get famous from the occasional quote in a story, but rather because I hope to influence at the margin the competence of the stories that are written. And I will say that most of the time (not nearly all), the reporters I talk to write stories that by and large "get it right." I hope some of that is attributable to their discussions with me, but I think it is more attributable to the fact that reporters who seek out experts in the areas they are writing stories on really are trying to do a good job, and that tends to get reflected in the accuracy of what they write.
Contrast this to stories like this one in the Atlanta Journal Constitution, about the tax-exempt status of the NFL. Most of the basic facts are correct - the NFL is, in fact, a tax-exempt entity under 501(c)(6). But the reporter who wrote this story makes no effort to place this status in context, and therefore leaves the impression that this is a huge scandal. I hate stories like this.
I've talked many times with sports reporters across the country about this issue, and I invariably find that the reporter in question starts with no understanding about the differences between 501(c)(6) status and "charitable" status under 501(c)(3). Most of them don't realize that trade associations don't benefit from the Section 170 charitable contributions deduction; to them, "exempt" means the same thing whether you are the NFL or the Red Cross. When reporters leave this critical difference out, readers come away with the same confused impression: that the NFL enjoys the same tax benefits as the Salavation Army or the local church. It doesn't.
Second, the reporters invariably fail to distinguish the NFL league entity from the individual teams. The individual teams are taxpaying, for-profit enterprises (the Green Bay Packers do have a unique ownership structure, in which the corporation is owned by citizens of Green Bay, but it is organized as a for-profit corporation under Wisconsin law). They are not owned by the league. Again, notice that the quote used by the reporter from Tom Coburn talks about the value of the individual teams, juxtaposed against the very vague statement that "many" of the NFL's "subsidiaries and teams" are tax-paying entities. This is classic obfuscation, in which the reader is left with the impression that the NFL is a monolithic nonprofit, classified in the same way as the Salvation Army, with teams that may themselves be exempt.
Finally, the story doesn't point out that 501(c)(6) status doesn't get you very much in the tax world. In most states (actually, I think all), trade associations aren't considered charities, and their property would not be tax-exempt under general state property tax exemption rules. So the quote in the story about the NFL having "$1 billion in assets" again leaves the mis-impression that somehow these assets are escaping taxation. Even the value of the income tax exemption is questionable. If you look at the NFL's 2011 Form 990, you will see that its expenses for the year exceeded its revenue. While I can't conduct an audit from afar, it sure looks like virtually everything reported by the NFL as an expense would be deductible if the NFL were a taxpaying entity. The result: even if the NFL weren't tax-exempt, it probably could easily arrange its affairs to pay no income tax.
Now that's not to say that exempt status is worthless; it must be worth something to the NFL, or else it would have abandoned that status, like Major League Baseball did years ago. But this whole "shock and awe" tinge to the story makes me want to throw up. In the overall policy world of exempt organizations, I just don't find the NFL's "trade association" status all that bothersome. After all, all sorts of local, state and even national business organizations qualify under that same status (e.g., the American Bar Association; the American Medical Association, etc.). There's plenty of stuff in the exempt organizations world to get worked up over (political expenditures by (c)(4)'s, for example); the NFL's status just doesn't hit my hot button.
Tuesday, October 16, 2012
From the Nonprofit Quarterly comes a story about the city council of Scranton, PA and the city council's potential "hardball" approach to coaxing PILOTs from the city's nonprofit sector.
The story recounts how the City Council has asked that it be given notice of any zoning variance applied for by a nonprofit, so that the council can (if it chooses to do so) oppose the variance before the zoning authorities. The undercurrent of the story is that the potential opposition might be tied to whether the nonprofit agrees to a PILOT. The author of the NPQ article indignantly claims this is discriminatory, because the tax status of the organization requesting the variance should have no bearing on whether the variance is granted:
If a tax-exempt and a tax-paying entity both apply for variances regarding off-site parking requirements, for example, it would seem to be a big stretch to argue that the tax status of an applicant trumps the empirical questions about the land use.
Well, I'm not sure I agree. Zoning is clearly about land use, but in a larger sense it is about the overall economic health of a particular geographic area. Tax revenues are certainly a consideration in that overall economic health and I don't find it untoward for zoning variances to consider the effect on the local tax base (assuming, of course, that consideration is not prohibited by local zoning laws; I have to believe that if the city council's attorney thinks that such consideration is appropriate, there probably isn't a Pennsylvania statute prohibiting it). If Scranton wants to play hardball with nonprofit organizations, potentially holding zoning variances "hostage" in return for payments, that's life in big city politics. There's some saying about "kitchens" and "heat" that seems appropriate here . . .
Monday, October 15, 2012
The dispute between the town of Vestal, NY and United Health Services over a property tax exemption for a new clinic owned by UHS offers a good lesson in the requirements for state property tax exemption. UHS built the clinic on land leased from a for-profit corporation. There is no dispute that the building is tax-exempt; the dispute regards an exemption on the underlying land.
While property tax exemption laws vary considerably from state to state, in most states property tax exemption requires that the exempt property meet two requirements: (1) it must be owned by an exempt charity and (2) it must actually be used "exclusively" (which usually really means "primarily") for exempt purposes. In New York, the relevant statutory language comes from Section 420-a of the New York Real Property Tax Law, which states:
Real property owned by a corporation or association organized or conducted exclusively for religious, charitable, hospital, educational, or moral or mental improvement of men, women or children purposes, or for two or more such purposes, and used exclusively for carrying out thereupon one or more of such purposes either by the owning corporation or association or by another such corporation or association as hereinafter provided shall be exempt from taxation as provided in this section.
The New York law seems pretty clear in requiring "ownership" by an exempt entity, which is pretty clearly not the case in the Vestal-UHS dispute. It may be, however, that UHS is claiming that the terms of its lease are the equivalent of "ownership" for New York property tax rules. The IRS sometimes treats very long-term leasing arrangements as the equivalent of fee ownership. In its regulations regarding tax-deferred exchanges under Code Section 1031, for example, the IRS treats a leasehold of 30 years or more as "like kind" to a fee interest. Treas. Reg. 1.1031(a)-1(c).
Since UHS has declined to reveal the specific provisions of its lease, I don't know what it's argument is on the ownership question (there is a suggestion in the cited story that UHS is claiming that it is responsible for paying the property taxes, which is enough to meet NY law). I'm also not sure whether New York would recognize certain leasehold interests (or obligations to pay the taxes) as the equivalent of "ownership" for property tax purposes - perhaps some reader from New York could enlighten us on that point.
But the story is a good illustration of how state property tax exemption differs from federal (or even state) income tax exemption. Federal income tax exemption is focused solely on the "charitable-ness" of the entity seeking exemption. Property tax exemption, on the other hand, generally requires meeting a two-pronged "ownership and use" test. The latter can produce different results - for example, property that is owned by a charity but not used for charitable purposes (e.g., leased to for-profit entities, or not used at all - that is, fallow property) generally will not qualify for exemption, just as property used for exempt purposes but owned by a for-profit entity and leased to a charity will not qualify.