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June 14, 2022 | In The News

PGA Tour Rakes in Cash by Exploiting Tax Loophole

Sports fans may be baffled by what’s happening lately in professional golf. The PGA Tour, founded 93 years ago, is facing at least one, and possibly two, serious challengers for the first time in its history.

The big question is why it took so long.

We got one answer on May 11, when the Tour denied waivers to two dozen players that would have enabled them to compete in a London tournament June 9-11. The organization’s rules give the commissioner, Jay Monahan, sole discretion over allowing golfers to play in international tournaments that occur at the same time as Tour events. Playing in conflicting North American events is strictly forbidden.

Pro golfers who tee off anyway in quest of prizes that are triple those of the average PGA Tour event face being banned for life. No wonder new leagues have a hard time getting off the ground.

Besides exploiting its most valuable talent and unfairly blocking competitors, another reason for the PGA Tour’s seemingly impervious monopoly is that it pays absolutely nothing in income taxes — despite $1.5 billion in revenues a year and $72.8 million in profits.

Unlike the National Football League, Major League Baseball, the National Basketball Association and many other money-making sports enterprises, the Tour is exempt from federal taxes, thus allowing the organization to build up a massive reserve to deploy against competitors.

Only about half the Tour’s revenues are paid out to its golfers. Much of the rest goes to profits and to sustain a large bureaucracy. The Tour’s employees are paid $140 million to run 45 golf events from its new $65 million headquarters.

Commissioner Monahan made $8.9 million in 2019, the latest year for which his pay was disclosed. If he were a professional golfer, he would have ranked second, after Brooks Koepka and ahead of Rory McIlroy, on the official PGA money list that year. Monahan’s salary is likely much higher now. The chief operating officer made $5.6 million in 2019. Seven other Tour executives were paid at least $2 million.

The Internal Revenue Service, nevertheless, treats the Tour the same as it does large tax-exempt charities like the American Cancer Society, whose CEO makes $982,000 a year; Yale University, whose president is paid $1.6 million; and St. Jude Children’s Hospital, whose CEO makes $2.3 million.

How can this be? The Tour’s 501(c)(6) nonprofit designation excludes “certain organizations from tax due to their activities related to social welfare,” according to the Tax Foundation. In 1966, as part of a deal to approve the merger between the American Football League and the NFL, Congress created a loophole for pro sports leagues.

The IRS specifically provided a 501(c)(6) exemption for “business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues.” And “football leagues” was later applied to other sports organizations as well.

Americans tend to understand why charities, religious organizations and educational groups don’t have to pay taxes. But it’s hard for taxpayers to fathom why they have to pay taxes, while professional sports leagues that rake in billions of dollars a year don’t owe a dime to Uncle Sam.

Not surprisingly, sports leagues began feeling pressure from the media and public officials over their questionable tax-free status. In 2007, baseball gave up its tax exemption; in 2015, football did the same. The PGA Tour, however, remains untaxed.

As a result, the U.S. Treasury was deprived of more than $70 million between 2016 and 2019 (again, the 2020 and 2021 information hasn’t been disclosed yet).

Chambers of commerce and real estate boards fit the IRS requirement that a 501(c)(6) tax-exempt organization must “promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit.” But the Tour’s governance structure clearly does not.

The PGA Tour is obviously set up to make a profit. It has a chief commercial officer, a chief marketing officer and a business model that aggressively thwarts competition, a classic strategy for profitability.

By restraining competition, the Tour can keep its own purses low. By threatening expulsion for life, as the Commissioner has reportedly done to players tempted to play in tournaments sponsored by other leagues, the Tour can keep its workforce in line.

As a result, the average golfer earns a small fraction of what other pro athletes make, and PGA Tour golfers are forced to pay for their own travel and other expenses.

According to its official IRS filing, the Tour’s principal mission is promoting the sport of golf and “providing competitive earnings opportunities” for its members. In fact, competition is precisely what the Tour doesn’t want.

In March, an organization called LIV Golf Investments, headed by Hall of Fame golfer Greg Norman, announced a series of eight international tournaments. The average purses of these tournaments are more than $32 million, compared with $9 million for the average PGA Tour event.

Another group, Premier Golf League, has proposed a series of new events as well.

LIV’s aim is not to replace the Tour but to offer additional opportunities. A tax-exempt nonprofit that truly respected the “common interest” of its members would encourage their participation in such events.

So far, the Tour has tried to prevent golfers from participating in LIV tournaments.

Washington policymakers are growing tired of the PGA Tour enjoying both a tax exemption and an apparent immunity from antitrust action. Rep. Greg Steube of Florida introduced legislationto take away the Tour’s 501(c)(6) status as a “matter of common sense and fairness.”

Alden Abbott, former general counsel to the Federal Trade Commission, has written that a ban on golfers playing in a competing league’s tournament would “trigger a slam-dunk antitrust suit.”

The PGA Tour shouldn’t wait for lawmakers and bureaucrats to hand down penalties.

The Tour should recognize its obligations to the common interest of its members, the way other nonprofits do, and allow golfers to compete in other events. Competition will benefit the game of golf, bring more fans to the sport and improve the welfare of pro golfers. Those, after all, are the PGA Tour’s stated goals.

The PGA Tour should then follow the lead of other professional sports leagues and start paying taxes like other for-profit businesses. It’s completely unfair to ask struggling Americans to pay taxes while a $1.5 billion global brand pays no taxes at all.