MLB and the Tax Man: A Love Story

"Look, we play The Star Spangled Banner before every game. You want us to pay income taxes, too?" -- Bill Veeck

Major League Baseball has a long history of getting along very, very well with the US government. They get away with things that many other companies do not. For instance, following the landmark 1922 case, Federal Baseball Club v. National League, at the tail end of the league wars, baseball was deemed exempt from antitrust laws. Baseball got away with the essentially unconstitutional reserve clause for about 100 years. And, from 1966 until recently, MLB has not had to pay taxes.

Say whaaaaat?

The finances of baseball are very interesting, if one cares to pay attention - and in 2008, this guy did. This tax statement, from MLB's fiscal year of 01/11/2005 - 31/10/2006, shows something very interesting: just one MLB executive, Commissioner Bud Selig, listed his salary ($14.5 MM). The above blogger wondered if MLB filed an incomplete return, and links to an article in which an IRS agent clearly states that non-profit organizations must report the salaries of all executives and officers.

We need to go back to 1966, and for the simplest explanation, I'm going to throw to Patrick Hruby, who outlined this in his interview with Sportsnet's Bob McCown:

... In 1966 there was this large Congressional bill about investment and property depreciation (Bill Suspending the Investment Tax Credit and Accelerated Depreciation Allowance, Pub. L. No. 89-800, 80 Stat. 1508 (Nov. 8, 1966), because I know you were curious), and specific language placing professional football into this special kind of tax-exempt status was tossed into the back end of it. ... I've asked staffers, and ... they assume it was probably just a really smart bit of lobbying on the part of the NFL.

Lobbying the government is something the pro sports does very well. A new publicly-funded stadium opens every year in one of the major North American sports. But, to recap: professional sports have long been covered under section 501(c)6 of the United States Code (Title 26, Chapter 1, Subchapter F, Part I), which classifies them essentially as a business league, or an organization that fosters business - a municipal chamber of commerce is the best example. The difference is that in the above tax return, MLB claimed receipts of over $124 MM.

To mention the above blog one more time, he mentions that the MLB, a tax-exempt organization, did not file a complete tax return, and the IRS agent, Marcus Owens, former director of the IRS' tax-exempt organizations division, claims that the tax code clearly calls for non-profits to list the salaries of all officers and executives. There is one hitch: MLB has forfeited its 501(c)6 status. Here's Hruby again:

... A couple of years ago the IRS tweaked the rule and said that if you're going to qualify ... you have to have much more extensive reporting on what the people who work for you make -- you have to report a lot more of their salaries on your yearly tax reports.

So, rather than disclose the entirety of its salaries, MLB decided to instead pay taxes on a tax bill of, Hruby estimates, north of $150 MM. That number seems plausible considering what they claimed in 2006 and what other leagues report (the NFL, for instance, reported a gross income of $255 MM in 2012, and the PGA claimed $130 MM).

Now, a ton of this is offset by tax-exempt practices, like loans to teams and charitable work. There is a good deal of conversation happening about this topic, especially in these times of budget cuts and wondering where the next federal dollar is going to come from. Some estimates assert that Uncle Sam could bring in upwards of $90 MM by taxing league offices (and remember, MLB is already paying), which is a drop in the ocean, but again, this is a time where we are searching under every rock for new revenue.

To me, however, the glaring question is why does MLB want to pay taxes on $150-200 MM of income instead of telling people how much their executives make? Especially when we already (supposedly) know, from 2005 tax returns, what most of these officers make (Bob DuPuy, for instance, made a shade under $5 MM for that fiscal year, for instance).

In the words of Lew Carroll, it gets curiouser and curiouser.

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One final note, and I see this coming up a lot in blogs while reading up on this topic ("It may seem absurd that a collection of teams (the NFL) that generated at least $9 billion in revenue last season would be given tax-exempt status"): baseball players pay taxes. Owners and teams pay taxes. The GMs, executives, and stadium ushers pay taxes. There is tax payed on almost all of the $7-8 BB in annual revenue that goes through MLB - we are talking strictly about the income that goes to the league office here.

For further reading, I really encourage you to read Patrick Hruby's work at Sports on Earth.