During his Wednesday morning press conference, PGA Tour Commissioner Jay Monahan made it evident that the PGA Tour has zero intention of abandoning its 501(c)(6) tax-exempt status after he announced upcoming changes to the PGA Tour structure in response to the ever-growing LIV threat.
“Never,” Monahan replied when asked if the PGA Tour contemplated abandoning the 501(c)(6) statues. Monahan went on to say, “The 501(c)6 status and the integrity of that and all it does for us, that’s always going to be a central fabric to who we are as an organization.” However, it may not be up to Monahan whether the PGA Tour ultimately retains its tax-exempt status when those changes begin to materialize.
Like the majority of the world, you probably don’t know what a 501(c)(6) status is or why it matters. According to the Internal Revenue Code (IRC), “IRC 501(c)(6) provides for [tax] exemption of business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues … which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.” This tax-exemption that accompanies the IRC 501(c)(6) status is pivotal for the PGA Tour. According to Rep. Greg Steube (R-Fla.), “the PGA Tour in 2019 took in $1.5 billion in revenues, profited more than $250 million from 2016 to 2019, and skirted about $80 million in federal corporate taxes.” Many professional sports leagues and/or organizations have claimed 501(c)(6) status at one point in time, most notably the NFL and MLB. But what are the requirements to qualify for 501(c)(6) status?
To meet the requirements of IRC 501(c)(6) and Reg. 1.501(c)(6)-1, an organization must possess the following characteristics:
It must be an association of persons having some common business Organization interest and its purpose must be to promote this common business interest;
It must be a membership organization and have a meaningful extent of membership support;
It must not be organized for profit;
No part of its net earnings may inure to the benefit of any private shareholder or individual;
Its activities must be directed to the improvement of business conditions of one or more lines of business (discussed under “The ‘Line of Business’ Requirement,” page 21) as distinguished from the performance of particular services for individual persons;
Its primary activity does not consist of performing particular services for individual persons; and
Its purpose must not be to engage in a regular business of a kind ordinarily carried on for profit, even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining.
These characteristics are critical as the IRC states that “an organization must possess all the above characteristics to qualify under IRC 501(c)(6).” It is also important to note that, “the characteristics are interrelated and an organization that fails to meet one characteristic will probably fail at least one of the other characteristics.” So, now the question turns back to the new plans announced Wednesday and whether those planned changes violate any of the necessary characteristics to qualify as a 501(c)(6) organization.
While we could spend hours if not days analyzing every requirement individually, let’s set our focus on the characteristic that is most likely to come into question, characteristic number four, “No part of its net earnings may inure to the benefit of any private shareholder or individual;”. What is an inurement and when does that inurement affect the association’s exempt status?
According to the IRC, an Inurement results from "an expenditure of organizational funds resulting in a benefit which is beyond the scope of the benefits which logically flow from the organization's performance of its exempt functions." G.C.M. 38559 (Nov. 8, 1980). The IRC provides examples of cases where the exemption was denied because of inurement of earnings such as, “an organization that used its funds to provide financial assistance and welfare benefits for the members.” (Rev. Rul. 67-251, 1967-2 C.B. 196).
That example should be extremely troubling to the PGA Tour as one of the major factors in the PGA Tour’s ongoing battle with LIV Golf is the newfound demand for guaranteed earnings in professional golf, as shown in the recently proposed changes in the form of the “Earnings Assurance Program” that will guarantee a league minimum of $500,000 per player on tour. That Earnings Assurance Program may not seem like an issue at face value, but that view changes when you investigate the way the program will allegedly operate. Per the most recent proposal released by the PGA Tour, any PGA Tour member who fails to earn $500,000 on the course in a given year, the PGA Tour will split the difference to help the player reach the $500,000 in yearly earnings. (Example: Player A makes $250,000 in a year from tournament play, thus, PGA Tour pays the player the other $250,000) Bringing it back to the inurement of it all, the argument can definitely be made that this Earnings Assurance Program is a bona fide inurement as the PGA Tour would be utilizing reserve funds “to provide financial assistance and welfare benefits for the members,” because the sole purpose of the program is to provide financial assistance to players when they cannot make enough money during a given year.
While lawyers and regulators can, and surely will, have heated arguments on whether the new PGA Tour changes constitute an inurement, and therefore, its 501(c)(6) should be denied, it should be noted that the over-arching theme of the proposed changes and the evolving PGA Tour-LIV Golf arms-race to secure top players may lead to unintended consequences like the PGA Tour ultimately losing its IRC 501(c)(6) tax-exemption status.
As of now, the IRC has backed the PGA Tour’s 501(c)(6) status pointing to the furthering of a common interest in accord with Section 1.501(c)(6)-1 of the Income Tax Regulations which states, “a business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit.” Specifically, regarding the PGA Tour the IRC said, “the organization was formed to promote interest in a particular sport, to elevate the standards of the sport as a profession, and to sponsor and conduct tournaments for the encouragement of its members.”
Many avid golfers, have associated this promotion of the sport of golf with the phrase “growing the game.” Whether you agree that the game is actually being grown, the PGA Tour will definitely lean on this theme going forward because the IRC stated that Section 1.501(c)(6)-1 of the Income Tax Regulations “provides that the activities of the organization should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons.” The “growing the game” theme can be seen in Monahan’s statements during his Wednesday press conference. “Every single member of the PGA TOUR is going to benefit from the changes that we're going to be making,” Monahan said. “The TOUR is going to continue to grow by having the best players in the world committed to it, by us continuing to lean into and invest in our ethos, which is the single-best competitive platform.”
For now, Jay Monahan said that the Tour will try to create for-profit subsidiaries that could create additional value for the members. One possible for-profit subsidiary was announced immediately after Monahan’s press conference, the TGL, a primetime, tech-driven league concept that will debut in January 2024 led by Tiger Woods and Rory McIlroy. Only time will tell whether the PGA Tour and Jay Monahan can weather the brewing storm, but it surely never hurts to have Tiger Woods (the bona fide needle) on your side.
(P.S. – was Phil right???)
Benjamin Kaner is a 2L at New York Law School with a passion for sports and law. Benjamin is passionate about all sports but especially Golf, International Football, and Formula 1. Benjamin is interested in working with sports leagues and teams in the future. You can find Benjamin on Twitter and Instagram @BenKaner.