Major League Baseball Says It Isn’t in the Athletics Business

It might come as a surprise to some to learn that Major League Baseball used to be a tax-exempt non-profit. It’s true: Section 501(c)(6) of the Internal Revenue Code allows for professional sports leagues to claim tax-exempt status. That didn’t make the teams tax-exempt; the rule applied to sports’ central offices. It is an understandably controversial part of the tax code. Legislators have attempted to eliminate that tax-exempt status. MLB eventually voluntarily surrendered its non-profit status in 2007, mostly so it didn’t have to report its executive compensation.

MLB might not be a non-profit anymore, but that doesn’t mean it likes paying taxes. Its latest attempt to keep the IRS at bay concerns one of the unforeseen side effects of the new tax law, which we’ve talked about before. In this instance, MLB teams are upset about a deduction the IRS says they’re ineligible for. As the Wall Street Journal’s Richard Rubin explains,

Team owners are fighting a proposed tax regulation that would deny baseball teams and other sports franchises a lucrative deduction they say they scored in last year’s tax law.

Congress intended that teams get the “full deduction,” MLB Commissioner Rob Manfred wrote in an Oct. 1 letter to the Treasury Department and IRS, attempting to draw a “stark contrast” between baseball teams that he said should get the break and others, such as investment bankers, who can’t.

The tax break at issue is the 20% deduction for pass-through businesses such as partnerships and S corporations that pay their income taxes through their owners’ individual returns. Congress designed the break as a companion to the rate cut for corporations, but it imposed limits that the government is now directing at team owners.

For those of you who either don’t know or don’t want to know what that last paragraph means, let me explain. The tax reform bill allowed certain types of enterprises called “pass-through” businesses – where the business pays its taxes via their owners’ tax returns – to have a tax deduction. Since many MLB teams are partnerships or other kinds of pass-through entities, they want to have this deduction too.

Now here’s the problem:

Congress included “athletics” on the list of businesses that couldn’t benefit from the new 20% deduction. Such exclusions in the law were meant to prevent people from turning labor income into business income. In athletics, that was intended, at least, to prevent a player from routing his salary through a limited liability company to get the business break.

And that has led Commissioner Rob Manfred to – no joke –argue Major League Baseball is not an athletics business in a letter to the IRS. Manfred wrote that “the activities of a major league professional athlete make up a de minimis amount of the total activities of all employees of a professional sports franchise.” He goes on to argue:

A professional sports club does not merely employ professional athletes, but rather employs hundreds of additional individuals who are responsible for conducting activities related to stadium operations, marketing, team operations, broadcasting and media, retail store operations, community engagement, and general and administrative functions. In fact, the substantial majority of time spent by a club’s employees does not relate to playing in the sporting contests presented by the club.

To MLB, a baseball team is in the business of receiving athletic services, not providing them. “The services being performed in connection with a sports franchise are those performed by the players, who are employed by the club—and in that regard, the club is receiving services, not performing them.” In other words, MLB is attempting to position itself as a league of marketing companies, rather than a sporting enterprise. Says MLB: “[The IRS’ interpretation of the law] incorrectly assumes that a professional sports club is . . . in the field of athletics merely because it employs athletes.” The problem is that this proves a bit too much. As Rubin explains:

…even if the performance of athletic services is only a small part of what a baseball team does, the IRS rule says that a business that is more than 5% athletic services is a service business and can’t get the tax break.

And that’s kind of the problem. MLB is trying to say it isn’t in the principle business of athletics because it employs primarily non-athletes. But this sort of thinking strikes me as a bit absurd. In the law, we look to the plain language of words when trying to determine the intent of the legislature. One way to do that is looking at a dictionary.Merriam-Webster defines “athletics” as “exercises, sports, or games engaged in by athletes“; by the plain language of the statute, Major League Baseball qualifies. Why? Because it is a business enterprise engaged in the marketing, presentation, and production of athletic events. MLB’s argument would be a bit like saying that Metro Goldwyn Mayer isn’t a movie company because it receives acting services and merely distributes movies that contain them. As a practical matter, MLB is more than a mere intermediary; it employs the athletes, facilitates the games, and markets them. It has no other product.

The other, more notable problem with MLB’s letter is how it frames itself and its teams. Here, it cites from a press release during the passage of the tax reform law.

“The Tax Cuts and Jobs Act includes specific safeguards to prevent tax avoidance and help ensure taxpayers of all income levels play by the rules under this new fairer, simpler tax system. Our legislation will ensure this much-needed tax relief goes to the local job creators it’s designed to help by distinguishing between the individual wage income of NBA All-Star Stephen Curry and the pass-through business income of Steve’s Bike Shop.” (Ways and Means release, November 2, 2017).

The boldface and underline were placed there by MLB. Now, there is, of course, a legal distinction they’re trying to make: Steve’s Bike Shop is a pass-through entity, while Stephen Curry isn’t. And yes, there is a certain legal merit to that position – but I find that particular example to be pretty disingenuous. MLB is comparing itself and its teams to Steve’s Bike Shop and distancing itself from Stephen Curry, who is the example of someone so rich he shouldn’t receive a tax cut. But at the same time, Steve’s Bike Shop doesn’t employ Stephen Curry, while MLB teams employ professional athletes like Stephen Curry. MLB is a national enterprise and its teams are hardly a local bike shop; they are by no means a small business, nor are they a “Main Street” job creator. To use professional athletes as an example of people who do not need the deduction, whilst arguing that its billionaire owners do, smacks of bad faith, and is something the MLBPA should perhaps take notice of.

Finally, it’s worth noting that MLB isn’t alone here. Entertainment content writers are also lobbying the IRS using a similar argument. Both spend much of their submissions talking about the intent of Congress in passing the law. That makes sense: effectuating legislative intent is generally the goal of statutory interpretation. At the same time, however, it’s not clear that Congress had any intent on this issue.

Mark Prater, who was the lead Senate staff author of the provision, said he doesn’t recall explicit conversations about whether pro teams would qualify.

Oops.