Tax Exemption and its Implications for Sporting Clubs

This essay delves into the concept of tax exemption, particularly as it applies to sporting clubs. It begins with an abstract and introduction to tax-free status granted by the federal government, outlining the role of the Internal Revenue Service (IRS) and the requirement of non-profit status. The essay then presents a case study on sporting clubs like the NRL and AFL, exploring the arguments for and against their tax-exempt status, considering factors such as community reinvestment, non-profit structures, and charitable contributions. It discusses how sporting clubs generate revenue and the implications of their tax status, also examining why they should or should not be granted the tax-free status. The essay also applies accounting theories like public interest theory, capture theory, economic interest theory, and private interest theory to analyze the motivations and impacts of tax exemptions on sporting clubs. It concludes by suggesting that the IRS should consider various factors when granting tax-free status, especially as organizations evolve, and that there should be a division in the tax rules between small and large clubs.

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TAX EXEMPTION
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ABSTRACT
The following essay is on the tax-free status granted by the federal government and why
and how it is given. A case study on sporting clubs and why they qualify for tax-exempt status is
presented with arguments for and against the tax-free status. Accounting theories have also been
used to explain further the reasons why sporting clubs should retain their status.
INTRODUCTION
An organization or institution that has a tax-free status (tax-free) is one that is exempted
from income taxes and federal corporate for most types of revenue. The tax-exempt condition is
given by the federal government in the form of the Internal Revenue Service (IRS). For an
organization to apply for a federal tax exemption, they need to have been granted non-profit
status. The non-profit status is issued by the state.
There are various types of exemption in the United States Tax Code and total, they are 26
exemptions. The best-known form is the charitable exemption that is under 501(c) (3). Many
community organizations have this tax-exempt status. Another status is 501(C) (4) which is
appropriate for social welfare organizations (Bertrand et al. 2018).
Organizations become tax exempt by applying for the status which is a long process.
Form 1023 for 501(c)(3) which is the application form for organizations and Form 1024 that is
for others is 30 pages long, and the IRS says that the form can take 8hours to complete. It takes
several months to be granted status, but after completing the form, the IRS usually sends a letter
that says your status is pending. When the IRS issues the status, they send a letter of
determination. This can be used by the organization to show funders and when applying for
grants.
Discussion

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The NRL and AFL were both granted the tax-free status on the basis that the profits
earned from both will be reinvested back in the community to encourage participation in sports
and to provide local facilities such as stadiums for sports. After the NRL and AFL have paid
their employee salaries (who pay income tax) the surplus profited is supplied to clubs. This is to
help them in building property and entertainment establishments. Also, they can fund community
infrastructure (Fishman 2017).
Sporting clubs need to be automatically granted the tax-free status by the IRS due to
some reasons. First, most sporting clubs are non-profit organizations. This is because all the
profits that are earned are re-invested back into the club to sustain it. Thus because they are non-
profit their income should not be taxed (Anderson 2017).
Second most sporting clubs are formed for the sole purpose of encouraging people to play
the particular sport or game, for example, sporting clubs that are established in schools and
universities aim at encouraging students to participate in the extracurricular activity. This way
they foster both the mental and physical wellbeing of the students. Hence they should be granted
tax-free status. Lastly, sporting clubs should be allowed a tax-exempt status because most are
charitable organizations that focus on giving back to the community by building infrastructure
and entertainment facilities such as stadiums (Nielsen and Storm 2017).
Most clubs have managed to earn substantial income after they were granted the tax-free
status due to some reasons. First, it is because of the tax payer's money. These clubs sell out their
tickets when they are hosting games. The ticket prices are at times very high, and millions of
people buy them. Therefore, they get a significant amount of money from the ticket sales.
Second, the clubs gain vast amounts of money from gambling. Most of the clubs gain money
from gambling sites where people are given odds to predict which team will win or draw. The

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clubs get millions of money from these sites (Farrar and Faunce 2017). Third, they get money
from media rights which include television broadcasting rights where they are paid millions.
Lastly, they get the surplus income from commercial sponsorships and endorsements deals.
Sporting clubs should not be given the tax-free status due to some reasons. One of the
reasons is that most sporting clubs make millions of money each year that they do not re-invest
in the community. They do not fund any community developments which at the most time the
government or community funds. Thus they need to be taxed so that the money can be used for
community developments. Second most sporting clubs are not non-profit. They are formed and
funded by investors who want to make profit returns from the club (Harrison and Seim 2017).
Third most sporting clubs are not built for the sole purpose of encouraging sporting
activities but rather for competition. The sporting clubs aim at participating in contests and
earning income from the wins. Therefore they need to be taxed. Lastly, another reason why
sporting clubs should be taxed is that they focus more on the non-sport activities than the
sporting. For example, most sporting clubs provide leisure activities to their members such as
dining and thus need to be taxed.
The AFL and NRL are most likely going to maintain the tax-free status. This is because
most of their agendas are aimed at the society and community at large. By re-investing in the
community and helping in its development, they are acting in the interest of the public.
Therefore, they are practicing the public interest theory where the organization acts in the
interest of the public. If they are to lose the tax-free status, then the community will suffer at
large. Funds will have to be found elsewhere for the building of infrastructure (Iggers 2018).
The AFL and NRL have also managed to maintain their tax-free status by ‘capturing' the
government. This is best explained in the capture theory where the government is set to regulate

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industries for the benefit of the public but instead shift and act in the interest of the organization.
Both clubs have therefore managed to capture the government in allowing them to continue
making net profits for themselves without being taxed. If their tax status were to be removed in
this case, their substantial net profits would be taxed which some of the members may
disapprove (Gans and Ryall 2017).
Also, the AFL and NRL also have set regulations that the market has adopted. For
example, they ask taxpayers to fund the stage on which they will perform. This is explained by
the economist interest theory where the industry sets the regulations, and the government
approves them (Becker 2017). This theory best explains how the government builds and
upgrades the facilities in the stadium. This is because they set the requests and the government
granted them. If their tax-free status were to be invoked in this case, both clubs would have to
fund their performance and stadiums.
Another theory that can be used to explain why the tax-free status of these clubs needs to
be lifted is the private interest theory (Mizutani and Nakamura 2017). It is evident that both the
AFL and NRL act in the interest of their members and investors. They cannot account for the
profits they are making since none is re-invested in the community and none is used to encourage
sports. Therefore, where is the money going to? Most likely the members are benefitting from
the significant income as seen the CEO Gillon McLachlan earned $1.7 million in 2016. In this
theory, the industry sets regulations that are of interested to the industry (Levi-Faur 2017).
If tax-free status were withdrawn from small local and children's sporting clubs, the clubs
would be unable to sustain themselves because most of their earnings instead of being re-
invested in the club will be taxed. They will suffer huge loses and will not be able to encourage
sporting activities. There should be a division in the tax rules between small clubs and large

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clubs, and this can be decided by looking at the objectives of the club and their gross receipts of
the year. If the club practices the public interest theory where all their objectives are of benefit to
the public, then they are granted the tax-free status (Prentice 2018). On the other hand, if the
club's set regulations that are of benefit to the club like in the economic interest theory, then they
should not be granted tax-free status.
Conclusion
The IRS should consider more factors when granting tax-free status to organizations and
institutions because most of them do not need it. Also in the case where an organization is given
a tax-exempt status but with time grows and their objectives do not align with those that are
eligible to get the status, then the IRS needs to lift the tax-free status. This way the status is
granted to organizations that need it.

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REFERENCES
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