In Spring 1974, Deane Beman had just moved from competitor to commissioner of the Tournament Players Division of the PGA of America -- what is known today as the PGA Tour. Shortly into the job, he was shocked to learn the TPD was classified as a for-profit operation.
After all, as Beman chronicler Adam Schupak writes, the organization had a mere $400,000 in assets. New York state, where the now PGA Tour was headquartered at the time, and New York City wanted almost $100,000 in taxes, not to mention Uncle Sam's cut. The PGA of America was getting about the same in "royalties" -- part of the deal made to separate the pro tournament players from the country club pros.
The tax bill was stifling. The realization that his organization wasn't making money was overwhelming. Something had to be done.
Beman, a former insurance broker himself, with the help of an attorney friend took a flier and applied for tax-exempt status with the IRS.
The Tournament Players Division filed to be recognized as a 501(c)(6) organization, a status given to the likes of trade associations, business leagues and sports leagues. A mere five months after Beman filed the application, the IRS approved it.
In the nearly 40 years since the Tour became a tax-exempt organization, Schupak writes their financial folks estimate $500 million in taxes saved for the Tour, its players and tournaments.
"(The exemption) gave us the ability to pass along these hundreds of millions of dollars to our players in prize money and pension benefits and local charities through tournament organizations," Beman said.
So what took almost four decades for someone in Congress to sour on the idea of sports leagues as tax-exempt organizations?
Sen. Tom Coburn doesn't believe sports leagues should qualify as 501(c)(6) organizations. The Oklahoma Republican introduced legislation, S.1524, in September that would strip sports leagues of that status if their annual income exceeds $10 million.
His primary target, the NFL, is a nearly $10 billion per year entity. The PGA Tour is a $1 billion per year business. Any major sports league -- heck, any fledgling sports league -- would not be able to claim themselves a tax-exempt trade group if the Coburn bill picks up steam.
The Senator's office says the likes of the NFL, NHL and PGA Tour care not for “the success of their respective sports—football, ice hockey, and professional golf—but these leagues are clearly organized for profit to promote their specific brands.”
In '74, Beman said he saw the PGA Tour "not just as a sports league, but as a public trust." But that was before the age of 10-figure rights contracts and $10 million tournament purses. Now that sports are big business, at least some in Washington want the federal government to get their cut -- or, framed another way, want to prevent sports leagues from reaping even more benefits from governments and municipalities.
So many local and state governments foot part or all of the bill for new stadiums, public transportation to and from these facilities and offer tax exemptions for the economic dollars the leagues' fans bring to their area, some of which they get through sales taxes and other fees.
Taxing the likes of the PGA Tour at the federal level will do next to nothing to put a dent in the $17 trillion federal debt, but it would be a symbolic stand.
In 2013, the PGA Tour and its tournaments eclipsed the $2 billion mark in total charitable giving in 75 years of history. Averaging nearly $27 million per year is nothing to scoff at, but the overwhelming portion of the $2 billion has been raised and donated since 1979.
That year, commissioner Beman made sure PGA Tour events were run as 501(c)(3) charitable organizations. Both 501(c)(3) and 501(c)(6) are tax-exempt, but clearly classified differently. The former is the what everyone understands as a non-profit organization, but, more succinctly, it's a charity.
Beman's decision was influenced by myriad factors. Sponsoring a PGA Tour event would make more sense for a business if it could write it off as either a charitable gift -- to the tournaments themselves -- or as a business expense if the money was filtered through the PGA Tour itself. The tournaments themselves would not be taxed for their income with the aim of maximizing the money that would go to local charities. Everyone would come out looking great from a community relations standpoint.
Charity is at the heart of the PGA Tour's public relations campaign. It's emphasized in every PGA Tour telecast, on their website and through various other channels. It should be. In October 2005, the Tour passed the $1 billion mark in all-time charitable giving. Another eight years later, it has tacked on another $1 billion. A total of $130 million was donated in 2012.
However, ESPN's Outside the Lines recently completed an investigation into what percentage of the total income from the 25 PGA Tour events run by 501(c)(3) organizations went to other local charitable organizations. They weren't impressed, saying just 16 percent of revenue went directly to charities. Turning to a sector watchdog group called Charity Navigator for their assessment, OTL reported the PGA Tour's events collectively received a failing grade for not passing along at least 65 percent of income to charity -- Charity Navigator's minimum standard for efficiency.
What Charity Navigator is saying is that the overhead cost of running these individual charities -- created specifically to run golf tournaments that help other charities -- is too high. According to Guidestar, another charitable oversight organization, only 6.8 percent of organizations that file an IRS Form 990 (basically, the tax return for 501(c)(3) and 501(c)(6) organizations) spend more than 50 percent of their income on overhead. Just 3.5 percent spend 70 percent. By the letter of the giving law, the PGA Tour's charity-tournament combos are mighty inefficient as the former but outstanding as the latter.
However, overhead isn't the only thing that determines the value of a charity. Charity Navigator said it themselves earlier in 2013.
Charity Navigator, Guidestar and the Better Business Bureau's Wise Giving Alliance wrote an open letter pleading to scrutizing potential donors to look beyond overhead as the mere standard of measuring a charity.
“The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as 'overhead’—is a poor measure of a charity’s performance,” the letter read.
A campaign to "end the overhead myth" had begun.
“We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results,” the letter continued.
Charity Navigator president Ken Berger, cited several times in the ESPN report, said an important factor in gauging a charity's worth is if it is "achieving meaningful results."
It's hard to look past $1 billion in eight years. Nevertheless, Berger warned against charities with the kind of overhead the PGA Tour's nonprofit tournaments have.
“Show me a nonprofit that uses 70 percent of its funds for overhead, and I predict with a great deal of certainty that it is an organization that is either clueless or focused on lining someone’s pocket rather than effectively serving others,” he said.
The problem is that the definition of what counts as overhead in running a pro golf tournament is kind of vague. What counts as a fundraising expense, which is the true meaning of overhead in the charitable world, as compared to a program expense? The distinction, which is hard to make, could move the tournaments' collective giving-to-income ratio in a big way. Many PGA Tour events would say the cost of putting on a tournament is a program expense. Most auditors would tell you it's a fundraising cost.
Regardless of distinction, there are certain minimum costs involved in running a PGA Tour event. A purse has to be fully funded, typically done as a mix of funds from the PGA Tour's rights agreements and sponsors. In addition, sponsors commit to ad buys during PGA Tour telecasts. And that's to say nothing of the logistics of it all -- course setup, ticket sales, parking, etc. It's the cost of doing business, but it counts against these organizations when it comes to assessing how much money went directly to charity.
In reality, many of those costs could be stripped out of the charitable equation. Players don't play for free. Tournaments don't run themselves.
"It's a very expensive business," said AT&T National chairman Greg McLaughlin to the Washington Post in 2007. "If you don't put on a nice event, you don't get the people to come back. The goal is to run a great experience ... and raise as much money for charity as possible."
And that's to say nothing of the hundreds -- sometimes thousands -- of volunteers who keep the PGA Tour viable. If the tournaments had to pay each person, even at minimum wage, who marshals, serves drinks and other things for free, then just about no money would get into the hands of local charities supported by tournaments.
The charitable organizations running PGA Tour events may have eye-popping overhead costs, but they may reduce the overhead costs for the charities benefiting from their activities.
The same '07 Washington Post story in which McLaughlin was quoted makes the case. Charity Navigator gives the Tiger Woods Foundation four stars, the highest ranking it offers, because it spends such a minimal amount of money on overhead. What helps keep that overhead so low? The money donated by Charity Event Corp., the organization connected to Woods that technically runs the AT&T National, the World Challenge and Woods' annual Tiger Jam concert in Las Vegas.
Woods' case is an odd one, however. The world No. 1 has three charitable organizations all feeding each other. Blended together, their overhead rate could well draw scrutiny.
However, PGA Tour events may somewhat lower fundraising costs for the charities that receive direct cash from their efforts. The Tour players and the event are the fundraising cost, paid for by sponsors and TV rights owners.
Then again, sponsors could simply avoid the PGA Tour and donate directly to charity. Why not? Because sponsors buy in for millions in advertising exposure and corporate hospitality, all the while considered a charitable donation.
Why pay out a $7 million purse when that could go to charity? Answer: The PGA Tour wouldn't exist without players.
There's a quid pro quo element in all of this. How much back scratching is being done and in what proportion can certainly be questioned.
PGA Tour players are members of the tour. They are not employees. As the jargon goes, the pros are "independent contractors."
Every now and then, some PGA Tour players talk of starting a union, of requiring the Tour to collectively bargain with the best golfers in the world. However, that will never happen because the consequences would be disastrous for both sides.
The operations of 501(c)(6) organizations, like trade groups and business leagues, cannot directly benefit any private shareholder or individual. In fact, the 501(c)(6) must exist for the benefit of the organization's members. Paying out hundreds of millions in purse money each year -- including an expertly managed deferred-compensation retirement plan -- definitely benefits its members.
If the Coburn bill went through, not only would the PGA Tour be forced to pay millions in taxes each year, the fundamental relationship between the Tour and its players may well have to change.
Sen. Coburn has alleged that the PGA Tour, as well the NFL and NHL, do not meet the standard of a 501(c)(6) because they don't promote their respective sports, but merely their slice of them.
The PGA Tour is a founding partner of The First Tee, which uses golf as a vehicle to teach children the game and life lessons simultaneously. The Tour also has a number of charities under its massive umbrella, including Birdies for the Brave. And don't forget the International Golf Federation, which was formed with big help from the PGA Tour, to be the game's governing body as far as the Olympics are concerned. Millions have been invested in each by the PGA Tour, all which cannot be misconstrued as anything but trying to benefit golf at large.
That's not enough to sway Sen. Coburn, which might lead a cynic to believe a press conference at the McGladrey Classic in November wasn't what it appeared.
At Sea Island G.C., PGA Tour commissioner Tim Finchem and PGA of America Ted Bishop announced several new cooperative initiatives, including the prominent placement of PGA of America teachers at a number of PGA Tour stops, offering free brief lessons to those interested. The PGA Tour will also work with its media partners to highlight PGA of America professionals in its telecasts.
Finchem said the programs signified a "significant ratcheting up of concrete things we can and should be doing" to increase golf participation. Hey, Sen. Coburn, were you listening?
Also a topic that day? Purse size. The Players Championship, the PGA Tour's signature event, and the PGA Championship, the fourth major of the golf year, were going to each offer a record $10 million purse in 2014. Finchem even suggested he might up The Players purse by a dollar to maintain its title as the world's most lucrative pro golf event.
The PGA Tour is the most powerful professional golf organization. It's not even close. However, they're not a monopoly, at least on a global scale.
The LPGA Tour, the leading pro golf organization for women in the world, is also a 501(c)(6) organization which would be subject to taxation if Sen. Coburn's bill became law. Their collective purse size is 80 percent less than that of the PGA Tour. The cost of sponsoring a PGA Tour event dwarfs that of an LPGA Tour event. Overhead? Lower. The LPGA Tour, through a spokesperson, declined to comment for this story.
The PGA Tour has global competition, and it's growing. The European Tour, Asian Tour and OneAsia compete for the participation of the world's best pro golfers on a weekly basis. The PGA Tour almost always wins.
The European Tour, based in England, does not get the same tax-exempt status in the United Kingdom as its peer organization in Florida.
“The European Tour does differ from the PGA Tour, which is largely exempt from federal income taxes under section 501(c)(6) of U.S. legislation, whereas the European Tour is liable to pay Corporation Tax, just like any other corporate organisation," said Jonathan Orr, the European Tour’s Financial Director and Company Secretary, in an emailed statement.
The European Tour's biggest money maker comes every two years, with the biennial Ryder Cup having turned into an event that captivates global sporting attention. Capitalizing on the competitiveness of the matches in the last quarter-century, the European Tour, which splits Ryder Cup profits with the PGA of America, has been aggressive in marketing the Europe-versus-America matches.
However, it's the individual tax rate that dictates how a lot of players choose to set their schedules. Pro players pay taxes to the individual states (where applicable) in which they earn money playing tournaments, as well to the federal government. That rate, however, is often still lower than in many European countries, but is staggering compared to other locations for European Tour events.
“In terms of individual events, it is probably fair to say the tax landscape on the European Tour is more complicated due to the fact we visit several different tax jurisdictions," Orr said. "For example, the tax environment in countries such as France and the UK differ to each other, and there are also territories visited by The European Tour such as Dubai where the players are paid their prize fund without the deduction of any tax."
Ultimately, it is that weekly competition for talent that dictates how effective PGA Tour events are in getting money to charity. The better the field, the more people who attend, the more companies that are interested in sponsoring the event and part of its purse. To attract an appealing field, regular-season PGA Tour events must offer a top-notch player experience, including a sizable, competitive purse, as well other perks for showing up to play.
As the saying goes, it's spending money to make money. In the eyes of Charity Navigator and others, it may be spending too much to get too little to organizations that need the financial backing. In the eyes of the PGA Tour, sponsors are making an investment in their communities when they get involved with these tournaments, including an in-kind donation to put on a great event with serious economic impact, as well the charitable component.
There is an important distinction to be made here, and it's one that seems hard to understand. The PGA Tour is not a charity; it's just tax exempt. It exists to benefit its members. It does that by putting on lucrative, first-class tournaments around the world. Those tournaments happen to be charitable organizations that donate to local causes with the event's proceeds beyond what it costs to put on a high-quality event.
Should the PGA Tour, or any sports league for that matter, be tax-exempt? No, not with their rights at astronomical values because they're the rare thing people will watch as it happens on TV anymore.
Should the PGA Tour's events be more efficient in their spending to get more money to charity? Probably, but a golf fan isn't expecting the cost of their ticket to directly help other people. And it's that difference between what the PGA Tour, its events, sponsors and golf fans expect in charitable giving compared to the likes of Charity Navigator that set up this debate.