PGA/LIV Joint Venture Nears Completion: Revenue Ruling 98-15 Can’t Stop the Private Benefit
British tabloid media is reporting that after nearly two years the joint venture between the PGA Tour and LIV Golf is almost a done deal. The Sun thinks that Trump’s election will clear the last remaining hurdles for the deal to go through. We first reported last year that PGAT, a 501(c)(6) business league, signed a “Framework Agreement” with the Public Investment Fund of the Kingdom of Saudi Arabia (PIF).
I have been skeptical of the deal from a tax exemption standpoint ever since PGAT admitted that it seeks the joint venture not in an effort to improve the golf industry — that’s the purpose for which it was granted tax exemption on millions or billions in advertising revenue — but to protect PGAT’s advertising revenue from serious erosion caused by LIV Golf’s market intrusion. LIV Golf is backed by oceans of oil money and has been attracting golf pros to its tournaments in droves ever since it started. Because it pays fatter prizes to many more competitors. If PGAT can’t pay the same prizes, all the best golfers will eventually migrate to LIV. And that would dry up PGAT’s tax-exempt advertising revenue. That’s what this is about. This ain’t about improving golf as a line of business.
PGAT fought back at first by banning players for life from its tournaments if they participated in LIV Golf tournaments. But that only made the top golfers stay with PGAT. The other golfers had far less to lose and much more to gain by defecting. A player finishing well below the big money line on PGA leaderboards could earn more in one LIV Golf tournament than he could in a whole career of fair to middlin PGA tournament finishes. Just by entering the tournament, because all players receive prizes even if they finish dead last. Besides, its an obvious antitrust violation to impose boycotts on labor. Even I know that. PGAT finally conceded that it could not beat LIV so it had to join ’em. But what’s in it for LIV? Well, LIV is Saudi Arabia and Saudia Arabia needs its image waxed. Sponsoring golf is the sports version of “greenwashing.” Call it “sportswashing.” Everybody is in it for something and this just ain’t charity anymore.
Reuters reports that British media might be premature in thinking the deal is imminent. But according to the Sun, PIF will pay $1.3 billion dollars and take back an 11% stake in the joint venture:
Golf’s civil war is on the brink of a £1BILLION peace deal. Rebel tour LIV’s Saudi Arabian backers are poised to cough up the staggering fee to become part of the PGA Tour circuit. The money will give Saudi Arabia’s Public Investment Fund, who bankroll the breakaway LIV Golf, an 11 per cent share in the Tour. In return they will get two places on the PGA Tour board — including the post of chairman. Superstars Tiger Woods and Rory McIlroy have played key roles in the peace talks. The deal still has to be approved by PGA players but they are expected to agree.
Other reports suggest the players are likely to approve because the deal will include bonus payments for players that refused to participate in LIV Golf tournaments, sacrificing millions for their loyalty to PGAT. Tiger is about to get $100 million and Rory $50 million, but how did their loyalty to PGAT improve golf as a line of business? Either way, there is a whole lot of private benefit going on, what with the players on the verge of a big payday for restricting their services (how does that improve the golf industry?) and the Saudis getting 11% of the exempt profits, not to mention the sports-washing effect on their international image.
The problem is that Revenue Ruling 98-15 does nothing to preclude tax exemption even if we stipulate improper private benefit. Like all safe harbors, I suppose, Revenue Ruling 98-15 facilitates a lot of the harm — unnecessary enrichment of private interests, aka “private benefit — it intends to preclude. Safe harbors always let in some of the guilty in order to save all the innocent. The one thing OpenAI’s joint venture with Microsoft should teach us is that compliance with a theoretical model of nonprofit corporate governance does not always guarantee the charitable purpose will take precedence over profit-making in a nonprofit/for-profit joint venture. It is not terribly difficult for the exempt side in a joint venture to find independent board members who express charitable intent but who don’t mind enriching the for-profit partner. Just pay them handsomely for their board service. That’s what OpenAI (c)(3) is doing and PGAT can easily do the same.
Revenue Ruling 98-15 is ineffective because the harbor’s entry is way too broad. The only requirement for use of the safe harbor is that the exempt organization “conclude that it could better serve its community if it obtained additional funding.” That wide berth detaches Revenue Ruling 98-15 from its fundamental theory; that exempt organizations should benefit private parties only as and to the extent necessary to achieve the public good. Organizations should be allowed entry into the joint venture safe harbor only if they show the joint venture is necessary, not just convenient, useful or helpful, to achieve the public benefit for which it has been granted tax exemption.
If PGAT were pressed to show a charitable necessity for the joint venture, it would fail because this is not about improving golf. Its about preserving PGAT’s lucrative and tax exempt advertising revenue. As long as PGAT need only show that the joint venture “might help,” improve the golf industry (and even that is a stretch) it can get away with all the private benefit that is about to happen.
darryll k. jones