The NHRA, COVID-19, and the IRS
by Neil Van Zile
This is a rewrite and expansion on a Facebook post I wrote about six months ago. Take it with a large grain of salt.
Northeast Drag News really isn’t in the business of having opinions. Our main purpose is journalistic; report the news and results of drag racing and straight-line motorsports in and around the New England area. We know that everyone has opinions about what happens in this sport, and we have them too. But our mission is to help give the racers and the fans the information that they need to help them form those opinions, to help make the sport better, and to make the drag racing community stronger in the process.
That actually sounds kind of high-falutin’ for an online newspaper about drag racing. Sorry for that.
The past year has made everyone take a new look at a lot of things that we all took for granted in the past, and drag racing has been no exception. We have some ideas about how the drag racing community can actually take advantage of the opportunities that have arisen because of the events of the past year which we will share in future commentary here.
To make positive changes, you need to have a solid understanding of what is wrong, and then you can figure out what changes will have the most beneficial effect.
Let’s start with the “business structure” of the sport, specifically the National Hot Rod Association and its activities.
There has been a lot of discussion about the future of the NHRA lately. I won’t bother to rehash all of that here. COVID-19 has created a series of problems for businesses of all types, and the NHRA is no exception.
But when we talk about the NHRA, we have to account for the elephant in the room. The elephant is that the NHRA is not a normal business. It is a 501(c)(6) not-for-profit business. That means that the NHRA has to comply with a different set of rules than normal private businesses or publically-owned corporations.
There are many well-known organizations that are 501(c)(6) not-for-profit businesses, some of them may surprise you. The NFL and the National Hockey League, the Better Business Bureau, The American Dental Association, The American Legion, and the Electronic Hand Hygiene Compliance Organization Inc. (don’t ask me what that is, I have no idea.)
This is the IRS explanation of what a 501(c)(6) is:
“501(c)(6) provides for exemption of business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues (whether or not administering a pension fund for football players), 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.” (You can see the whole IRS document here if you are so inclined)
The word “inures” is the key to the whole thing. Inure is a fancy word that simply means “benefit.” According to FortenberryLaw.com, “The inurement prohibition forbids the use of the income or assets of a tax-exempt organization to directly or indirectly unduly benefit an individual or other person that has a close relationship with the organization or is able to exercise significant control over the organization.”
The keyword in that definition is “unduly” and how that pertains to how much someone who works for a 501(c)(6) is paid, either directly in cash money or indirectly in the form of business perks. There are no specific set of rules that says what is or is not “inurement”, or what the IRS considers “unduly.” That has always been decided by the IRS on a case-by-case basis. If there is a question about how much someone is paid or perks that they may get in the course of their employment, the IRS can investigate. But there are many factors that the IRS takes into accounts such as the size of the organization and industry norms for businesses of that size and scope.
While there aren’t any specific guidelines for what or how much someone can “unduly benefit”, there are some basic things that a 501(c)(6) business can do to protect itself from being accused of inurement. Owning private jets and golden toilets is not a good idea. And having a lot of money in the bank is not a good look for a 501(c)(6).
At the end of 2019, the NHRA had about $49 million in assets, and in theory, those assets could have been used to get them through 2020 and the COVID-induced troubles. That may sound like a lot of money, but a lot of those assets are physical things that they really can’t afford to sell to raise cash. The NHRA did sell Atlanta Dragway earlier this year, and they still own dragstrips in Gainesville, Indianapolis, and Pomona. But selling dragstrips is not a good long-term answer to the NHRA’s financial problems.
The NHRA has also made a number of other changes to lower its cash outflow, some of which have produced a lot of negative commentary on the internet. Drastically lowered purses across the board and a reduced event schedule are at least partly in response to the need to save cash.
A lot has also been written about how much the various executives at the NHRA are paid. According to the NHRA’s latest Form 990 tax filing, Peter Clifford, NHRA’s CEO, was paid $973,682 and received another $32,812 in other forms of compensation in 2018. That is more than a million bucks a year, which sounds like a lot of money, (OK, it IS a lot of money). But when you realize that the NHRA is an organization with nearly $100,000,000 in yearly revenue and almost 1,400 employees, with facilities in multiple states, serving millions of customers a year, that amount of compensation is well within the norms of what would be considered “standard business practices.”
You also have to take into account all of the money that flows into the sport through sponsorships, contingencies, merchandise sales, media income, and other sources. That probably amounts to many times more than the NHRA actually receives directly, but much of that money is dependent on the activities and good auspices of the NHRA and its racing and marketing. None of that money is paid directly to the NHRA so it doesn’t show up on their books.
When you take that into money into account and figure in all the people who are employed to keep that outside money flowing, you can begin to see why the executives are paid as much as they are.
And, as CEO, Clifford also has fiduciary responsibility for the health and well-being of the business, which means that he, and the other executives, can be held financially responsible for any real or perceived business failure. That fact alone is one reason business executives are paid as much as they are.
And then there is Tom Compton. Compton is paid $200,000 a year to be the NHRA’s “Former President”, which seems wrong on its face. But again, it is standard business practice to pay former executives a yearly stipend to keep them from giving away insider information or to keep them from using their experience to compete against you.
I would encourage you to go here and read the NHRA’s latest Form 990 that was filed for the year 2019. It’s a long and complicated document, but it is enlightening. I am also highly anticipating the release of their next Form 990. We will report that event here on Northeast Drag News.
So what does all this mean?
First of all, let’s all agree on a few basic concepts. Firstly, many of us who follow the sport, either as participants or as fans, have had some level of dissatisfaction with the NHRA for a number of years. And secondly, that dissatisfaction pre-dates the COVID-19 pandemic.
I was personally hearing complaints about the NHRA when I was a working photographer back in the 1990s, and I had a few of my own.
The question remains as to whether the NHRA can, or even wants to, “fix” itself. As we see it, the NHRA has three options to choose from at this point.
One: Do nothing, keep doing what it has been doing, hope for the best.
This is honestly the most likely scenario, at least for the foreseeable future. COVID-19 will have less effect on professional drag racing in 2021. Races will be held, fans will buy tickets or watch on TV, sponsors will pay money to be involved, and if all that happens without a major hitch, then the NHRA can think about really getting back on its financial feet in 2022.
The other two options really only apply if the NHRA cannot recover financially from the loss of revenue due to COVID-19. But they could do these things even if they do recover.
Two: Call it a day, close the doors, walk away.
Since the NHRA is a 501(c)(6) it CANNOT be sold. That is an important point. For-profit businesses can always put themselves up for sale, look for angel investors, or go public with an IPO to raise cash. Non-profits can’t do those things.
501(c)(6) organizations can voluntarily or involuntarily be disolved by the IRS. Basically they can simply say “we quit” and just stop doing business. The IRS will come in and decide what to do with the assets without making any real effort to continue the activities that the 501(c)(6) business was engaged in. The IRS is not in the business of managing businesses, so they have no mandate or infrastructure to do that. They will sell the assets, pay the outstanding bills and keep the rest for taxes. Pretty simple.
Three: Make an effort to see if there is any way to get someone else to continue the activities of the organization, take that plan to the IRS, call it a day, close the doors, hope for the best.
501(c)(6)s CAN file for bankruptcy. Doing so would allow the organization to come up with some sort of plan to ensure that the activities of the organization would continue in the future. But we all know what happens with plans; “Man plans, God laughs.”
They can have discussions with all the parties involved and get assurances from those parties, and then any of those parties can change their mind once the bankruptcy filing is submitted. Or the bankruptcy court can decide to not accept your plan or to make changes to the plan.
In any event, bankruptcy would result in some sort of restructuring. That restructuring could result in actions that would allow the activities that the NHRA currently performs to continue under new management, or it could result in the complete stoppage of those activities.
Much of the future of drag racing as a sport is out of the hands of the NHRA. There is a clear change in the wind. We are seeing much more in the form of what could be called “grassroots” activity. Big money bracket races put on by independent promoters, events like the recent Funny Car Chaos in Ennis, TX, and the growing number of racing series being created and run on a local and regional level by the racers themselves. New England has a number of these series, some old and some relatively new; NESSA and NODRAMA at Lebanon Valley, East Coast Pro Mod and Iannotti Brothers’ Top Sportsman at New England, and the Gassah Guys at Winterport. And there are a lot more; The All-Stars, Central Mass Drag Racers, NETO, East Coast Flat Heads, etc. The tracks like these groups because they run their own eliminators and that allows the tracks to free up some human resources for other stuff, like selling tickets and T-shirts.
But that business model probably won’t work for the so-called “professional” classes of drag racing. Top Fuel, Fuel Funny Car, Pro Stock, and their ilk bring a whole set of managerial issues to the table that can’t be handled by racers on a volunteer basis. There are simply too many issues that those classes have for volunteers to be able to deal with them. Issues such as racer and fan safety, the high level of financial cost, and involvement of major business and legal entities. These are not things that volunteers can be expected to deal with. They are the kinds of things that well-paid experts and professionals are trained to handle.
When the NHRA held its first National Championship event in 1959, volunteers and part-time employees were in charge. Most of the people involved, even at the highest level, had full-time employment elsewhere. Those days are long gone.
So the reality is we need the NHRA or something very much like it. Or we need to decide to go back to the roots of the sport and forego the “professional” level of drag racing. I for one do not want to do that. Personally, I prefer watching the non-professional classes. I enjoy drag racing at a local and regional level. Don’t get me wrong, I enjoy a 300 mph fuel car run as much as anyone, but there is simply something about seeing a good old station wagon with its front wheels in the air that puts a big smile on my face. And I am much more interested in watching races with people I know personally behind the wheel.
But I also know that the professional classes are what gets the most attention, and that can translate into new fans of the sport. And with any luck, those new fans will become racers and build station wagons that lift the front wheels.