In a press release issued on June 6, 2023, the PGA Tour (a tax-exempt organization under section 501(c)(6) of the federal Internal Revenue Code), DP World Tour, and LIV Golf, backed by Saudi Arabia’s Public Investment Fund (PIF), announced a transaction that would combine each organization’s businesses and end all pending litigation between the PGA Tour and LIV Golf. Although many details of the transaction remain unknown, it is not expected to be structured as a merger. Instead, a new, for-profit entity would be formed in which PIF would invest billions of dollars and the PGA Tour likely would appoint a majority of the board. Despite all the fanfare surrounding the announcement, this transaction might not make the cut if the parties cannot avoid the tax traps and other obstructions that lie ahead.
The transaction must be approved by the PGA Tour’s policy board before the new entity may be established. In addition to uncertainty over approval, U.S. Senator Richard Blumenthal, Chairman of the Senate Permanent Subcommittee on Investigations, has opened an investigation requesting documentation from the PGA Tour on several aspects of the transaction and expressed concerns as to the legality of the proposed transaction. Additionally, the Justice Department has initiated a review of the transaction after concerns over antitrust violations were raised by Senator Elizabeth Warren and Senator Ron Wyden.
Why isn’t the transaction structured as a merger? Because, importantly, the PGA Tour wants to continue operating as a section 501(c)(6) tax-exempt organization. As a section 501(c)(6) organization, the PGA Tour’s income generally is not subject to federal income tax. So, not only will this new entity significantly change the global golf landscape, it also will highlight certain considerations a tax-exempt organization, like the PGA Tour, must take into account in engaging in a joint venture with a for-profit entity.
The PGA Tour will need to navigate the transaction and its future activities with care to ensure that all entities remain sufficiently separate. If the entities do not remain sufficiently separate, then the PGA Tour’s tax-exempt status could be at risk, as the for-profit activities of the new entity could be attributed to the PGA Tour. It’s worth noting that this type of structure, where a tax-exempt organization forms and operates a for-profit entity, is not novel and can routinely be found, for example, in hospital structures. Although there is precedent for such a structure, the PGA Tour likely will be tested as it attempts to complete this transaction in a way that keeps its tax-exempt status out of the rough.
Nutter Summer Associate Anna Litvak assisted in drafting this blog post.
PartnerErin Whitney Cicchetti is a partner in the Tax Department. Businesses, nonprofit organizations, and individuals rely on Erin to advise them on a variety of domestic, state, and international tax matters.
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