ZYLA: Will IRS Examine NHRA’s Non-Profit Status?

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HARRISBURG, N.C. — Information attained from Tax Analysts (www.taxanalysts.com) indicates an unnamed client has hired the services of a Washington, D.C., law firm asking the IRS to examine the legality of the National Hot Rod Ass’n’s (NHRA) 501(c6) non-profit status in accordance with IRS regulations.

The information states in a letter to the IRS from Marcus S. Owens, Esq., of the Caplin & Drysdale firm in Washington, D.C., that the NHRA may not be operating in compliance of the Internal Revenue Code requirements to retain its nonprofit status.

The letter from the attorney gives a background on the NHRA, and points to the fact that the organization was formed as a “business league” under the 501c6 rulings, which deem NHRA as tax exempt.

The information also lists that the NHRA has 80,000 members of which 35,000 are licensed drivers and operates an NHRA Museum, which is also tax exempt under section 501 (c3). A similarity is then drawn that the NHRA conducts business much like publicly owned for-profit entities like NASCAR and IHRA.

Interestingly, the failed attempt to take over the professional portions of NHRA by HD Partners (covered in a “From The Briefcase” column in 2007) is then highlighted as a maneuver by NHRA after a very profitable 2007 season. HD Partners Acquisition Corporation was a publicly owned company which was “formed specifically” as a vehicle to effect a merger, asset acquisition or similar business combination with one or more operating businesses in the media, entertainment or telecommunications industry,” according to the HD Partners Proxy.

After HD shareholders voted down the sale, HD Partners dissolved according to law in a proper manner, and NHRA has operated since 2008 in its current nonprofit manner. The Tax Analyst’s information goes on to disclose how much money was awarded to competitors in 2008 ($24,235,425) and the fact that is also expended significant monies to track operators ($10,946,985), pointing to the “Significance of the racing activities” under NHRA’s guidance.

Some of the other notables in the lengthy information from “Tax Analysts” is NHRA’s lack of accountability to its 80,000 members, all of whom have no voting rights with respect to the Board of Directors, and the listing the Board Of Directors salaries for 2008, including Tom Compton, Dallas Gardner, Peter Clifford and Graham Light. The info goes on to say that the president’s salary (Compton, $700K-plus) is set by the Board of Directors and that the compensation for the directors is “apparently” set by a “personnel committee” according to IRS Form 990.

Also mentioned in Form 990 is “while NHRA has a Conflicts of Interest Policy, it does not require its Officers or Directors to disclose annually whether any conflicts exist.”

Significant space is dedicated to NHRA’s “business” as a for profit enterprise, and again points to specific instances of what the attorneys representing the client feel are breaches in the conduct code of nonprofit entities.

The letter to the IRS concludes with NHRA’s business activities, financial benefits provided to private parties and compensation arrangements as “troubling, at best,” and call for an examination of the NHRA practices.

I’m sure more news will be forthcoming concerning this possible legal examination, but one thing is true about the NHRA. From this seat, the NHRA provides a professional racing service for racers to compete in the sportsman level or as professionals. It has succeeded tremendously in offering drivers a race schedule that impacts all of the major markets, and its demographics are most impressive.

The professional racer needs an association’s growth and geographic market penetration to help sell its high dollar marketing proposals to prospective sponsors. Without sponsors, many of the top attractions — Top Fuel, Funny Car and Pro Stock — would find fields shrinking fast.

Additionally, and nothing to do with nonprofit or profit status, the current NHRA leadership has accomplished much for the growth of racing. Granted, you will always have detractors, for whatever reason, but there is no doubting the directors are leading the NHRA though troubled economic times in fine fashion.

As for the NHRA director compensation, the salaries of all the directors are in line with what other officers in other businesses the size of NHRA (123,000,000 million gross) receive. Thus, Compton’s salary is not out of line.

As for the NHRA, Jerry Archambeault, NHRA’s Vice President of Public Relations, was quick to reply.

“NHRA was granted exempt status by the IRS decades ago and has operated accordingly ever since. In its annual tax returns filed with the IRS, NHRA has clearly laid out its operations. Since its formation in 1951, NHRA has operated to further its mission of preserving and promoting the sport of drag racing and improving safety in the sport. Founded by Wally Parks to provide a safer alternative to illegal street racing, NHRA — then and now — supports a broad range of activities from the grassroots to professional levels. Claims that NHRA is not operating properly are baseless and not supported by any action from the IRS,” said Archambeault.

Regardless of whether NHRA retains its nonprofit status or has to revamp its business operation, NHRA Drag Racing has done much to grow the sport from the very beginning. Be it sportsman or pro, it’s been the efforts of NHRA that has paved the road of drag racing success.

The profit or nonprofit status will be decided if and only if the IRS accepts the attorney’s request for an examination.

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