NHRA could face IRS scrutiny

[January 29, 2011]  IOWA CITY, Iowa (AP) -- A political action committee looking to replace the BCS bowl system with a playoff filed a complaint with the IRS last year, claiming three bowls were in violation of their tax-exempt status.

Now the National Hot Rod Association is facing a similar accusation, though not from a political group.

It's from one of the organization's members.

A longtime NHRA member filed an anonymous complaint with the IRS, claiming the drag racing organization has been operating more like a commercial business instead of furthering the sport and serving the 80,000-or-so members it represents as a nonprofit group.

"It appears to be operated for the benefit of those who run the show, much the way a business is operated for the people who own the business," said Marcus S. Owens, senior member of the law firm Caplin and Drysdale, which filed the complaint.

The complaint compares the NHRA to NASCAR and the International Hot Rod Association, both for-profit auto racing organizations.

Hand-delivered on Jan. 12 in Washington, D.C., it contends the majority of the NHRA's revenue -- roughly $122 million in 2008 -- is derived from nontraditional sources for a trade association. Instead of representing the sport in Congress and before the government, the complaint argues the NHRA puts most of its focus on holding public, televised events -- in other words, races.

It also maintains that compensation for the organization's management is out of whack with heads of similar tax-exempt associations. That includes a salary of $771,632 for president Thomas Compton in 2008 and $319,073 for one hour of work per week for board chairman Dallas Gardner, which the complaint says is well beyond industry standards.

The complaint also contends the NHRA is run by a select group of individuals rather than its members, which don't have voting rights.

The NHRA denied it operates as a for-profit business and has been compliant under section 501(c)(6) of the Internal Revenue code for years.

"NHRA was granted exempt status by the IRS decades ago and has operated accordingly ever since," the NHRA said in a statement. "In its annual tax returns filed with the IRS, NHRA has clearly laid out its operations. Claims that NHRA is not operating properly are baseless and not supported by any action from the IRS."

The Bowl Championship Series faced similar scrutiny in October when Playoff PAC, a political action committee that wants the bowls replaced with a championship playoff system, filed a complaint to the IRS.

It claimed that three of the five games that constitute the Bowl Championship Series -- the Fiesta, Sugar and Orange Bowls -- violated its tax-exempt status by paying excessive salaries and perks, providing "sweetheart loans" and doing undisclosed lobbying.

Owens, the former head of the IRS exempt organizations division, said the NHRA complaint would be sent to the IRS exempt organization examination office in Dallas, where it would be reviewed by a committee of senior agents.

If they determine the NHRA should be audited, the case would be sent to a revenue agent group, most likely near the organization's headquarters in Glendora, Calif., to review its finances and activities.

Should the IRS determine that NHRA has been operating as a for-profit business in violation of its tax-exempt status, the organization could be taxed on its revenue for as long as it's been acting like a business, according to Owens.

An IRS spokeswoman said the agency was prohibited from commenting on any specific taxpayer situation, case or allegation.

"At this point, the end result would be the client simply wants an independent third party to make sure it deserves to be tax exempt," Owens said. "I don't know for fact since I haven't spoken to him about this issue, but I would assume the client would be satisfied with the organization returning to a membership model and stopped acting like a commercial enterprise."

[Associated Press; By JOHN MARSHALL]

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.