The Oscar goes to…the tax code
One of comedian Steve Martin’s more famous skits is “How to be a millionaire and never pay taxes.” The punchline is “First, you get a million dollars.” And then, he says, when the IRS asks why you didn’t pay taxes, you just say two simple words, “I forgot.”
Well, in Hollywood you can make more than $135 million annually and pay no taxes by hosting an annual TV show called the Academy Awards.
The Academy of Motion Picture Arts and Sciences (AMPAS), which has hosted the Oscars since 1929, is a nonprofit tax-exempt membership organization. And because of some very generous provisions in nonprofit tax law, nonprofits like AMPAS can pocket millions in TV rights and licensing fees and pay no income taxes. Tax records show that nearly 88 percent of AMPAS’s 2021 revenues came from TV broadcast rights.
The Oscars are not the only tax-free award show. The nonprofit National Academy of Recording Arts and Sciences, which hosts the Grammys, pocked more than $75 million in broadcast, sponsorship, and ticket sale revenues in 2021 and paid no income taxes on those proceeds.
Similarly, the Academy of Television Arts and Sciences, which hosts the Emmy Awards, earned more than $19 million on its 2021 primetime broadcast. The Country Music Association booked $29 million in tax-free licensing income for its 2021 award show, more than twice the $13 million earned by the Academy of Country Music on its award show. The Screen Actors Guild earned $10.5 million in broadcast rights from its award show in 2021.
Combined, these award shows collected more than $280 million in revenues tax-free. Not only did these nonprofit organizations pay no income taxes on the income, but TV networks got to deduct the licensing fees as a cost of doing business. This means that the full $280 million was fully exempt from federal taxes. This is what economists call double-non-tax income.
This is all legal because of the relaxed rules written into an obscure tax code provision called the unrelated business income tax (UBIT). UBIT requires nonprofits to pay income tax on revenue derived from sources unrelated to their primary mission. The rule was created in the 1950s to stop nonprofits from purchasing commercial businesses and living off the profits, such as the 1946 case in which New York University purchased C.F. Meuller pasta company with the intent of benefiting from the profits generated by macaroni sales.
While for-profit firms must pay income tax on profits earned from licensing and selling broadcast rights, nonprofits are exempt on the theory that “The sale of the rights and broadcasting of the events contribute importantly to the organization’s exempt purpose,” according to the IRS.
But the Academy of Motion Picture Arts and Sciences is a different kind of nonprofit than New York University or your local food bank. Its nonprofit status falls under the 501(c)(6) section of the tax code, which is reserved for chambers of commerce, trade associations, business leagues, and professional sports associations. So, we can think of AMPAS as the chamber of commerce for the movie industry or the Professional Golfers Association of filmmakers. (Coincidentally, the Professional Golfers Association booked $143 million in tournament revenue in 2021, which was also exempt from UBIT.)
UBIT rules were intended to prevent nonprofits from profiting by owning commercial businesses, but the rules effectively allow nonprofits to be businesses and compete with businesses. Tightening the rules would not mean the end of the Oscars, the Emmys, or the Country Music Awards; it would simply put them on a level playing field with for-profit award shows such as the People’s Choice Awards, Billboard Music Awards, and now the Golden Globe Awards.
The Golden Globe Awards used to be hosted by the nonprofit Hollywood Foreign Press Association (HFPA). But after a recent scandal, HFPA sold the Globes to Dick Clark Productions and Eldridge Industries, who are turning the event into a for-profit enterprise.
With Washington running $2 trillion deficits, it is time to overhaul these rules and ask if subsidizing any televised award show is something taxpayers should continue to support.
Scott Hodge is president emeritus of the Tax Foundation and author of the forthcoming book, “Taxocracy: What You Don’t Know About Taxes and How They Rule Your Daily Life.”