While professional athletes in this country’s four most popular professional leagues have significant player salaries, this article focuses on the National Basketball Association (“NBA”). The NBA players are Exhibit A for great potential and unrealized opportunity. They comprise a group of the world’s most talented employees for this particular industry who by virtue of both wealth and the cultural connectivity, have the potential for an extraordinary “giving back” impact on urban America. If the vast majority of those players establish charitable foundations and pool their funds they could do something unprecedented – have transformative effects on entire communities. Such like-minded players can be termed “New Age Athletes.”4
But the term is a bit of a misnomer because the reference is not just for those who are chronologically new in years on the planet. Each year there will be rookie players as young as 19 years old joining an NBA roster who may choose to translate their instant multi-million dollar income into a multi-million dollar consumption of goods and services with little or no capital contributions to charitable causes or the ownership of assets. What is new is the culture to use sophisticated private foundations in partnership with other for-profit entities to make major and sustainable improvements in communities from which they come.
One such example is a player who is now retired after nearly a decade in the NBA. A testimonial to his status as a new age athlete is codified in the State of the Union address in January 2007 by President George W. Bush:
“The greatest strength we have is a heroic kindness, courage and self sacrifice of the American people. You see this spirit often if you know where to look. And tonight we need only look above to the gallery. Dikembe Mutombo grew up in Africa amid great poverty and disease. He came to Georgetown on a scholarship to study medicine. Georgetown basketball coach John Thompson took a look at Dikembe and had a different idea. Dikembe became a star in the NBA and a citizen of the United States. But he never forgot the land of his birth or the duty to share his blessings with others. He built a brand new hospital in his own hometown. A friend has said of this good-hearted man, Mutombo [sic] believes that God has given him the opportunity to do great things. And we’re proud to call this son of the Congo a citizen of the United States.”5
A statistical review of current NBA players reveals that most have similar income but are not nearly as focused on such charitable projects. The NBA teams in the aggregate pay their players a total of just under $2 billion a year.6 Yet at various times during the 2009-2010 season, there were approximately 418 players, and only 130 appear to have a semblance of a foundation.7 A recent study of the 2008 season concluded that only 43 players were likely to have truly functional foundations.8 The median salary per player for the aggregate 30 teams is $3,425,665.9 If even half of 418 players funded a foundation with .05% of their salaries, without touching any endorsement money, more than $71 million of charitable funds would be generated each year. If that group chooses to pool their funds over five years for a portfolio of common projects, they could contribute $355 million for those initiatives.
A view of the highest paid NBA players also provides a glimpse of a significant opportunity to raise equity capital for charitable causes. The 25 highest paid NBA players have a combined salary of more than $462 million.10 That represents more than the entire gross domestic product (purchasing power) of the country of Zimbabwe.11 That purchasing power would make those players the 211th richest nation in the world.12 If they allocated 10% of just their salaries for charitable causes, without touching endorsement income, and pooled their funds for five years they would have amassed more than $231 million. Many of those top players have cultural connectivity with the crisis-burdened urban areas, and as such, high octane potential to be investors, as some already are, in urban projects. In fact, 20 of the top 25 salaried NBA players are African Americans.13
Income from endorsements also can be funneled into foundations, which in total can result in significant amounts of pooled assets. LeBron James’ high school graduation gift endorsement from Nike was $90 million, and since 2007 he leads the NBA in endorsements with an estimated $25 million in that year alone.14 His total endorsement package was $170 million.15 His mission is beyond the bounce of the basketball – to view his profession “differently than anyone has ever done … before.”16 That statement was made in 2007. Within three years, those words proved prophetic.
James was savvy enough in 2008 to re-negotiate his contract to establish free agency while he was still at a prime time to maximize his value and options. And then on July 9, 2010, he did what no other player had done before. He and premier sports network ESPN orchestrated the largest media feeding frenzy in NBA history over his announcement as to where he would take his professional services.17 Of particular relevance to this article, no other player devised such an announcement and negotiated with the multi-billion dollar media empire to mandate that all proceeds be donated to a charity.18 The beneficiary was the Boys and Girls Clubs of America in the amount of $2.5 million dollars.19 As testimony that the charitable purpose was genuinely part of his view of professionalism as an athlete, James secured ESPN’s agreement to commit 10 minutes of the one-hour program to give credit to charity sponsors.20 James, his marketing team and his foundation presented this idea to the network and the commitment to make the announcement, not from ESPN studios, but from the Boys and Girls Club.21 This is the different view of the player James referenced. It is an entrepreneurial and philanthropic perspective well beyond just playing the game on the floor. For these reasons, LeBron James is the poster child for the new age athlete.
Beyond the charity activities of James, there are 400-plus NBA players who can participate in myriad projects designed specifically for low-income communities. They can be laced with tax incentives that not only assist people in great need, but provide numerous tax benefits to reduce the player’s considerable tax liability and that of other partners in those projects. Those benefits include tax-exempt financing, non-recognition and exclusion of gross income, bond credits, tax credits, expense deductions and favorable depreciation rates.22 The aggregation of those benefits has often been the missing piece that allows the venture to make economic sense – essentially gap financing.23 As will be discussed below, therein lies the opportunity to collectively provide a transformative impact on entire communities of historic proportions.
The Jacksonville, Florida, Illustration
In many urban cores where the poor and historically disenfranchised reside, a common litany of maladies is faced daily that areuncommon to the general US population and major cities globally.24 Jacksonville, Florida, is just one of several major cities that faces some of those issues and therefore presents a philanthropic opportunity. The city is 15th largest in the nation, nearly 30% of which are African American.25 While the city of Jacksonville comprises the entirety of Duval County and is the largest city in square miles in the contiguous 48 states of this country,26 it has an overconcentration of African Americans in economically depressed areas, particularly north and northwest Jacksonville.27 Approximately 90% of the tenants of low-income public housing provided by the city are African American.28 Just over 41% of the African-American residents live on city blocks that are greater than 80% black.29
The infant mortality rate for African Americans in Jacksonville is 16.2 deaths per 1,000 births.30 That rate is 122% higher than that for the white population generally and 20% higher than the rate among African Americans in Florida as a whole.31 From a global perspective, the Jacksonville rate among African Americans is slightly better than that in Malaysia, but worse than in the countries of Bahrain, Jordan, Panama, Jamaica and Argentina.32 As stated by the most recent authoritative study regarding Jacksonville infant mortality, African-American infants in Jacksonville are more than twice as likely to die within the first year of life as white babies.33
The Asthma Epidemic
One may initially think asthma is not a serious health issue, since heart disease and cancer and AIDS take far more lives per year.34 But a recent Jacksonville area health department study revealed startling statistics about asthma-related issues, starting with the fact that asthma is now the most common chronic illness of Jacksonville children.35 The study then notes “remarkable disparities” in asthma-induced deaths between blacks and whites in Jacksonville.36 The death rates among African Americans were 117% higher than that of whites.37
Beyond the tragedy of death is the drain on the individuals who survive and the millions of dollars in health care costs after emergency room visits and overall hospitalization to treat the asthma attack. The disproportionate effect on African Americans is again apparent. In 2005, the hospitalization rate in Jacksonville for asthma was 91.5% higher for blacks than whites, and blacks were over 2 1/2 times more likely to be treated in the emergency room for an attack than
whites.38 Some suggest that emergency room care is an inadequate remedy because it “only [treats] the asthma attack, not the long-term problem” often addressed early by primary physicians in preventive care to avoid the attack.”39 These facts, coupled with the fact that the “numbers of minorities with asthma is increasing exponentially” led the author of the study to conclude that asthma is a “local epidemic.”40
The same study suggests means of ameliorating the epidemic. The primary asthma prevention targets are identified as the following:
- Decreasing the occurrence of asthma through eliminating the environmental triggers (e.g., mold, dust, allergens, bug feces, industrial pollution).41
- Increase access to quality health care.42
- Increase education and community awareness and prevention activism.43
- Reduce obesity and low birth rates, both of which are linked as an associated adverse factor.44
Dare we have the audacity to hope that some of those professional NBA players with multi-million dollar salaries use their respective foundations to bring those curative solutions to reality? To reduce the above environmental triggers for asthma, foundations could, for example, be part of a team that partially subsidizes the cost of mold elimination. As to access to quality health care, those without health insurance already have some assistance through the Duval County Health Department.45 But that department has found that “grants are difficult to get because every community in the country wants them.”46 The player foundations can be an alternate source for grants, or a collaborative link to governmental sources. In light of the needs described above for Jacksonville, foundations may infuse capital or be contributors to health care plans to increase access by those who are unable to afford commercial insurance.47 And since these athletes are already high-profile images for physical exercise, they are uniquely positioned to inspire others to minimize obesity, and thereby assist in reducing the adverse effects of that factor on the incidence of asthma. The player can make appearances at obesity awareness workshops as easily as he can appear for car dealership-sponsored golf tournaments. And his foundation can just as easily co-sponsor or fund those workshops.
Reduction of the Government Burden
These remedial efforts from the player foundations can also reduce the public burden of paying for the inadequacies in asthma-related health care. African-American asthma patients in Jacksonville’s emergency rooms are almost twice as likely to be covered under public sources, i.e., Medicare, Medicaid and KidCare.48 If player foundations infuse sufficient funds into existing support structures to help those patients receive preventive care, or assist in the purchase of commercial insurance, there may be fewer asthma attacks, and the incidence of emergency room visits would decrease. And that could also reduce the public costs associated with emergency room and general hospital care. The potential savings may be significant. In 2005, Jacksonville’s cost for asthma-related emergency room visits was almost $8 million, equating to 7.5% of the state total.49 Nearly one in five of all ER asthma-related visits in Jacksonville were of African-American children between the ages of five and 14, a rate 260% higher than the asthma-related ER visits of whites in Jacksonville.50 These disparities are revealed to show how players who self-identify with those in need have the wherewithal to make a difference. Reducing that disparity can have the dual benefit of saving lives and saving dwindling and scarce public funds.
As noted above, Jacksonville is just one example. In Harlem, a programmatic success is found in a project that focuses on transforming the quality of life for a 100-block low-income community, particularly tracking children from birth to 21 years old.51 The fundamental principles are stated as “help[ing] kids in a sustained way, starting as early in their lives as possible, and to create a critical mass of adults around them who understand what it takes to help children succeed…”52 Initiatives include heath care (“Baby Care”), nutritional programs like a subsidized farmers’ market, and charter schools.53 The model has been replicated in other cities, and typifies projects into which new age athletes can invest through their respective foundations.54
Joint Venture Opportunities with Profit Entities
There are three primary types of charitable organizations a socially conscious professional athlete would consider to house and distribute charitable funds. Sophisticated donors may funnel contributions through public charities, private foundations, or donor-advised funds.55 Professional athletes have most often elected to use private foundations in light of the propensity to actively direct their own funds rather than primarily raise funds from the general public.56
If a new age athlete establishes a private foundation for pursuing projects with long-term beneficial effects in historically disadvantaged communities, the foundation is not likely to achieve those large-scale benefits as a stand-alone entity. It is more likely that joint venturing with other entities, even profit entities, is required. Section 4944 of the Internal Revenue code is an obscurely helpful authority for reaching the limits of the joint venture opportunities with private profit entities. Particularly relevant to this article is the use of joint ventures and investments made by tax-exempt entities into for-profit entities.
Program-related Investments versus Jeopardizing Investments
Section 4944 of the Internal Revenue code (“IRC or Code”) imposes excise taxes when a private foundation “invests any amount in such a manner as to jeopardize the carrying out of any of its exempt purposes Ö”57
Those taxes can be substantial and a very clear deterrent to any questionable investment. The tax can be imposed on both the foundation and separately on any and all managers of the foundation.58 Also noteworthy is the fact that private foundations are subject to other excise taxes beyond the jeopardizing investments. Code sections 4940 through 4945 and a complex array of companion regulations are even greater cause for very careful analysis before a foundation invests in and jointly with for-profit ventures.59 The investment decision therefore is a high-risk game.
An exception to the jeopardy excise tax exists for what are called program-related investments (“PRIs”).60 An investment will not be considered a jeopardizing investment if it meets two criteria: (1) the “primary” purpose is to accomplish its exempt purposes and (2) no “significant” purpose of the investment is for production of income or appreciation of property.61
So investments significantly related to the exempt purposes are program-related and thus not in jeopardy of losing exempt status or having the excise taxes applied. Conversely, investments made primarily for the production of income or property appreciation are subject to those excise taxes and potential loss of exemption. Obviously then the question is what factors determine whether the primary purpose of the investment is for exempt purposes rather than income production or property appreciation. As described below, there is ample authority for the conclusion that a private foundation composed of professional athletes can be a member in a limited liability company with for-profit members and still have a primarily exempt purpose without losing exempt status, and without being subject to excise taxes due to jeopardizing investments.
Properly Purposed Investments as PRIs for the New Age Athlete and the Creative Use of LLCs
To have major impact on communities, athletes and their venture partners may need to pool their funds just to amass the amount of capital required to make a difference. With the rare exceptions noted above, most NBA player foundations examined to date have yet to pool their funds or develop a portfolio of investments. And as stated earlier, most NBA players have not created their own foundations. Yet the IRS has provided guidance to private foundations on portfolio development, albeit from obscure sources. The vehicle is a creative joint venture with for-profit entities and non-exempt individuals through a limited liability company.
In Private Letter Ruling 200610020, the IRS was asked to rule on whether a private foundation could make investments as part of an LLC with other non-exempt members without being subject to the excise tax under Section 4944.62 Stated in the affirmative, the entity sought IRS endorsement of the investments as program-related investments.
In the request for the PLR, the private foundation proposed an organizational structure whereby the members of the LLC invest (via capital contributions) into a common fund. The members would include the foundation, composed of individual professional athletes, and for-profit entities and individuals.63 The fund is designed to invest in businesses operating in low-income communities owned by minorities or other disadvantaged groups who have lacked access to conventional financing on reasonable terms.64 The overall intent is to enhance the economic well-being of those communities. An additional mission of the LLC is to educate individual LLC members on entrepreneurship and finance training. The fund will make qualified investments into “Portfolio Companies” (i.e., the target businesses in low-income communities).65
In order to qualify as a PRI, rather than a jeopardizing investment and excise taxes or exemption loss, the LLC investment must comply with the two-pronged requirements noted above (primary charitable purpose and no significant purpose for income production or property appreciation). The IRS concluded both requirements were met. There was a primary charitable and educational purpose because there was a sufficient nexus between the recipients of the investment (the Portfolio Companies) and the charitable purpose (improving the economic well-being of low-income communities). The nexus was evidenced from having the Portfolio Companies (1) actually operate in the target communities, (2) owned by those denied conventional financing, and (3) selected based on the ability to fill community needs.66 The educational program was further evidence of the charitable purpose since individual LLC members must participate in that activity, including training on how to evaluate business opportunities, and the principles of angel in
vesting, which gave them practical business experience.67
The IRS also found that the LLC investment was not made for income production or property appreciation.68 Deriving factors from its regulations, the IRS stated the non-income purposes were evidenced from the following considerations: (1) private investors investing solely for profit would not likely make the same LLC investment on the same terms as the LLC,69 (2) the LLC members expected a lower return on their investment than private sector investors (angel investors) due to the risky nature of the fund’s investment criteria in low-income communities without conventional financing, and (3) the foundation is authorized through the LLC’s Operating Agreement to assure that the fund’s activities remain charitable. The third factor includes the foundation’s ability to veto any non-charitable investment objectives, liquidate any non-charitable investment, redeem any fund investment that jeopardizes the status as a PRI, or alternatively cap its investment return.70
There are several other private letter rulings consistent with the above ruling, including allowing the profit corporation’s own investment to qualify as a PRI because it furthered the foundation’s exempt purpose.71 The IRS also endorsed as a PRI the foundation’s ownership of stock in for-profit businesses.72 The regulations also authorize PRI treatment of a foundation’s capital contribution if conventional financing is available, but dependent on the foundation’s funds to fill in the gap on the amount of equity capital necessary to make the loan.73 This is acceptable even when the private foundation purchases the common stock of a for-profit corporation, and even if that stock appreciates in value and the foundation profits thereby.74
In each circumstance, the IRS approved the private foundation’s joint venturing with for-profit entities, both LLCs and corporations, and with private individuals. In each instance, the foundations were allowed to invest their own funds jointly with funds of for-profit entities even if the LLC or corporation in which they both contributed funds was a for-profit business. And the IRS allowed PRI status for the LLC’s investments in target businesses as long as their funds were used in furtherance of the foundation’s exempt purposes and that governing documents for the LLC authorized the foundation to assure that the funds shall be used for those exempt purposes.
Application to the New Age Athlete
If a professional athlete or a group of athletes wanted to have transformative effects on the health care issues facing those in acute need in the city of Jacksonville, the IRS has endorsed sophisticated joint ventures through the players’ respective foundations. Certainly individualized efforts can occur without these joint ventures. A single player could make a simple contribution from his foundation to targeted individuals. Or a player could infuse funds into targeted nonprofit organizations that in turn allocate resources to those targeted individuals. But if the mission is to provide real and sustainable solutions, such big issues likely require big resource allocations. As noted above, the Jacksonville issues in infant mortality and asthma are pervasive among a community of nearly a quarter million people.75 These maladies have causes that are complex and long-developing in genetics, environment, class and race. Dissolving the heath care disparity, in this author’s view, is therefore not likely solved by governmental subsidies alone, or nonprofit organizations alone, which are often already under-resourced.76 The private sector has a role to play, and these athletes have a propitious opportunity to make a larger contribution as part of and in connection with that sector.
There are also existing major corporations available as joint venture partners from the private sector. The Goldman Sachs Group, Inc., funded its own foundation in 1999 with a $200 million donation.77 Grants have been awarded in excess of $114 million since its inception.78 January 2010 initiatives were created specifically to “deploy the firm’s capital to help transform distressed US communities into sustainable and vibrant neighborhoods of choice and opportunity.”79 The most recent projects may well be part of its larger effort to reestablish itself as a good corporate citizen after the recent economic crisis.80 The value of that intangible asset of goodwill, like many assets, is more appreciated when it is lost. If Goldman Sachs is dedicating its own capital for urban projects to improve its goodwill, who better to partner with than foundations of professional athletes that carry considerable cache in those same urban communities?
PRL 200610020 is a model for Jacksonville joint ventures in an LLC between the exempt player foundations and the non-exempt private sector corporate entities. The foundation would be composed of several professional athletes. Those athletes could be current or former players for the Jacksonville Jaguars, or those who were raised in Jacksonville, or those with any other basis of affinity with the city or their self-identification with the low-income target community. The foundation would be just one member of a for-profit LLC.81 Other members could be individuals and for-profit entities that could include corporations with local business activity, historically or as part of its growth model.82 All the members would then make capital contributions into a fund. The fund would be the principal asset of the LLC. The vast majority of that fund would then be invested in a chosen Jacksonville health care initiative.
This LLC model accommodates a dual philanthropic bottom line. The mission can be both charitable for the low-income community and educational for entrepreneurial training. In PRI 200610020, 15% of the funds were to be used to train entrepreneurs and athlete LLC members. For the Jacksonville initiative, methods to improve health care for the target community have already been identified. But the service providers are under-resourced. The foundation could help fund the training of those who need access to quality care, preventive education, and obesity prevention. The athlete members could receive training in how to evaluate the health care services and preferred investment methods in meeting the charitable goals.
One significant benefit to the new age athlete is that effective use of foundations during current seasons can help them transition into careers after their on-field career has ended. In the Jacksonville example, the player foundation members may envision owning and/or operating stand-alone health clinics within the target community or subsidiary out-patient clinics of existing hospital facilities. If athletes establish foundations during their playing days while they are highly visible, they can maximize their goodwill with their team, and presumably increase bargaining power for upcoming contracts. The use of a foundation during playing days also increases bargaining power to negotiate favorable terms with a corporate joint venture partner while his intangible asset of brand name is most valuable. Once his playing career is over or in the fourth quarter, his bargaining power may have decreased and the transition to other industries is more difficult.
The LLC is particularly well suited for these joint ventures because of statutory flexibility in management and profit distribution. Unlike the typical C corporation, the LLC members determine whether to manage the entity through a single manager or any agreed configuration of a group of members regardless of respective ownership interests.83 These managers need not own any particular amount of ownership interests.84 Under the PLRs and regulations, the foundation must have primary authority to assure the invested amounts by members into the fund shall be distributed consistent with the charitable and educational purposes.85 Under the Delaware LLC statutes, the foundation can be the manager by whatever terms are established in the operating agreement.86 Regarding distributions, the LLC operating agreement may govern the allocation of profits among members even if that allocation is different from a corporate dollar-per-share distribution based on respective ownership interests.87 That flexibility would allow the foundation and the for-profit members to adjust their respective profits to meet the complex requirements of the excise tax statutes and regulations in order to retain PRL status for the foundation’s investment and the LLC distributions.
Another advantage of the LLC model in the Jacksonville context involves the use of pooled investments and portfolio companies. When funds are pooled to amass significant capital, investments still may need to be placed in more than one area. To resolve that city’s multi-faceted health care issues, investments may need to occur in stages and be strategically placed in various service providers. One investment may involve a capital outlay into a new community clinic specializing in the infant mortality and asthma issues they face most acutely, and a separate investment in existing nonprofit organizations that are also part of the solution. Another investment may be loans or educational training grants to service providers (nurses and technicians). Still another investment may be the creation of an equity capital fund for small businesses designed to assist that same community (e.g., providers of durable medical equipment for infants and asthmatics). Through greater use of portfolio investments, the new age athlete can therefore enhance the effectiveness of his private foundation by working simultaneously on several fronts of the same war. The net effect may be accelerated achievement of major long-term benefits to the target community.
The NBA players have a propitious opportunity to do something unprecedented – pool funds through their respective private foundations to have transformative effects on entire communities. Jacksonville, is just one of many large urban communities that could be the beneficiary of such targeted efforts. Through regulations and private letter rulings, the IRS has now provided reliable guidance for carefully constructed joint ventures through LLCs that are well designed to pursue those goals.
The foundations can joint venture with profit entities as long as the capital contributions remain devoted to the charitable projects, and the LLC’s operating agreement requires the foundation to monitor the investment distributions. The LLC can identify and invest in portfolio companies and still allow profits to both the foundation and its for-profit members. And the operating agreement can provide the flexible allocations of profit to avoid loss of exempt status or excise taxes. The benefits of the increased profitable philanthropy by these new age athletes are not just to the target community and their tax return and career transition. More capital contributions to revitalize communities can translate to fewer governmental subsidies and tax loss for the country. So while players may often answer oft-repeated media questions with a cliche, another worn cliche is a comment to these talented potentially new age athletes — “the ball is in your court.”