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Drag Racing Association's Tax-Exempt Status Under Scrutiny

January 20, 2011, Caplin & Drysdale

January 20, 2011

CONTACTS: Heather Maurer: (202) 862-7857
                   Ufuoma Otu: (202) 449-9804

Washington, D.C. – The IRS has recently received an anonymous complaint, challenging the tax-exempt status of the National Hot Rod Association (NHRA). The complaint contends that the drag racing organization's activities mimic those organized by for-profit automobile entertainment companies.

"Public information reveals that the NHRA operates like a commercial business by providing specific services to its members – whether in the form of prize money to winners or payments to race track operators or other private groups benefiting from the racing events," said Marcus S. Owens, former director of the exempt organizations division at the IRS and now a senior member in the Washington law firm Caplin & Drysdale.

Owens, who wrote the complaint on behalf of his client that wishes to remain anonymous, also noted that a large portion of NHRA's revenue, totaling approximately $122 million in 2008, is derived through cash received at drag racing events, activities normally organized by for-profit entities such as NASCAR or the International Hot Rod Association (IHRA).

The letter further identifies other issues, including questionable governance structures and compensation practices. Though the Association boasts an 80,000 member roster, members do not possess voting rights to elect an independent Board of Directors to approve compensation and other matters pertaining to its Officers and Directors.

At present, compensation is determined by a "personnel committee", who are likely to be selected and paid by NHRA officials. Based on NHRA's 2008 tax filings, two of the Association's executives received compensation well beyond industry standards. Thomas Compton, the Association's President and Board Member, received $771,632 in total compensation. Dallas Gardner, Chairman of the NHRA Board, received $319,073 for one single hour of work per week. Comparable data indicates that average total compensation paid to CEOs at the ten largest trade associations in the United States was $642,447 in 2006 for full-time positions*.

* See ASAE, Association Compensation & Benefits Study (2006) at 27, T.20. Each of these organizations had more than 100 employees.

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