Is it charitable to donate to a group that facilitates opportunities for athletes at a particular college? The IRS thinks not.
In a recent memo released from the office of the IRS Chief Counsel, the IRS asserts that this would be a “private benefit” to just a few star athletes. Whether or not that’s the case, the NCAA and IRS have hurt college athletes by creating more ambiguity around how many opportunities these unpaid young people are given.
Why Would NIL Collectives Fail to Qualify as a Charity?
In the IRS’ eyes, charities are generally organizations that satisfy Internal Revenue Code 501(c)(3), are exempt from paying taxes, and whose donors may deduct the value of their contributions.
For an organization to satisfy 501(c)(3), it must:
- Further an exempt purpose
- Not be organized or operated for the benefit of private interest.
- Not attempt to influence legislation as a substantial part of its activities or participate in political campaigns.
Exempt purposes include religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals.
Well-operated NIL (name, image, and likeness) collectives foster national amateur sports and are not involved in politics. But whether they are operated for the benefit of private interests is a tougher question that should be decided on a case-by-case basis. So, what are these newfangled “NIL collectives”?
What are NIL Collectives?
After states started passing legislation legalizing NIL opportunities for college athletes and getting lambasted in NCAA v. Alston, the NCAA approved an interim NIL policy on June 30, 2021. That policy allows college athletes to be compensated for the use of their NIL. In other words, college athletes could start doing endorsements.
The natural evolution of this was NIL “collectives,” which are predominantly 501(c)(3) non-profit organizations that collect money to develop opportunities for college athletes at a given college. Some collectives benefit only members of the higher revenue-generating sports, like football and men’s and women’s basketball. Other collectives develop opportunities for all student-athletes at a university. Like any new venture, there are good operators, bad operators, and uninformed NIL collective operators.
Why Did the IRS Suggest Donations to NIL Collectives May Not be Deductible?
On June 9, 2023, the IRS released a memo on whether an organization developing NIL opportunities for college athletes furthers an exempt purpose under Section 501(c)(3). In the memo, the IRS said that:
“[a]n organization that develops paid NIL opportunities for student-athletes will, in many cases, be operating for a substantial nonexempt purpose—serving the private interests of student-athletes—which is more than incidental to any exempt purpose furthered by the activity.”
The IRS memo did not say all, but repeatedly said “many,” thus leaving the door open for well-operated NIL collectives to retain or obtain 501(c)(3) status.
Some question why providing private benefits in conjunction with a charitable purpose disqualifies organizations from 501(c)(3) status, but it is logical when the private benefit is too narrow. This is because it would not be fair to get a tax deduction for personal expenses or gain. A common analogy is that of an athletic booster club. The IRS explains two scenarios of boosters where in one scenario, when the booster is properly run for a charitable and public cause, the booster qualifies for 501(c)(3) status. In another, when run for private gain, does not qualify. In short, if a booster conducts its activities to benefit the entire class of athletes without regard to parent/donor participation, then it may qualify for 501(c)(3) status.
In the recent memo, the IRS suggests that many, but not necessarily all, NIL collectives do not qualify for 501(c)(3) status. The IRS reasoned that:
“Student-athletes generally benefit from a nonprofit NIL collective through the compensation paid by the collective for use of their NIL. This private benefit is not a byproduct but is rather a fundamental part of a nonprofit NIL collective’s activities.” It goes on to state that “the compensation for NIL activities arranged for or facilitated by the nonprofit NIL collective is the very justification for the organization’s existence and any incidental exempt purpose it furthers.”
In response, NCAA President Charlie Baker said in an interview with Sports Illustrated on June 14, 2023 that he agreed with the IRS memo, though Mr. Baker failed to differentiate amongst the various NIL collectives.
In doing so, the IRS and the NCAA are generalizing that all NIL collectives provide benefits to particular people, thereby disqualifying all NIL collectives from 501(c)(3) status. Is that the case though and what does this all mean?
What Does This Mean?
There are over 200 NIL collectives, many of whom have been granted 501(c)(3) status and are receiving millions in donations from boosters who believed that their donations were tax-deductible. And many NIL collectives are supported by high-net-worth alumni, to whom deductibility of contributions makes a material difference when calculating their taxes and choosing whom to support.
Even though the IRS memo is an opinion that should not be “used or cited as precedent,” donors are now worried that the IRS will disallow their donations and possibly penalize NIL collectives.
Gary Marcinick, the President and Founder of Cohesion Foundation, an Ohio State University supporting NIL collective, notes that the IRS memo “has created a lot of ambiguity, which will create a difficult environment to fundraise.”
As its name implies, Cohesion Foundation educates, connects, and fosters opportunities for OSU’s athletes to support charities and build a stronger community. It seeks to support all 1,000 student-athletes at OSU and in the past two years has partnered with 29 charities.
Perhaps for the IRS, it’s the case of a few bad apples (i.e., NIL collectives handing out Bentleys) being seen as representative of all NIL collectives. But for NIL collectives like the Cohesion Foundation, who support a broad class of people and ultimately support other charities, the NCAA president’s words and IRS memo “will impact local charities and substantially reduce opportunities for student athletes,” says Mr. Marcinick.
Consequently, less money will likely go to college athletes. Once again, rather than addressing the core concern that college athletes are employees deserving fair compensation, the NCAA’s temporary solution has generated additional challenges.
If you have questions regarding the IRS’ memo on the tax-exempt status of NIL collectives or the deductibility of past or future donations to NIL collectives, please reach out to KJK attorneys Samir B. Dahman (SBD@kjk.com; 614.427.5750) or Demetrius J. Robinson (DJR@kjk.com; 614.427.5749).