IRS addresses whether college NIL collectives further an exempt purpose

Organizations that develop paid name, image, and likeness (NIL) opportunities for collegiate student-athletes (college NIL collectives) in many cases will not be furthering an exempt purpose under Sec. 501(c)(3), the IRS advised in an Office of Chief Counsel legal memorandum published Friday (AM 2023-004 (5/23/23)). This could significantly affect the landscape of college NIL collectives, because if the collective does not further a Sec. 501(c)(3) exempt purpose, it will not be a tax-exempt organization under Sec. 501(a) and donations to the collective will not be tax deductible to donors.

Sec. 501(c)(3) provides exemption under Sec. 501(a) for organizations organized and operated exclusively for one or more of the exempt purposes set forth in section 501(c)(3). An organization will not be considered operated exclusively for exempt purposes unless it serves a public rather than a private interest. However, an organization may serve both public and private interests if the private benefit is clearly incidental to the overriding public interest.

In AM 2023-004, the IRS Office of the Chief Counsel said the private benefit provided to student athletes by NIL collectives is in many cases far beyond the incidental private benefit that the law allows.

“Nonprofit NIL collectives make compensatory payments to student-athletes in exchange for services and the use of a valuable property right (NIL), which does not further educational purposes under section 501(c)(3),” the memo said. “Absent a finding that NIL collectives select student-athletes for participation based on need, such that their activities could be considered conducted for the relief of the poor or distressed, and that payments are reasonably calculated to meet that need, payments to the student-athletes are properly regarded as serving private rather than public interests.”

In 2021, the NCAA adopted an NIL policy that allows student-athletes to be compensated for use of their NIL without affecting their NCAA eligibility. Under that policy, student-athletes can be compensated for NIL activities within certain limitations. State laws also play a role, although not every state regulates NILs.

NIL collectives, which generally function independently of the school, were formed in the wake of the interim policy by boosters and fans to develop and fund NIL deals. Some were formed as nonprofit entities under state law by receiving a tax exemption under Sec. 501(c)(3). Others were established

through a fiscal sponsorship agreement or as an activity or program of an existing Sec. 501(c)(3) organization that supports the affiliated university or its athletic program. Some were developed as for-profit organizations.

Donors to tax-exempt organizations typically can receive a tax deduction for their contributions. However, how should donors in tax years 2021, 2022, and even 2023 view their historical donation to what the IRS is now calling a nonexempt organization?

“I would expect that historic donations to collectives will not need to be refiled or changed,” said Ken Kurdziel, CPA, partner at James Moore & Co., specializing in college athletics and higher education.

Inclusion of an organization’s name on the IRS Auto-Revocation list serves as the required update to collective donors that their donations are no longer tax-deductible.

“Contributions may be deducted by persons unaware of a change in an organization’s status until the IRS publishes an announcement that contributions to the organization are no longer deductible,” according to the IRS’s Automatic Exemption Revocation for Non-Filing online FAQs.

Once an organization is added to the list, that serves as notice to donors and others that the organization is no longer eligible to received tax-deductible contributions under Sec. 70 and that donors and others may no longer rely on an IRS determination letter dated before the effective date of revocation and may no longer rely on a prior listing in Tax Exempt Organization Search or in the IRS Business Master File extract for purposes of claiming tax-deductible contributions.

The IRS does not have numbers on how many NILs exist or how many are registered as nonprofits, an IRS spokesman said Tuesday. The 131 Football Bowl Subdivision schools have over 200 collectives, dozens have received Sec. 501(c)(3) status, and they have received millions in donations, Sports Illustrated reported.

“In assessing the benefit to student-athletes from a collective’s activities, this Office also finds significant the numerous statements by athletic directors, boosters, and others on the importance of NIL collectives, including nonprofit NIL collectives, to the retention and recruitment of student-athletes. Collectives are usually organized by boosters and fans of athletic programs at particular schools. It is reasonable to assume that these organizers, as supporters of a particular school, have an interest in limiting a collective’s NIL opportunities to the student-athletes at that school rather than making these opportunities available to any student-athlete willing to participate in the collective’s activities,” the IRS memo reads.

How well those boosters, fans, and alumni organized the collectives will determine the legal memo’s effect on them, said Matt Brown, publisher of Extra Points, a website that covers college sports news.

“I believe some NIL collectives probably will be able to retain their 501(c)(3) status, even after this ruling,” Brown said. “Other groups, groups that took their time and established a broad donor base, should be able to migrate to a not-for-profit LLC model without too much trouble. But for a few collectives, groups that were based around making life easier for a small number of wealthy donors, may find themselves in serious trouble.”

Other factors suggested by the IRS memo that the primary purpose of a nonprofit NIL collective is to compensate student-athletes include:

• Telling donors that most of their money goes directly to student-athletes;
• Making public that all students on a particular team or position will earn a specified amount of money, or that is the intended goal of the collective; or
• Allowing donors to specify what athletic team will receive the donation without naming a charitable program that the donor wishes to support.

“Given the role that NIL collectives play in student-athlete retention and recruitment, and the presence of other factors listed above, it is apparent that helping student-athletes monetize their NIL is a substantial nonexempt purpose of many nonprofit NIL collectives,” the IRS memo said.

— Jacob T. Crowley, CPA, is an assistant professor of accounting at Ohio Northern University in Ada, Ohio. To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.