NIL Collectives Do Not Qualify for Tax Exempt Status

Donors better get a tax opinion before claiming a deduction for a donation to FTW NIL

Where I’m from, if you are at a barbecue or a family reunion you might hear somebody say “Lord have mercy!  Whoever made the macaroni and cheese put her whole foot in it!”  In another place, and responding to one diner’s question regarding how the meatloaf taste, another diner might quietly say, [referring to the cook] “she put her foot in it.” It is usually a woman about whom the comment is made.  As a culinary matter, the phrase means the meal is so good, you oughta have two or three helpings before you leave, and take another plate home with you.

Well let me tell you.  Last Friday, Lynne Camillo, Deputy Associate Chief Counsel (Exempt Organizations and Employment Taxes), put her foot deep into Chief Counsel Memorandum AM 2023-004 (June 9, 2023) addressing whether NIL Collectives qualify for tax exempt status under IRC 501(c)(3).  You might recall that we stated that the chances of the Bed Red Collaborative, Nebraska’s nonprofit NIL Collective, actually qualifying for tax exemption is about the same as the chances of pigs flying.  From the description of what NILs are all about to the conclusion that they are not entitled to tax exemption, the memorandum weaves a tight analysis and comes to the right conclusion.  NIL Collectives can’t possibly be tax exempt, not even if they help recruit and obtain NIL money for athletes to play college football or basketball (and donations for big boosters). NILs are essentially sports agencies trolling for talent like any other sports agency.  Most operate under an exclusive contract, funneling talent to one employer.  Here first is the description of NILs from the memorandum:

FACTS

A nonprofit NIL collective pools contributions, identifies and partners with local and regional charities to develop paid NIL opportunities for student-athletes of the university for which the collective is created to support, and pays compensation to the student athletes in exchange for their NIL in a manner that is consistent with NCAA regulations, university policies, and state and local law. Some nonprofit NIL collectives inform donors they intend to pay student-athletes anywhere from 80 to 100 percent of all contributions as compensation for NIL rights, while others state that their purpose is to create an endowment to support the payments to student-athletes.

The paid NIL opportunities for student-athletes typically include promoting the collective or a partner charity through a video or social media post, attending a fundraising event, autographing memorabilia for the collective or a partner charity to sell, or participating in or leading a sports camp. The athlete performs the service and, if applicable, the collective transfers the NIL rights to the partner charity. These NIL activities are usually provided at no cost to partner charities. Nonprofit NIL collectives often serve two stated purposes: (1) to raise awareness and to support the mission of the nonprofit NIL collective or of its charitable partners and (2) to compensate student-athletes for use of their NIL in the collective’s activities. Some collectives develop opportunities for only a limited number of identified athletes, some benefit only members of one or more of the higher revenue-generating sports, such as football and men’s and women’s basketball, while others develop opportunities for all student-athletes at a university.

Nonprofit NIL collectives generally post descriptions of each NIL opportunity to an online platform and the student-athletes may then choose whether to accept an opportunity. Those student-athletes who accept an opportunity will perform the activity, document performance, and receive payment from the collective.7 Some nonprofit NIL collectives also assist student-athletes with NIL activity reporting required by state law or university policy. Other collectives go further and assist student-athletes with personal brand development, financial planning, tax compliance, and even offer legal advice.

Here is just part of the discussion of “qualitative” and “quantitative” private benefit — a doctrine about which I still have some cobwebs in my mind.  Its a 12 page single spaced memorandum with a thorough consideration of the same public benefit doctrine the UK Supreme Court ruled on last week;

The private benefit to student-athletes is also not a necessary concomitant to the accomplishment of a nonprofit NIL collective’s exempt purpose of promoting the collective or its partner charities. A private benefit is a necessary concomitant when the exempt purpose could not be achieved without benefiting certain private interests. It will be difficult for a nonprofit NIL collective to establish that it is impossible to accomplish its exempt purpose without compensating student-athletes for their NIL. In many circumstances, 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.

An exempt organization can, of course, pay reasonable compensation for services without endangering its exemption. However, the reasonableness of compensation is not determinative of whether private interests are impermissibly benefited. Rather, the critical inquiry is whether an organization’s activities are carried on in such a way that private interests are substantially benefited. The benefits to student-athletes from a nonprofit NIL collective’s activities extend beyond compensation. NIL collectives relieve student-athletes of the transaction and compliance costs they would otherwise incur to participate in an NIL deal. These activities include, but are not limited to, identifying and vetting partner charities, negotiating the terms of an NIL deal, and ensuring compliance with state NIL laws and university-specific NIL policies. Some collectives also provide additional services such as financial planning, tax assistance, legal advice, and assistance in personal brand development. The primary beneficiaries of these activities are the student-athletes. 

These activities are not necessary to the promotion and marketing of charitable causes and therefore cannot be considered qualitatively incidental to the accomplishment of the nonprofit NIL collective’s exempt purpose. The private benefit to student-athletes [constituting 80 – 100% of the NIL’s donations] is also not qualitatively incidental because it is generally directed to a limited noncharitable class. Student-athletes are not themselves a recognized charitable class. While the Service has previously recognized as charitable certain organizations whose activities benefited student-athletes, the rulings were based on a determination that the activities advanced education. 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). 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.

Nicely done, Lynne.  You put ya foot in it!

darryll jones