NIL Donor Advised Workarounds
This weekend the NY Times ran an interesting story about how NIL and the transfer portal has transformed college football into a professional league without player contracts and unlimited free agency everyday all the time. At Ohio State and Utah, every scholarship student gets a cost-free four year vehicle lease. Jiminy! But what really caught my attention was the discussion of NIL workarounds. Its pretty basic private benefit stuff once you boil it down. Fold an otherwise free standing “nonprofit” NIL into a larger operating charity and call whatever the NIL does “insubstantial” by comparison to the bigger charity’s other activities. Or put money in a DAF and then distribute money through a university athletic foundation. IRS boots on the ground apparently think that works, based on a notion that insubstantial private benefit is no vice. I disagree and have for years, but there is pretty good authority. If the private benefit does not preclude tax exemption, the activity is at worse a mere unrelated business, the tax liability of which is easily zeroed-out. Anyway, here are some interesting snippets describing a transparently illegitimate but so far successful strategy:
While in theory they operate independently of athletic programs, collectives have become deeply embedded in the economics of college sports, offering vast supplements to the scholarships that schools provide.
. . .
The New York Times identified more than 120 collectives, including at least one for every school in each of the five major college football conferences. The average starter at a big-time football program now takes in about $103,000 a year, according to Opendorse, a company that processes payments to the players for the collectives. This year, Opendorse said it expects to process over $100 million in payments for athletes, with about 80 percent coming through collectives.
The Penn State collective, which is not a tax-exempt charity, tells donors their gift can still be tax-deductible if they route their money through an affiliated charity called the BPS Foundation. It is one of more than 60 collectives that offer donors tax deductions — either because the collective itself has been approved for charitable status by the I.R.S., or because the collective partners with an outside charity.
“If it’s not a 501(c)(3), I’m not going to give money to it,” said Dick Stewart, who attended the Happy Valley United fund-raiser, referring to the I.R.S. designation for charities. Stewart, an estate planning lawyer, donated $10,000 to Happy Valley United in June from a foundation he runs that was created by a deceased client who was a Penn State graduate.
The BPS Foundation, for instance, takes in tax-deductible donations, and then puts them at the disposal of for-profit collectives at Penn State and 24 other schools.
“You can say, ‘I want to make a $1,000 donation to support the women’s basketball team at U.N.L.V.,’” said Rob Sine, a partner at Blueprint Sports, which operates those collectives. He said the foundation would then turn to the for-profit side of the collective and ask them, “How do you want to use it?” The collective would then choose players to do charity work, and the foundation would pay them, he said.
In June, the I.R.S.’s chief counsel issued a memo that agreed — belatedly — with critics of these new groups. “Many organizations that develop paid N.I.L. opportunities for student-athletes are not tax exempt,” the memo said, because their top goal is to help the athletes, not the public. That led to changes at a few collectives. At the University of Michigan, a new collective agreed to a major shift to gain I.R.S. approval. Instead of giving 70 percent of its revenue to athletes, as planned, it will now give them 30 percent and use the rest for more direct charitable work.
darryll k. jones