Cognitive Dissonance Regarding NIL Collectives and Tax Exemption

By themselves, the tax exemption issues pertaining to NIL Collectives aren’t that difficult to identify even if they are a little more difficult to resolve.  The only cognitive dissonance I have with IRS Chief Counsel assertion that NIL Collectives exist for private benefit is the part asserting that student athletes are not, by that status alone, a charitable class.  Because I always thought that students and amateur athletes compose two separate classes of charitable beneficiaries. But the recent IRS Chief Counsel Memorandum suggests that students and athletes combined — “student athletes” — do not compose a charitable class.  That still has me a little stumped.  Here is the assertion:

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.

Wait, what? Something just bothers me about that path to what is obviously the right result.  I think it might be better to say that “employees or independent contractors do not become a charitable class just because they study and play sports for free when not working for an NIL.”  I am still thinking about it because the notion that student athletes don’t make up a charitable class feels too broad a statement, one that necessarily questions tax exemption for a whole bunch of other activities.  It seems to me that student-athletes make up a charitable class, but that paying them for endorsements has nothing to do with study or sport.   

Another practical problem with wrapping brains around NIL collectives is that the answer lies in several different sources of law.  One has to consider state law, federal tax law, maybe anti-trust and labor law, and then NCAA rules imposed by contract law.  Fortunately, scholars are gathering all those divergent sources in their attempts to get to the right outcome.  I have only skimmed one such paper along those lines but it looks helpful:

Abstract

Since 2021, student-athletes have been reaping financial benefits of the commercialized use of their name, image, and likenesses (NIL). In addition to engaging in direct endorsement contracts with third party businesses, student-athletes are likewise working with NIL collectives to secure novel forms of funding opportunities. NIL collectives rely on pooled funds from boosters and outside supporters to pay student-athletes who play sports for their affiliated schools. While the majority of NIL collectives are for-profit entities, a number have secured Internal Revenue Code (IRC) section 501(c)(3) tax-exempt status. Recently, however, the Internal Revenue Service (IRS) issued a memorandum indicating its viewpoint has shifted, now suggesting that most NIL collectives are not charitable in nature. This Article is the first to explore this tax classification change, and the potential impact of such on the broader NIL collective landscape.

darryll k. jones