Service Denial of Exemption for NIL Muddles Charitable Class, Charitable Need and Antecedent Purpose

We all know intuitively that NIL collectives should not be tax exempt.  But the Service’s path to that conclusion is somewhat muddled, unnecessarily so I think.  In PLR 202428008, released last Friday, the Service concluded that a Type I supporting organization for a public university did not qualify for exemption based on its collection of donations to be used by otherwise unrelated charities to purchase endorsements from the organization’s parent university’s students. 

I am describing the transactions awkwardly but generically for my own better understanding. I frequently tell my students to find the economic common denominators in a transaction. Here, the organization obtains cash donations.  It has no charitable activity.  It just uses the cash to make grants to other nonprofit organizations. Those other organizations purchase endorsements from the NIL’s (or in this case, its parent university’s) students. The organization exercises expenditure authority, of sorts, over the grants to the other nonprofit organizations.  It ensures the endorsement contract between the student-athlete and the nonprofit organization pays no more than reasonable compensation.  

The ruling concludes that the organization is not entitled to tax exemption because it provides non-charitable beneficiaries, student-athletes, with substantial private benefits.  As the ruling points out, the organization is no different from a talent agency, except that it accepts donations spurred by the advantage of tax deductions and funds the buyer’s obligation.  That seems an accurate description.

But what always trips me up, not only in the PLR, but also in the NIL Chief Counsel Memorandum (CCM) apparently discussed in the ruling (the ruling refers to an “advice memorandum”)  is the assertion that NIL collectives serve all student-athletes and therefore do not benefit a “charitable class.”  The ruling, like the CCM states that student-athletes would compose a charitable class vis-à-vis a collective if the student-athletes were poor or otherwise disadvantaged.  The assertion that only poor student athletes compose a charitable class always confuses me. It cannot possibly be correct because students and college athletes have always been deemed a charitable class without regard to their economic status.  We have not limited the charitable class to poor students or poor amateur athletes, and I wish the Service would avoid the implication.

I am being anal and professorial, I know, but the more accurate statement would be that student-athletes compose a charitable class (they always do, even the rich students right?), but brokering endorsement contracts for them does not meet the need that makes them a charitable class.  Endorsement contracts do not pursue a charitable need. But giving even a rich, very talented student a scholarship to Juilliard is not private benefit because doing so meets a charitable need. Isn’t that student a member of a charitable class? Peyton Manning was a rich kid and yet his scholarship to Tennessee was not private benefit.  Giving him “walking around money” might have been private benefit if it served a noncharitable need (something other than studying or playing football).  A charitable charitable class can have charitable and noncharitable needs, it seems to me, and we should distinguish between the two. 

After that bit of confusion, the ruling provides a pretty thorough discussion of private benefit.  Non-incidental qualitative and quantitative private benefit will disqualify an organization.  But the incidental analysis necessarily implies an antecedent activity that is itself charitable.  Incidental to what?  An NIL that is nothing more than a talent placement agency has no antecedent charitable activity to which a benefit might be “incidental.”  Universities have the antecedent purpose (education and competition), to which an in-house NIL’s placement activities might be viewed as incidental but I am beginning to doubt that as well.  The analysis in the PLR means, correctly I think, that placement activities are not qualitatively incidental even if NIL money spent on student-athletes is a miniscule part of a university or athletic department budget.  Even if an NIL had an antecedent study or competition purpose — its own or as an in house NIL collective — its placement activity would not seem like a necessary part of study and competition. Providing endorsement contracts is hardly necessary to that charitable goal.  

So we don’t need to attack the notion that student-athletes compose a charitable class to say that providing them with endorsement contracts does not serve a charitable need or purpose.  That’s all I’m saying. Let’s clarify that student-athletes are charitable beneficiaries, but brokering endorsement contracts does not pursue their charitable need. I don’t think it can hardly ever be even if the NIL is serving an antecedent charitable purpose.  In either case, the purpose is not furthered by meeting a student-athlete’s private noncharitable need.

darryll k. jones