Are NILprofits Nonprofits?

The holidays are nearing, and with them, the expanded college football playoff. I, for one, am here for it. And on the subject of college athletics, the IRS recently denied tax-exempt status to an organization facilitating name, image, and likeness (NIL) compensation for student-athletes. The IRS’ decision, formalized in IRS Letter Ruling 202428008, highlights the tension between emerging NIL markets and the requirements of Section 501(c)(3) for charitable tax-exempt organizations. Even if you’re not a college sports fan like yours truly, you’ll want to keep reading. Below, I explore the IRS’s reasoning and its broader implications.

The Facts

The organization in question sought 501(c)(3) status, presenting itself as a supporting organization of a public charity. Its stated mission included leveraging student-athletes’ NIL through public appearances and social media to support charitable endeavors. Compensation for NIL activities would be paid by the public charity, while the applicant organization managed contributions and coordinated relationships.

Despite its framing, the IRS was no fool. It found the organization’s primary purpose to be facilitating NIL compensation rather than advancing a public charitable purpose. Central to this determination was the private benefit conferred to student-athletes, which the IRS deemed substantial and inconsistent with Section 501(c)(3).

Private Benefit and Exempt Purposes

Under Section 501(c)(3), organizations must operate “exclusively for exempt purposes,” serving a public rather than private interest. Any private benefit must be incidental—both quantitatively and qualitatively—to the organization’s public benefit. As an example of the former, the private benefit must be minimal compared to the public benefit. The IRS concluded that compensating student-athletes outweighed the broader charitable impact of the organization’s activities. Characterizing the latter, private benefits must be necessary byproducts of achieving a public purpose. The IRS rejected the argument that compensating student-athletes was essential to further the mission of supporting partner charities.

Perhaps rightly, the IRS emphasized that the organization’s activities served identified individuals—student-athletes—rather than a broader charitable class. This structure resembled a business model rather than a charitable endeavor. The IRS cited precedents, such as Better Business Bureau v. United States, reinforcing that even a single substantial nonexempt purpose disqualifies an organization from tax exemption.

Moreover, the IRS rejected comparisons to exempt organizations paying honorariums for professional services. Unlike those cases, NIL compensation primarily benefited private individuals without demonstrable public necessity. And it wasn’t the first time that the IRS determined as much.

Implications for NIL Collectives

This ruling is part of a growing body of IRS guidance clarifying the limitations of tax-exempt status in the NIL context, and the organization in question should have probably seen that coming. For one, if the organization wanted to win the day, the organization should have structured its programs to ensure that private benefits are secondary and incidental to public purposes. For another, its beneficiaries must fit within a charitable category (college athletes ain’t it). Finally, its activities must directly further exempt purposes without relying on private benefit as a primary mechanism. That wasn’t done here, and it’s doubtful that any NIL-related “charities” can accomplish this.

So, in summary, the IRS’s decision underscores the challenges of aligning NIL initiatives with the strict requirements of Section 501(c)(3). This ruling also sets a clear precedent for the IRS’s scrutiny of emerging nonprofit models and their adherence to exempt purposes.

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law