How to Build a Tax-Exempt NIL Collective

I’ve had a change of heart about NIL collectives.  Like Ebenezer Scrooge on Christmas Eve. It happened not so dramatically, but only after conversations I had last semester with a student writing a paper on NIL collectives. Despite my prior indignation, I now think a stand-alone NIL collective can qualify for tax exemption. Even if we really know its about paying D1 athletes. The only reasonable objections to tax exemption for NIL collectives are (1) the amount some student-athletes are paid and (2) the fact that “employment” is often unrelated to study or competition, which are the only two charitable needs of student-athletes.  If the amounts paid to student-athletes are commensurate with what a normal worker  (including celebrity endorsers) are paid, and the internship is part of an educational effort, an NIL collective qualifies for tax exemption. It is actually pretty simple.  Here is my proposed Revenue Ruling explaining:

Revenue Ruling 2025-XX

A nonprofit organization that recruits university students for internship programs related to their studies to provide students work experience in private industry, nonprofit, and government offices qualifies for exemption under section 501(c)(3) of the Code even though participation is limited to students engaged in intercollegiate athletics. See Revenue Ruling 70-584; Revenue Ruling 69-177 distinguished.

Advice has been requested whether a nonprofit organization formed to recruit university student-athletes for internships related to their studies and designed to prepare them for employment in industry, nonprofits or government is exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code of 1954.

FACTS

The organization was formed for the purpose of helping a university provide students with work experience (internships) related to their major course of study. The organization is not controlled by the university but participates in the university’s effort to ensure all students have access to internships related to their academic studies.  Students are nominated by the university for positions in private industry, nonprofits, and government agencies (internship sponsors). Only students who participate in intercollegiate athletic competition are eligible because they are amongst the students whose schedules (including time spent for class attendance, study, practice, and travel) preclude participation in other university-recognized internships.  The internships are unlike other university-recognized internships because they allow students to work irregular schedules and normally last for a student’s entire period of enrollment at the university rather than just one semester or term.

Students’ internship salaries are paid by the organization rather than by the internship sponsors or the university. Internship sponsors agree to monitor and train students (rather than simply utilize them for labor) and submit periodic reports to the university and organization.  Salaries are commensurate with salaries paid comparable full-time workers in the field in which students serve as interns.  Contributions used to fund the organization’s activities come from individuals, industry, foundations, businesses, and government grants.

LAW

Section 501(c)(3) of the Code provides for the exemption from Federal income tax of organizations organized and operated exclusively for charitable or educational purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(d)(1)(ii) of the Income Tax regulations states that an organization is not organized or operated exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.

Section 1.501(c)(3)-1(d)(2) of the Income Tax Regulations defines the term “charitable” as including the advancement of education and the lessening of the burdens of Government.

Section 1.501(c)(3)-1(d)(3) of the regulations defines the term “educational” as including the instruction or training of the individual for the purpose of improving or developing his capabilities.

Revenue Ruling 70-584, 1970-2 C.B. 114, determined that an organization was educational when it provided students majoring in such areas as sociology and political science opportunities for summer positions with local and municipal government agencies concerned with the improvement of urban life. Through an arrangement made with the agencies, the students’ salaries were paid by the organization rather than by the agencies for which they worked. The organization’s activity was part of an officially sponsored government program. The ruling provides that the operation of an internship program advances education since it trains the individual for the purpose of improving or developing his capabilities in his chosen field of study. The program is also charitable in that it lessens the burdens of government by contributing to students’ higher education and later employability.  

In Revenue Ruling 69-177, C.B. 1969-1, 150, an organization created by an exempt college was held not to be exempt where it provided students with jobs primarily for the purpose of providing them with an income to enable them to continue their education. In that case, the students are not employed for the purpose of receiving instruction or training, or for the purpose of improving or developing their capabilities.

ANALYSIS

The organization is similar to the organization described in Revenue Ruling 70-584.  It exists as part of a University’s effort to extend internship experiences related to a student’s academic study and whose schedule would otherwise preclude their participation in an internship.  Internships, paid and unpaid, are a recognized part of a university’s educational program. The organization is not like the organization described in Revenue Ruling 69-177 because students are nominated and selected for internships related to their major course of study.  The internships are not merely to provide income to the students but to enhance the educational experience and produce graduates with practical experience in their chosen fields of study.  Accordingly, it is held that the organization qualifies for exemption from federal income tax under section 501(c)(3) of the Code and contributions to the organization are deductible under section 170 of the Code.

Even though an organization considers itself within the scope of this Revenue Ruling, it must file an application on Form 1023, Exemption Application, in order to be recognized by the Service as exempt under section 501(c)(3) of the Code. The application should be filed with the District Director of Internal Revenue for the district in which is located the principal place of business or principal office of the organization. See section 1.501(a)-1 of the regulations.

darryll k. jones