Unwinding NIL Collectives After the Chief Counsel Kybosh

There is an interesting article in AL.com about about the impact of Chief Counsel’s NIL Memorandum on previously exempted NIL collectives.  That memo effectively poured cold water on the efficacy of stand alone NIL collectives.  The article provides possible answers to some nagging questions, but only by anecdote. How did the NIL collectives get tax exemption in the first place, can they gain tax exemption another way, and what should stand alone NIL collectives do with the money now that they know they aren’t tax exempt?

Walk of Champions was appropriately named because it was the NIL Collective formed to pay money to Alabama Crimson Tide football players.  Before the Supreme Court decreed that student athletes had a right to be paid for their name, image, and likeness, Alabama had a lock on the best talent, and was the most dominate college football program in the history of college football.  Now that the law recognizes the existence of a market in which competition must be permitted, Alabama and all other programs have to compete on a wider, if not more competitive economic playing field.  Like other schools, ‘Bama stakeholders created new entities to facilitate the competition.  

The hope was that tax exemption and charitable contributions would subsidize the effort.  The WOC collective existed and received tax exemption to support children’s health.  It would do so, according to the article, by paying student athletes to make appearances at pediatric hospital wards.  To cheer up patients.  In other words, the organization existed to support pediatrics by paying football players thousands of dollars — in this case $10,000 — to walk through pediatric wards and say hello to kids.  That’s it.  How in the world did it get tax exemption in the first place?  We might speculate that examiners are overworked and that the collectives were careful to include the right language in their 1023s.  Private benefit is probably harder to detect prospectively anyway.  But the article suggests an even more pragmatic explanation.  The Walk of Champions organizers sought and received expedited review, as is permissible under the Form 1023 instructions:

In the spring of 2023, John Parker Wilson, the former Alabama quarterback, had a request for the Internal Revenue Service: grant us nonprofit status by March 31, or Walk of Champions will lose the money.  “If the Organization does not receive its exemption determination by this date it will not receive this crucial start-up funding and other similar contributions will also be at risk,” reads a letter included with documents Wilson sent to the IRS.

The experts also talk about a less pragmatic and more theoretical issue.  The article points out that in addition to the stand alone WOC collective, the University of Alabama has an in-house NIL collective called “Yea Alabama.” The article doesn’t go into much detail, but everyone clearly assumes that in-house collectives are internal parts of the university and thus deserving of tax exemption.  Whatever private benefit in-house collectives convey is surely minimal compared to a University’s entire budget.  And nobody would suggest revoking the entire University’s tax exemption even if were a private institution.  Still, pretending that in-house NIL collectives don’t convey impermissible private benefit just because they are in-house is a misapplication of the private benefit doctrine.  A private benefit must be qualitatively incidental.  And to be qualitatively incidental, the benefit must be necessary to achieving the public good for which exemption is granted.  Neither education nor pediatric health care depend on paying athletes appearance fees.  The appearance fees are not qualitatively incidental.

The final interesting point raised in the article concerns what Walk of Champions and other stand alone NIL collectives should do with their donations now that they know the business model doesn’t work for tax exemption and charitable contribution deductions.  WOC is in the process of winding down after Chief Counsel’s memorandum.  The easiest thing to do would be to distribute all that previously deducted and tax exempted wealth to the university.  Only then could taxpayers recoup the public benefit it expected when we too hurriedly granted tax exemption and charitable contribution deductions.  But one expert said the easiest thing to do would be to return the donations to the donors.  But no, you can’t just give the money back.