ADs Consider NIL Work-Arounds (That Could Just Work)
Sports Illustrated is in town covering the National Association of Collegiate Directors of Athletics (NACDA) annual conference. Its being held out near Disney and Universal Studios at a resort with some of the best golf courses in town. Here is what SI reported about the NIL discussion taking place:
NCAA president Charlie Baker agrees with the IRS’s assessment that donations to non-profit NIL collectives are not tax deductible, while he also emphasizing that stricter NIL rules could be on the way. On Friday, the IRS Office of the Chief Counsel published a memo suggesting that donations made to non-profit NIL collectives “are not tax exempt” because the benefits they provide college athletes are “not incidental both qualitatively and quantitatively to any exempt purpose.” After his address Tuesday to thousands of college administrators here at the annual National Association of Collegiate Directors of Athletics event, Baker agreed with what he termed a “ruling” from the IRS. “In the context of what NIL is supposed to be about and how it is supposed to work and what it is supposed to provide, which is a service for an entity that is basically making what we’d describe as a business expense … yeah, it should be treated as a taxable event,” Baker told Sports Illustrated in an interview.
That isn’t so surprising, even if SI has the tax lingo all wrong. Nor is it surprising that some ADs — no doubt in consultation with tax types who know the lingo — are suggesting that bringing NILs in house will cure the tax exemption problem (and only then make the donation deduction problem go away). Make the NIL an internal part of the university or athletic foundation. Recall that the Chief Counsel Memorandum concluded that the private benefit to student-athletes is neither qualitatively nor quantitatively incidental. Not quantitatively incidental because the NILs pay 80 – 100 percent of donations to private persons (the student athletes). If the NILs are brought in house, the denominator changes and the percentages falls all the way down to 1% or less, I bet.
But what about qualitatively incidental. The CCM explains that private benefit is not incidental if the exempt purpose cannot be achieved without the private benefit. The CCM elaborated in a way that implied that private benefit must be necessary in the strictest sense, rather than useful and appropriate in the IRC 162 sense. I am not sure private benefit must be so necessary but I will run with it for the sake of this post. Another clear implication from the CCM is that NIL’s don’t even have a charitable purpose, never mind whether they are giving away too much of the store. The CCM explained that student-athletes don’t constitute a charitable class. Students do, athletes do, but only when those students and athletes are otherwise charitable (for example unable to pay the cost of attendance or food). The distinction is very subtle and I am not sure I’ve wrapped my head around it yet. It sounds right though.
Anyway, by folding an NIL into an exempt university or athletic foundation, the private benefit problem could conceivably disappear. Clearly, the university or athletic foundation would not need to spend 80 to 100% of ALL assets compensating student-athletes for NIL. No quantitative problem there. As for the qualitative requirement, it could be argued that helping students exploit NIL — helping them with jobs not so much interfering with school and practice — is related to a university’s educational mission. Is it absolutely necessary to the charitable mission? Probably not, but neither are a lot of things universities do for students that do not constitute private benefit. I think private benefit that is ordinary and “necessary” in the 162 sense might meet the qualitative requirement. If that is true, maybe the private benefit problem disappears.
But I still think these NILs look and act like for profit sports agencies. So if they were brought in house, would the fragmentation rule apply to make their activities unrelated, and thus taxable? We might think that a qualitatively incidental private benefit (a private benefit necessarily incurred — under IRC 162 standards, at least) would have to be substantially related to the charitable purpose and therefore not an unrelated business. But I am just brainstorming right now.
Even so, bringing it in house might cure the problem despite the fragmentation rule and even if the NIL activity is unrelated. The NIL would enjoy the penumbra of the university or athletic foundation’s undeniable exempt status and even if the NIL activity were unrelated, it probably would not generate much taxable income. But here is the real kicker and what makes the bother worth it all. Donors could still get big tax deductions for donating unrestricted funds to the University or Athletic Foundation, whose tax exempt status would remain intact notwithstanding the possibility that NIL activity is an unrelated business. Could the university or athletic department use those tax deductible dollars to fund its in-house NIL sports agency? Naplam in the morning, baby.
darryll k. jones