Overview
The IRS recently issued a Generic Legal Advice Memorandum (GLAM) 2023-004 addressing whether the operation of a “NIL collective” furthers an exempt purpose under section 501(c)(3). A NIL collective refers to an organization that facilities opportunities for collegiate athletes to benefit financially from their name, image, or likeness (NIL). Such opportunities generally involve services performed by the student-athlete, such as promoting the collective or other charity on social media or in a video, attending a fundraising event, autographing memorabilia for sale, or participating in or leading sports camps. In exchange for such services, the collective compensates the student-athletes for the use of their NIL in the collective’s activities.
NIL opportunities arose out of an Interim Policy that the National Collegiate Athletic Association (NCAA) instituted in 2021 allowing student-athletes to be compensated for use of their NIL without impacting their NCAA eligibility. Following the policy’s adoption, university athletic boosters and fans created NIL collectives to develop, fund, and/or facilitate NIL deals for student-athletes. Of those formed, some obtained tax-exempt status under state and federal law while others obtained tax benefits through their association with a fiscal sponsor or as an activity or program of an existing section 501(c)(3) organization. Following the release of the GLAM last Friday, however, tax benefits under section 501(c)(3) are no longer available to many NIL collectives.
The IRS held that NIL collectives largely operate for a substantial nonexempt purpose – “serving the private interests of student-athletes” – that is more than incidental to any exempt purpose furthered by the activity (i.e., a tax-exempt status disqualifier). Although the GLAM did not go so far as to say all NIL collectives inherently further a greater-than-incidental non-exempt purpose, it is expected that the result will impact the majority of collectives that have benefitted from tax-exempt treatment since 2021.
In explaining its position, the IRS determined that the private benefit to the student-athletes was both quantitatively and qualitatively more than incidental, and therefore the NIL collectives did not operate primarily to further an exempt purpose. It reasoned that the private benefit to student-athletes from the compensation arrangements encompassed a fundamental part of the NIL collectives' activities, not a mere byproduct. Furthermore, such activities were not a necessary concomitant to accomplishing the NIL collectives' exempt purpose of promoting the collective or its partner charities because, as the IRS said, "[i]t would be difficult for a nonprofit NIL collective to establish that it is impossible to accomplish its exempt purpose without compensating student-athletes for their NIL." The private benefit to the student-athletes also failed to be no more than qualitatively incidental because it directly benefited a limited noncharitable class. The facts indicated that contributions to the NIL collectives played a large role in the retention and recruitment of specific student-athletes, such as only those in certain positions or attending specific schools. The IRS cited no facts to indicate the NIL collectives' activities otherwise benefitted a larger charitable class. The benefit to private interests was also quantitatively substantial given that some NIL collectives promised to pay 80 to 100 percent of all contributions to student-athletes. Therefore, for a myriad of reasons, the NIL collectives referenced in the GLAM failed to pass tax-exempt muster.
Universities should understand the implications for structuring NIL collectives in relation to the exempt status of their institutions. In addition, they may want to consider ways to mitigate the tax consequences. The IRS indicated that existing collectives that have already applied for and received favorable determination letters and whose exemption is revoked may be able to have that revocation only apply going forward instead of retroactively. However, if a collective did not fully disclose all of its activities in its application for exemption, a revocation may be retroactive. Although donors may be able to rely on the IRS’s determination for the deductibility of prior contributions, donors should be aware that contributions going forward are most likely not deductible as charitable contributions.