In recent guidance, the IRS blew the whistle on claims of tax-exempt status by organizations formed to provide opportunities for student athletes to monetize their "name, image and likeness" ("NIL").
In 2021, following the Supreme Court's decision in NCAA v. Alston holding that many limitations placed on the compensation of student athletes violated antitrust laws, the NCAA adopted an interim policy permitting student athletes to be compensated for use of their NIL without jeopardizing their athletic eligibility. In the months that followed, many athletic boosters and fans formed independent organizations, referred to as "NIL collectives," to facilitate NIL monetization transactions for student athletes. Many of these were formed as nonprofit corporations, partnering with local charities to create paid NIL opportunities for student athletes, such as paid attendance at charity fundraisers or autographing memorabilia for the collective or charity to sell. These NIL collectives applied for for (and some have received) tax-exempt status with the IRS, claiming that their activities rendered them charities that were tax-exempt, and eligible to receive tax-deductible charitable donations, under Section 501(c)(3) of the Internal Revenue Code.
In AM 2023-004, a generic legal advice memorandum (or GLAM), the IRS called foul on many such NIL collectives' assertions of tax-exempt status. Section 501(c)(3) requires that charitable organizations must be organized and operated "exclusively" for one or more public purposes described broadly as "charitable," including religious, scientific and educational purposes. In furthering these purposes, charitable organizations frequently provide benefits to private individuals, but an organization will be ineligible for tax-exemption if it is organized or operated for the benefit of designated individuals or if the private benefit conveyed to individuals is not "clearly incidental to the overriding public interest." Thus, for example, a nonprofit formed to protect a publicly accessible lake or public park may remain eligible for tax-exempt status, even if its activities necessarily benefit those owning property adjoining the lake or park, so long as that private benefit is a mere byproduct of the organization's exempt activities and insubstantial compared to the benefit provided to the public.
Applying this standard to NIL collectives, the IRS suggested that the majority were almost certainly out of bounds, describing the compensation paid to student athletes as "not a byproduct but . . . rather a fundamental part of a nonprofit NIL collective's activities." On the IRS's view, the typical NIL collective inverts the permissible relationship between public and private benefit: far from being incidental to a broader charitable purpose, compensation of the student athletes was the very purpose of the NIL collectives, with any charitable impact (such as funding partner charities or any educational benefit provided to the student athletes or their schools more broadly) being incidental. The IRS noted that many NIL collectives advertise that they pay between 80 and 100 percent of the amounts they receive over to student athletes. In addition to the compensation provided directly to student athletes, the IRS also cited various other benefits provided to student athletes, including transaction- and compliance-related services (such as advising whether particular sponsorship activities comply with applicable NIL rules, which vary from state to state and school to school). The IRS stated that "many" NIL collectives are therefore ineligible for tax-exempt status, and even suggested in a footnote that it will reconsider the exempt status of NIL collectives that have already received favorable determination letters (albeit on a prospective basis).
The determination of whether a purported charity is organized and operated for charitable purposes is a fact-intensive inquiry that depends on all relevant facts and circumstances. The IRS's guidance is, as its name suggests, "generic," and does not rule on any particular NIL collective or any specific set of facts. Although a statement of the IRS's position, it does not have any legally binding authority itself. In response to the release of the GLAM, Senators Ben Cardin (D-Md.) and John Thune (R-S.D.) wrote to the IRS and Treasury, commending the GLAM's conclusion and urging them to adopt more formal guidance, such as a revenue ruling. The two have also introduced legislation denying a charitable deduction for NIL-related payments to student athletes. It is possible that further changes lie downfield, and in the meantime, NIL collectives asserting tax-exempt status should proceed very carefully, lest the IRS throw a flag.
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