The IRS has become stricter in disallowing applications for tax-exempt status filed by organizations created to facilitate name, image, and likeness (NIL) opportunities between student-athletes and their universities.
Background.
In 2021, the National Collegiate Athletic Association (NCAA) adopted a policy allowing student-athletes to profit from NIL deals following the Supreme Court’s ruling in NCAA v. Alston, 141 S. Ct. 2141 (2021).
Since the NCAA’s policy change, the college athletic landscape has altered drastically, with some student-athletes landing multi-million-dollar endorsement deals and others forgoing declaring for professional league drafts to remain at the college level so they may continue to benefit from these lucrative arrangements.
Sometimes called “boosters” or “promotors,” NIL collectives are generally legally separate entities from a university or its athletics department. They pool donations to matchmake student-athlete NIL opportunities with partnering businesses or charities. Collectives often seek tax-exempt status under Code Sec. 501(c)(3), making the case that their fundraising, promotional, or other support work constitutes “exempt purposes.”
2023 IRS guidance.
The IRS in a generic legal advice memo (Chief Counsel Memorandum AM 2023-004) issued last May addressed the proliferation of NIL collectives and reiterated that organizations bear the burden of proof in clearing this “operational test.” Overall, Chief Counsel concluded that NIL collectives “in most cases” provide private benefits that fall outside the scope of tax-exempt purposes.
To qualify, an organization must demonstrative that it is organized and operated for charitable, educational, religious, or other types of exempt purposes. These activities must be the primary focus of the entity, which benefits a public, and not private, interest. Additionally, organizations providing both a public and private benefit need to show that the private benefit is both “qualitatively” and “quantitatively incidental” to carrying out exempt activities, the memo stressed.
Further, “if an activity provides a direct or intentional benefit to private interests such that it is not qualitatively incidental, it does not matter that the benefit may be quantitatively insubstantial: the direct private benefit is deemed repugnant to the idea of an exclusively public charitable purpose.”
NIL collectives, the guidance illustrated, play a role in recruiting players to (or retaining them at) their affiliated institution. Compensation student-athletes receive justifies a collective’s existence, according to the memo. Student-athletes also receive benefits beyond compensation, such as having their NIL transaction and compliance costs covered by the collective.
“It is reasonable to assume that these organizers, as supporters of a particular school, have an interest in limiting a collective’s NIL opportunities to the student-athletes at that school rather than making these opportunities available to any student-athlete willing to participate in the collective’s activities,” read the guidance.
Recent letter rulings.
The operational test and the qualitative/quantitative aspects of the Section 501(c)(3) requirements as summarized in the memo have been applied to multiple denials of NIL collectives seeking tax-exempt status.
Three private letter rulings (PLR 202428008; PLR 202416015; and PLR 202414007) were released in recent months similarly determining that each applying organization’s activities directly offer a private benefit to student-athletes, who are not a charitable class. Each was denied tax-exempt status because it failed to meet the operational test.
The organization in the most recent letter ruling released July 12 argued that its primary purpose was to “leverage the student athletes’ rights of publicity in service of raising public awareness of and thereby increasing public engagement to what would be ‘partner’ charities,” as explained by the IRS. The organization reasoned that “these charities are seeking to boost their public profiles, to increase engagement with the local community and expand its pool of prospective volunteers.”
While these points were ultimately unpersuasive, it is possible for an NIL collective to meet the operational test and receive tax-exempt status. A team of tax professionals at law firm Alston & Bird wrote in a June 21 advisory post in response to the other two letter rulings that although the IRS has indicated “its heightened interest in the NIL space,” the rejections “are not indicative” of an outright prohibition.
“What they do indicate is the fine line an NIL collective must walk to ensure its application for tax-exempt status reflects a substantially charitable purpose,” the Alston & Bird team said. “Additionally, if an NIL collective’s application is approved, it must continue to operate in a way that meets its charitable mission to avoid a later challenge from the IRS.”
For information on the tax implications of NIL, see Name, Image, & Likeness Revisited: Where We Are Now (5/3/2023). For more on the operational test under Section 501(c)(3), see Checkpoint’s WG&L ¶ 100.2.
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