IRS memorandum calls tax-exempt status of NIL collectives into question
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In the ever-changing world of college sports and student-athlete compensation, IRS Chief Counsel Memorandum (AM 2023-004) has generated significant interest and discussion by asserting that many name, image, and likeness (NIL) collectives do not meet the definition of a tax-exempt organization Code Sec. 501(c)(3).
Understanding name, image, and likeness (NIL) collectives
In 2021, the National Collegiate Athletic Association (NCAA) adopted an interim policy allowing student-athletes to profit from the use of their name, image, and likeness (NIL) without compromising NCAA eligibility. This dramatic shift in collegiate athletics has given rise to organizations (“NIL collectives”) established by supporters of university athletic programs to develop paid NIL opportunities for student-athletes.
NIL collectives operate independently from the affiliated university; however, they fund and encourage NIL opportunities for the school’s student-athletes. These opportunities typically include:
- Promoting the collective or partner charity through video or social media;
- Attending a fundraising event;
- Autographing memorabilia for the collective or a partner charity to sell; or
- Participating in or leading a sports camp.
Many NIL collectives claim non-profit status under state and federal law or by aligning with existing section 501(c)(3) entities linked to university athletics, which potentially allows donors to receive a tax deduction for their contribution to the collective.
Tax-exempt organizations and Code Sec. 501(c)(3)
Tax-exempt entities and charitable organizations are governed by a complex set of special rules. Code Sec. 501(c)(3) and related regulations provide a federal tax exemption for organizations that are organized and operated exclusively for religious, charitable, scientific, literary, and educational purposes. An organization is “organized and operated exclusively” if it is operated primarily for exempt purposes.
Additionally, an organization is not organized or operated exclusively for charitable purposes unless it provides a public benefit, rather than benefiting a private interest. Thus, to be tax exempt, an organization must establish that it is not organized or operated for the benefit of private interests including specific individuals or people controlled by private interests.
IRS Chief Counsel Memorandum AM 2023-004
In June 2023, the IRS issued long-awaited guidance addressing whether the operation of a NIL collective furthers an exempt purpose under Code Sec. 501(c)(3). In a generic legal advice memorandum (GLAM), the IRS concluded that many NIL collectives do not qualify as tax exempt organizations under Code Sec. 501(c)(3) because they operate primarily to benefit the private interests of student-athletes.
The IRS highlighted several factors that contributed to its conclusion that the private benefit of compensating student-athletes was more than incidental, including that:
- Benefits extend beyond compensation to include transaction and compliance costs;
- Additional services like financial planning, tax assistance, and legal advice are offered in some circumstances;
- NIL collectives are considered to be significant to retaining and recruiting student-athletes;
- Donors are often informed that all or most of their donations are paid directly to student-athletes;
- Donors are often notified that donations serve specific teams or athletes that play specific positions; and
- Certain NIL collectives permit donors to choose which teams will receive funding from their donation.
According to the IRS memorandum, “the compensation for NIL activities arranged for or facilitated by the nonprofit NIL collective is the very justification for the organization’s existence and any incidental exempt purpose it furthers.”
Implications for NIL collectives, college athletes, and fans
While the memorandum is clear that it cannot be used or cited as precedent, it is likely to have an impact on donor tax exemptions offered by NIL collectives and the availability of NIL paid opportunities offered to student-athletes. Notably, the GLAM stops short of stating that NIL collectives cannot qualify for tax-exempt status under Code Sec. 501(c)(3) under any circumstances.
The IRS also does not address how its position could potentially impact charitable deductions for contributions made to non-profit NIL collectives or the tax-exempt status of current NIL collectives.