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Cal Rose

Cal Rose


Rogers, AR

Internal Revenue Service sign


Internal Revenue Service sign

This article appeared on on August 22, 2023.

Following the Supreme Court’s decision in NCAA v. Alston in 2021, the NCAA adopted an interim name, image and likeness, or NIL, policy that permitted NCAA student athletes to receive compensation for the use of their NIL — subject to certain limitations.

In the two years following the NCAA’s NIL policy adoption, student athletes have encountered a marketplace mired by a multitude of varying laws enacted by state legislatures paired with oftentimes conflicting internal policies created by colleges and universities.

Congress has yet to adopt federal NIL legislation, which has caused uncertainty for school administrators and student athletes on many NIL-related compliance issues. In an attempt to assist student athletes in navigating the uncertainties of the current NIL regulatory landscape, many organizations referred to as “NIL collectives” were established.

The primary purposes of these NIL collectives were generally two-fold: to assist student athletes with understanding the varying tax, legal and financial impacts of NIL transactions and, often more importantly, to provide a vehicle that would allow multiple donors to pool their funds to create expanded NIL opportunities for student athletes at a specific institution.

In some instances, NIL collectives were structured as for-profit LLCs or other similar entities. More often, though, NIL collectives were structured as non-profit organizations exempt from taxation. Many NIL collectives applied for, and have received, an initial determination of tax-exempt status under Section 501(c)(3) from the IRS.

The benefits of obtaining tax-exempt status include the ability to receive charitable donations from individuals and corporations who contribute to the collective, who in turn receive a charitable deduction — subject to certain limitations — while accomplishing the overall goal of providing NIL opportunities to student-athletes.

However, in a recent internal memo, the IRS cast significant doubt on the ability of most NIL collectives to satisfy the eligibility standards necessary to qualify as a tax-exempt entity. In the memo, which analyzed the activities of NIL collectives, the agency concluded that the activities of many NIL collectives do not, by design, qualify for tax-exempt status.

In order to qualify as tax-exempt under Section 501(c)(3), an organization must be organized and operated “exclusively for religious, charitable, scientific” and other specifically designated purposes.

If more than an insubstantial part of the organization’s activities is not in furtherance of these exempt purposes, the organization does not qualify for tax-exempt status. In this context, the organization will not satisfy this requirement if the organization serves a private interest rather than the interests of the general public.

From a practical standpoint, this means that an organization must not operate for the benefit of private interests (including those of student athletes at a specific college or university) and that the net revenues of the organization may not be paid to any private individual (or group of private individuals).

In analyzing the activities of NIL collectives, the IRS determined that the primary purpose of many NIL collectives is to compensate student-athletes. Factors suggesting this primary purpose include:

  • Limiting NIL opportunities to student-athletes at a particular school
  • Informing donors that most or all of their donations will go to student-athletes
  • Permitting donors to earmark donations to be paid to certain athletic teams

In fact, the IRS noted that, in many cases, compensation for NIL activities “is the very justification for the organization’s existence.” In the memo, the IRS questioned the charitable purpose that NIL collectives purport to serve by paying student athletes in exchange for services and concluded that NIL collectives’ services do not qualify as furthering educational purposes under Section 501(c)(3).

Consequently, the IRS memo concludes that NIL collectives generally cannot receive tax-deductible contributions from donors. This is based on the determination that many NIL collectives are operating for a substantial nonexempt purpose serving the private interests of student athletes, which is more than incidental to any exempt purpose furthered by the collective. The IRS further noted that such benefit is not simply “a byproduct but is rather a fundamental part” of the typical NIL collective’s activities.

Even though the IRS memo is not binding precedent, it’s a strong indication of how the IRS will view tax-exempt NIL collectives, who now face significant uncertainty regarding their future, as well as potential tax implications and penalties on past activities.

Tax-exempt collectives should seek tax and legal counsel before moving forward with any future operations, even if future activities are limited to the disbursement of remaining funds or other assets. Even if an NIL collective has previously received confirmation of tax-exempt status, continuing to operate as a 501(c)(3) organization poses a substantial risk to the organization and its officers and directors.

Cal Rose is a partner at Wright Lindsey Jennings with extensive experience advising nonprofits on how to obtain and keep tax-exempt status. He joined the firm in 2016. Cole Henderson joined the firm as an associate attorney in June 2023.