NIL Nonprofit Collectives Face Tax Law Problem: They’re Not Nonprofits
When NIL collectives surfaced, they appeared to be a new twist on an old practice: boosters paying recruits.
The Internal Revenue Service is now taking aim at collectives in a move that will likely raise their costs and deter contributions.
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Last week, the IRS Office of Chief Counsel published a memorandum that concluded collectives organized as 501(c)(3) tax-exempt nonprofits are often operating for a “substantial nonexempt purpose” and thus not compliant with the U.S. Tax Code.
The memo, which is not legal precedent and does not name a specific collective, explains that to qualify under 501(c)(3), an entity must be organized and operated for a recognized exempt purpose. There are eight such purposes: charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The entity must also benefit the public.
The problem with collectives is they’re usually operating for a substantial nonexempt purpose: “serving the private interests” of college athletes by facilitating NIL deals.
Collectives ostensibly operate independently of universities. Some are organized as nonprofits and several, including those connected to Baylor and Clemson, have applied and received recognition as nonprofits by the IRS. Some collectives perform additional services, including helping college athletes comply with school disclosure requirements and assisting in their personal brand development and financial planning.
Recognition as nonprofits, University of Massachusetts Professor Elizabeth “Betsy” Schmidt explained in an email, carries “two big benefits.” The author of Nonprofit Law: The Life Cycle of a Charitable Organization and an experienced nonprofit attorney, Schmidt highlighted §501(c)(3)s “don’t pay income taxes on their profits, and they can accept tax deductible contributions.”
Schmidt says collectives that are set up for a commercial purpose don’t fit a recognized purpose.
“Even if there were some charitable purpose,” Schmidt said, “the IRS is saying—correctly, in my opinion—that the benefit is to a small group of college athletes, not to the general public.”
She said through the memo, the IRS is “signaling that it will not allow any more of these organizations to become exempt.” NIL collectives can still exist, Schmidt stressed, “but they will have to pay taxes and the donors to the collectives will not be able to deduct those payments on their income taxes.”
Schools with a tax exemption have not lost it on account of the memo. The IRS normally publishes a notice of revocation, with an accompanying explanation, when it intends to take away an exemption.
That has not occurred for tax-exempt collectives. Yet. But the memo, Schmidt explained, signals the IRS “is likely to revoke the exemption of the organizations that currently hold that tax-exempt status.” The revocation would likely occur after additional examination.
LMU Loyola Law School professor Ellen Aprill, an expert in federal income tax and nonprofit organizations, told Sportico she is “impressed and pleased” by the analysis in the memorandum and its conclusion, and she underscored the memo “allows for the possibility of NIL collectives that qualify interest section 501(c)(3).”
But she cautioned that doing so “will call for care and creativity . . . its purpose must be a charitable one and compensation of the student athletes must be incidental to that purpose.”
Schmidt similarly doesn’t see new interpretations of tax law ending NIL collectives “Given how fanatic most fans are, I suspect the NILs will still be able to raise plenty of money,” she predicted.
Still, expect meetings between those involved with collectives and their accountants.
Robert Raiola CPA, the director of the Sports and Entertainment Group at PKF O’Connor Davies, spoke with Sportico and urged leaders of collectives to reach out to their accountants “as soon as possible for tax advice.”
The memo doesn’t tackle other concerns about collectives, most notably the issue that some appear to be paying recruits to persuade them to attend a particular college rather than for their NIL. The NCAA prohibits “pay-for-play” but has been reluctant to regulate NIL, in part because of concerns the NCAA and its members might run afoul of antitrust law and state laws.
The NCAA continues to lobby Congress for a college sports law that would address these and other matters, but has thus far come up short.
