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08.02.23   |   Insights

Breaking the NIL-lusion: IRS Denies Tax-Exemption Status to NIL Collectives

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Following NCAA v. Alston (2021), the NCAA implemented an interim name, image, and likeness (NIL) policy allowing NCAA student-athletes to earn money from their own publicity rights. In the two years since, Congress has yet to pass federal legislation on the matter, leaving student-athletes uncertain about various NIL-related issues. Such uncertainty led to the creation of NIL Collectives.

NIL Collectives are third-party collections of fans and boosters who pool together capital, to develop, fund, or facilitate NIL deals for student-athletes. Examples of their activities include promoting the collective or a partner charity through videos or social media posts, attending fundraising events, autographing memorabilia for sale, or participating in sports camps. Currently, there are more than two hundred collectives catering to student-athletes nationwide, with around eighty of them asserting non-profit status.

Some NIL Collectives are seeking tax-exempt status in order to receive tax-deductible contributions, allowing the larger donations to be written off as a donation to a charity. This incentive is crucial for NIL Collectives as it allows them to attract substantial funding that can be used to compensate student-athletes for their NIL-related activities. With limited legal precedent and guidance to rely on, NIL Collectives have been operating in a gray area by attempting to secure tax-exempt status.

On June 9, 2023, the IRS released memorandum number AM 2023-004, providing some much-needed clarity on the issue. In its memo, the IRS employs an operational test to ensure that organizations seeking tax-exempt status are genuinely dedicated to advancing exempt purposes that benefit the public, rather than serving private interests. To qualify for tax exemption, an organization must primarily engage in activities that further exempt purposes for a public benefit, and any substantial non-exempt purpose can lead to denial of exemption, regardless of the importance of its truly exempt purpose.

Applying this operational test to NIL Collectives, the IRS observed that, in most cases, the private benefits received by student-athletes far surpassed any incidental benefits, both in terms of quality and quantity. This private benefit is not a byproduct, but rather an integral part of the NIL Collective’s activities, as compensating student-athletes is the very justification for the organization’s existence. Therefore, it becomes challenging for an NIL Collective to demonstrate that compensating student-athletes for their NIL rights is essential to achieving its exempt purpose.

Overall, when NIL Collectives develop paid opportunities for student-athletes, they often operate with a substantial non-exempt purpose: primarily serving the private interests of the athletes rather than fulfilling any exempt purpose. While the IRS memo does not currently carry legal weight, it underscores the IRS’s firm stance on the tax status of NIL Collectives, and it strongly suggests that further actions will follow.

As NIL Collectives continue their operations, they should exercise caution when soliciting tax-deductible donations from boosters and operating as traditional tax-exempt organizations. Even if an NIL Collective has previously obtained non-profit status recognition, maintaining tax-exempt status carries significant risks. Contact your Critchfield attorney with any questions.

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