July 17th, 2023

Tax Exempt Status for NIL Collectives: Too Good to be True?

NIL overview

The Supreme Court sent shockwaves through the college sports world in June of 2021, ruling that college athletes are entitled to compensation for their name, image, and likeness, or “NIL”. Student athletes can now profit from their personal brand, earning compensation for activities such as commercial endorsements, social media posts, public appearances, writing books, hosting camps, and teaching lessons, among other things.  

For the first time in history, college athletes are reaping the benefits of the NCAA’s billion-dollar industry, and there are no signs of slowing down. In the first year following the Supreme Court’s ruling on NIL, college athletes earned about $917 million dollars in NIL deals. Year two holds even more promise, with experts predicting around $1.14 billion dollars in NIL deals.

Student athletes and businesses alike are racing to stake their claim in this new NIL landscape. However, the hands-off approach of the NCAA and federal government has allowed states to take the lead on NIL legislation, resulting in inconsistent state laws across the country. With various state laws and no national legislation to set the tone, colleges, businesses, and athletes are exploring uncharted waters at a rapid pace. For example, many states are now extending NIL rights to high school athletes, including Pennsylvania.  

NIL Collectives

As the spotlight grows on NIL, everyone is searching for ways to infiltrate the industry. For instance, entities known as NIL Collectives are popping up across the country. These are business entities that generate and collect revenue to fund NIL deals for student athletes. Although these collectives are a positive force to secure NIL deals for athletes, they have also been criticized as groups of wealthy donors using NIL deals to recruit top talent at their favorite schools. Absent federal legislation to establish clear guardrails, some collectives are pushing the envelope.

501(c)(3) Status

Most recently, creative NIL Collectives are forming as non-profit entities, receiving 501(c)(3) status from the IRS. This status affords collectives the privilege of being tax-exempt, while also making donors eligible for tax deductions on their contributions to the collective.

In order to qualify for 501(c)(3) status, an organization must be organized and operated exclusively for an exempt purpose, including charitable, religious, or educational purposes. As the trend for 501(c)(3) NIL Collectives expands, fierce debate has ensued regarding whether these collectives actually fit the criteria for a 501(c)(3) organization.

Impact of IRS Memo on 501(c)(3) NIL Collectives

The IRS finally weighed in on the debate, issuing a memorandum dated May 23, 2023, addressing whether NIL Collectives are operated for an exempt purpose under 501(c)(3). The IRS concluded that NIL Collectives serve the private interests of student athletes, which is not an exempt purpose. To the contrary, the IRS considers pooling funds for NIL deals as a substantial nonexempt purpose. Moreover, this nonexempt purpose is not incidental. This means that the nonexempt purpose is not a byproduct of another, exempt purpose. Instead, the primary purpose of NIL Collectives is substantially furthering a nonexempt purpose. For these reasons, the IRS believes that many NIL collectives do not meet the criteria for a 501(c)(3) entity and should not receive tax-exempt status.  

Although the IRS memorandum is not precedent, it certainly raises concerns for NIL Collectives attempting to operate as 501(c)(3) entities. In this ever-changing NIL landscape, the sports law attorneys at Gross McGinley are here to help athletes and businesses maximize NIL opportunities while remaining compliant with necessary regulations.

The content found in this resource is for informational reference use only and is not considered legal advice. Laws at all levels of government change frequently and the information found here may be or become outdated. It is recommended to consult your attorney for the most up-to-date information regarding current laws and legal matters.