By Michael Ilg; Photo Credit: Shun Ahmed
In May 2023, the Internal Revenue Service (“IRS”) released a memorandum addressing the tax status of Name, Image, and Likeness (“NIL”) collectives and the required burden of proof to obtain tax-exempt status under Code Section 501(c)(3).[1] To meet the “Operational Test” and “Private Benefit Doctrine” burden, an organization must be organized and operated exclusively for one or more exempt purpose.[2] If an organization serves private rather than public interests, it does not operate for exempt purposes.[3] The IRS explained that occasional private benefits must be both qualitatively and quantitatively incidental.[4]
In the past, the IRS has recognized charitable organizations that benefited student-athletes based on the benefit these organizations had on advancing their education.[5] In contrast, NIL collectives making payments in exchange for player promises and use of NIL funds likely does not further educational purposes under 501(c)(3).[6] Due to the qualitative determination that certain student-athletes are receiving private benefit for their athletic skill, and, quantitively, those athletes are receiving the bulk of the funds from all contributions, the private benefits are not incidental.[7] Because of this, these collectives are likely not tax-exempt under 501(c)(3).[8]
In contrast to the collectives, college athletic programs have not received much scrutiny for their 501(c)(3) exempt status, but this has potential to change. College athletic programs have become entangled with NIL collectives. Texas Football’s head coach Steve Sarkisian has made headlines flaunting a platoon of Lamborghini luxury cars at recruitment visits.[9] Louisiana State University Football head coach Brian Kelly has pledged a personal one-million-dollar match for donations to the school’s NIL collective.[10] Finally, Tennessee’s athletic department has announced a 10% “talent fee” for 2025 season ticket renewals to help pay athletes.[11]
In the past, college athletic programs received exempt status under Code Section 501(c)(3) for furthering an educational purpose to instruct individuals to improve or develop their capabilities.[12] So if the athletic programs and organizations supporting the programs provided necessary services to further this, it would be qualified to be exempt under 501(c)(3). Income related to charging admission at events and receiving money from boosters were determined to be substantially related to the educational process of the university.[13]
With this precedent and the IRS’s explicit lack of support for exempt status of NIL collectives, does this new NIL landscape leave college athletic programs vulnerable of losing their exempt status?
Under the Operational Test, a single nonexempt purpose, if substantial in nature, will preclude exemption regardless of the number or importance of truly exempt purposes.[14] College athletic programs, like NIL collectives, are focused on securing the best athletic talent for their sports teams. While the NIL collectives are directly paying the athletes, college athletic programs are engaging in activities to support and bolster the collective’s NIL capacities. The Operational Test focuses on the purpose towards an organization’s activities, and not the nature of the activities themselves.[15] So, even though college athletic programs aren’t directly paying athletes, they are performing actions for the purpose of enticing players to accept payments and use the collective’s services.[16] College athletic programs are subject to the same qualitative and quantitative assessment to consider the extent of private interests.[17] Like NIL collectives, college athletic programs encouraging support for NIL collectives and establishing mechanisms to generate funds to pay players has direct private impact on players receiving funds for their services. Quantitatively, college programs are more distanced in their impact on private compared to public interest since they are participating in more activities that have already been determined to fall under the umbrella of educational purpose, so the argument can be made that funds received by players through direct or indirect actions by college programs are insubstantial compared to the overall public benefit. However, all the public benefit for activities by college programs will now be accompanied by the private benefit of athletes being compensated for engaging in such activities. Because of this, college athletic programs would more than likely fail qualitatively and quantitatively for deciding whether private interests are incidental.
Given college athletic programs current involvement and entanglement with NIL collectives, there is a very real possibility of losing their exemption status as a 501(c)(3). With the IRS’s explicit stance and reasoning on the tax status of NIL collectives, college athletic programs may need to take a step back to reassess their current involvement with these organizations and how to protect their status in the future.
Michael Ilg is a 2L at Vanderbilt Law school from Omaha, Nebraska. After graduation, he plans to focus on corporate transactional law.
[1] Tim Shaw, NIL Collectives Blocked by IRS From Claiming Tax-Exempt Status, Thomson Reuters (July 17, 2024), https://tax.thomsonreuters.com/news/nil-collectives-blocked-by-irs-from-claiming-tax-exempt-status/.
[2] Memorandum from the Office of Chief Counsel Internal Revenue Service to the Director of EO Rulings & Agreements and the Director of EO Examinations (May 23, 2023), https://www.irs.gov/pub/lanoa/am-2023-004-508v.pdf.
[3] Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] Ian Valentino, Texas rolls out Lamborghinis for 5-star recruiting weekend visit, A to Z Sports (June 8, 2024, 2:32 PM), https://atozsports.com/college-football/texas-rolls-out-lamborghinis-for-5-star-recruiting-weekend-visit/.
[10] Michael Brauner, LSU Head Coach Brian Kelly Makes Absolutely Wild NIL Fundraising Offer, Sports Illustrated (Dec. 14, 2024), https://www.si.com/fannation/name-image-likeness/nil-news/lsu-head-coach-brian-kelly-makes-absolutely-wild-nil-fundraising-offer#:~:text=He%20along%20with%20his%20wife,instead%20giving%20to%20the%20collective.
[11] Gary B. Graves, Tennessee football’s 10% talent fee opens discussion of how many schools and sports will follow, AP (Sept. 25, 2024, 11:22 AM), https://apnews.com/article/nil-tennessee-volunteers-college-football-a0cb27d19f081f449dc6c8c0fd960eb4.
[12] Mitchell Franklin, Ronald Zullo, Athletic Programs and NIL Collectives: Truly Not-for-Profit?, Taxnotes (Mar. 27, 2023), https://www.taxnotes.com/featured-analysis/athletic-programs-and-nil-collectives-truly-not-profit/2023/03/24/7g02r.
[13] Id.
[14] See Memorandum supra note 2.
[15] Id.
[16] Id.
[17] Id.
