September 20, 2024
NILs and Charitable Income Tax Deductions
Take-Away: The IRS continues to ramp up its challenge to claims of tax-exempt status by organizations that are created to facilitate name, image, and likeness (NIL) opportunities between student-athletes and their universities.
Background: Along with the change to the college athletics landscape after the Supreme Court’s 2021 decision in NCAA v. Alston, 141 S.Ct. 2141, the IRS has become very active in its opinions regarding ‘name, image, and likeness’ (NIL) collectives. These collectives are separate legal entities from the university or its athletic department. Often the collective is formed by donors and promoters. The collective pools donations to ‘matchmake’ student-athlete NIL opportunities, often partnering with businesses or charities. These collectives frequently seek tax-exempt status under IRC 501(c)(3), claiming that the collective’s fundraising, promotions, or other activities constitute ‘exempt purposes.’ If the contribution to the collective is tax-deductible as a charitable contribution, more money can be attracted by the collective. As time passes, the IRS has become even more aggressive in its rejection of a collective’s claimed tax-exempt status.
Chief Counsel Memo AM 2023-004: Last year the IRS formally addressed the proliferation of NIL collectives. In its Memo, the IRS made it clear that the NIL organization bears the burden of proof to satisfy what is called the operational test to constitute a tax-exempt entity. The IRS concluded in its Memo that NIL collectives “in most cases provide private benefits that fall outside the scope of tax-exempt purposes.”
To qualify as tax-exempt, an organization must demonstrate that it is both organized and operated for charitable, educational, or other types of exempt purposes. These activities must be the primary focus of the entity and private benefit need to show that the private benefit is both qualitatively and quantitatively incidental to carrying out the exempt activities. Moreover-
“if an activity provides a direct or intentional benefit to private interests such that it is not qualitatively incidental, it does not matter that the benefit may be quantitatively insubstantial: the direct private benefit is deemed repugnant to the idea of an exclusively public charitable purpose.”
The Memo went on to observe that NIL collectives play a role in recruiting players to (or retaining them at) their college or university. The compensation that a student-athlete receives justifies the collective’s existence. In addition, the student-athlete also receives benefits beyond compensation such as having their NIL transaction and compliance costs covered by the collective. The Memo concluded:
“It is reasonable to assume that these organizers, as supporters of a particular school, have an interest in limiting a collective’s NIL opportunities to the student-athletes at that school rather than making these opportunities available to any student-athlete willing to participate in the collective’s activities.”
2024 Private Letter Rulings: Already this year the IRS has issued three different private letter rulings. With each, it concluded that the applying NIL organization’s activities directly offered a private benefit to student-athletes who it deemed are not a charitable class. Therefore, each NIL organization was denied tax-exempt status because it failed to meet a tax-exempt entity’s operational test. [PLR 202428008; PLR 202416015; and PLR 202414007.]
In the last PLR, issued on July 12, 2024, the NIL collective argued that its primary purpose was to “leverage the student athlete’s right of publicity in service of raising public awareness of and thereby increase public engagement to what would be ‘partner’ charities.” The NIL collective then reasoned that ‘these charities are seeking to boost their public profiles, to increase engagement with the local community and expand their pool of prospective volunteers.” Suffice it to say, the IRS was not impressed with this reasoning.
Conclusion: While it is possible that an NIL collective might one day satisfy the IRS’s operational test, it is clear that the collective’s application for tax-exempt status will inevitably have to reflect a substantial charitable purpose. Donations to an NIL collective should thus be made with this very ‘high bar’ in mind that the collective must meet before for any promised income tax charitable deductions to the donor can materialize. In short, donors beware.