After the Supreme Court loosened the NCAA’s restrictions on student-athlete compensation,[1] college boosters created a billion-dollar industry centered around compensating student-athletes for the use of their name, image, and likeness (“NIL”) in endorsements and advertisements.[2] Boosters accomplished this feat using “NIL collectives”—“entities affiliated with, yet independent from, a college or university” who ostensibly seek to “support NIL opportunities for student athletes.”[3] In essence, NIL collectives accumulate “donations [that they then] distribute to college athletes”[4] through “upfront amounts, monthly payments, and other incentives” in exchange for the athlete’s name, image, and likeness.[5] Since 2021, NIL collectives have secured “upwards of millions of dollars” for some athletes through these NIL agreements.[6] Key to this swift success is that “many [NIL collectives] apply for, and easily receive, [501(c)(3)] tax-exempt status from the IRS” in order “[t]o encourage donations to collectives.”[7]

How NIL Collectives Justify and Use 501(c)(3) Status

NIL collectives justify their 501(c)(3) tax-exempt status on the basis that they are charitably driven. Specifically, tax-exempt NIL collectives insist that they compensate athletes only so that the athletes’ NILs can be used for charitable purposes.[8] For example, athletes might autograph merchandise or appear in promotional content for charities with which the NIL collective partnered.[9] In this sense, tax-exempt NIL collectives maintain that they primarily support charities, not the student-athlete or the NIL collective’s own financial gain.[10] Although NIL collectives use their charitable status to attract large contributions from wealthy donors, who in turn can take a charitable tax deduction on such contributions, tax-exempt NIL collectives insist that they “promote philanthropy.”[11] That these large, tax deducted contributions from donors all, or substantially all, get paid to athletes—after the NIL collective takes a cut[12]—is beside the point to these booster-led organizations.

But in reality, “collectives are simply collecting the funds and passing them through to the student-athletes.”[13] The supposed charitable purpose claimed by the NIL collective is secondary to “getting actual funds into the hands of student-athletes who compete[,] [which is] the ultimate goal.”[14] Thus, NIL collectives have to reckon with the question, “What is charitable about paying college players?”[15]

Framed in this manner, it becomes clear that “the collective model is a roundabout way for schools and their boosters to get money into athletes’ hands without handing the cash directly to them.”[16] Far from fulfilling a non-exempt purpose, NIL collectives “are all money laundering” and acting as “legal buffer[s]” against the NCAA and IRS.[17] As one commentator bluntly surmised, “[Collectives] ae using [non-profit status] to get tax writeoffs to pay student-athletes. Unless you are OK with money laundering, you can’t pay athletes $20–30,000 a year through a non-profit.”[18]

Response from the IRS

The IRS agrees. In a memo from the Deputy Associate Chief Counsel, the IRS took the position that many supposedly tax-exempt NIL collectives are “operating for a substantial nonexempt purpose—serving the private interests of student-athletes.”[19] The memo emphasizes that a valid non-profit organization “engages primarily in activities that further an exempt purpose” and in “public rather than private interests.”[20] Noting that the student-athlete’s private compensation “is not a byproduct but is rather a fundamental part of a nonprofit NIL collective’s activities,” the memo declares that “helping student-athletes monetize their NIL is a substantial nonexempt purpose of many nonprofit NIL collectives.”[21] The IRS has echoed such conclusions in several subsequent private letter rulings that have denied 501(c)(3) status to NIL collectives.[22]

Some tax-exempt NIL collectives have shut down since the memo’s release and the IRS’s sporadic denial of 501(c)(3) applications, even as others still purport to operate as non-profits.[23] The result is a “complicated, often murky”[24] legal landscape that has left the NIL industry in a no-man’s land.[25] Clearly, binding law is needed to prevent continued abuse of tax-exempt status while providing unambiguous tax structuring guidance for NIL collectives.

A Path Forward

In 2022, Senators John Thune and Ben Cardin introduced the bipartisan Athlete Opportunity and Taxpayer Integrity Act, which would bar 501(c)(3) tax exemptions for NIL collectives nationwide.[26] Passing this law would expedite the process of bringing outstanding nonprofit NIL collectives to heel in light of the NCAA’s hesitation to clarify its guidelines. The bill eschews the IRS’s tedious case-by-case testing of each NIL collective and strips tax-exempt status from organizations that primarily exist to shunt money to college athletes—as all NIL collectives do. As summarized by Senator Thune, “[t]his common-sense legislation would prohibit these entities from inappropriately using NIL agreements to reduce their own tax obligations.”[27]

The NIL industry has emerged as a highly lucrative and unregulated enterprise. NIL collectives have successfully gamed the NCAA’s and IRS’s insufficient guidelines to undeservedly claim non-profit status for the purpose of paying college athletes with tax-free dollars. To prevent continued abuse and provide legal clarity for this burgeoning industry going forward, Congress should pass the Athlete Opportunity and Taxpayer Integrity Act and deny tax-exempt status to all NIL collectives.  

Michael Wahl is a third-year honors student at Regent University School of Law. He is a Senior Editor of the Regent University Law Review and an Executive Board member of the Alternative Dispute Resolution Board. You can find him on LinkedIn here.

References:

[1] See NCAA v. Alston, 594 U.S. 69 (2021).

[2] Cheyanne Mumphrey et al., Money in NCAA Sports Has Changed Life For a Few. For Many Athletes, College Degree Remains the Prize, Assoc. Press (Nov. 8, 2024), https://apnews.com/article/ncaa-sports-nil-athlete-pay-882646e1cfab9b093e1f2f1ab6f15d7f.

[3] Tim Shaw, The Long Read: Tax Implications of College Collectives, NIL Deals, Thomas Reuters (Oct. 6, 2022),  https://tax.thomsonreuters.com/news/the-long-read-tax-implications-of-college-collectives-nil-deals/.

[4] Ross Dellenger, IRS Says Donations Made to Nonprofit NIL Collectives Are Not Tax Exempt, Sports Illustrated (June 9, 2023), https://www.si.com/college/2023/06/10/irs-name-image-likeness-collectives-not-tax-exempt.

[5] Shaw, supra note 3.

[6] Id.

[7] Id.; see I.R.C. § 501(c)(3).

[8] James Beavers, Most NIL Collectives Do Not Further a Sec. 501(c)(3) Exempt Purpose, Tax Adviser (Sep. 1, 2023), https://www.thetaxadviser.com/issues/2023/sep/most-nil-collectives-do-not-further-a-sec-501c3-exempt-purpose.html.

[9] Thalia Beaty, Unintended Consequences: How NIL in College Sports Has Raised Questions About Nonprofits, Assoc. Press (July 29, 2022), https://www.ap.org/news-highlights/spotlights/2024/unintended-consequences-how-nil-in-college-sports-has-raised-questions-about-nonprofits/.  

[10] See id.

[11] Id.; see I.R.C. § 170.

[12] Beaty, supra note 9.

[13] Shaw, supra note 3.

[14] Id.

[15] Beaty, supra note 9.

[16] Ross Dellenger, Inside the NIL Battle That is Splintering the SEC: ‘We’re All Money Laundering’, Sports Illustrated (May 30, 2023), https://www.si.com/college/2023/05/30/sec-meetings-nil-athlete-employment-collectives-hot-topics.

[17] Id.

[18] Id.

[19] Memorandum from Lynne A. Camillo, Deputy Assoc. Chief Couns., to Stephen A. Martin & Lynn Brinkley, Whether Operation of an NIL Collective Furthers an Exempt Purpose Under Section 501(c)(3) (May 23, 2023).

[20] Id.

[21] Id.

[22] See John McKinley, NIL Organization Denied Tax-Exempt Status, J. Accountancy (Nov. 1, 2024), https://www.journalofaccountancy.com/issues/2024/nov/nil-organization-denied-tax-exempt-status.html (citing PLR 202428008).

[23] Beaty, supra note 9.

[24] Id.

[25] Dellenger, supra note 11.

[26] S.4969, 117th Cong. (2022).

[27] Shaw, supra note 3.