Summary

The IRS recently advised that many organizations that develop paid name, image, and likeness—known as NIL—opportunities for college student-athletes are not eligible for tax-exempt status under Internal Revenue Code Section 501(c)(3).

The Upshot

• The legal advice memorandum addressed an ongoing debate as to whether NIL organizations can receive tax-exempt status and whether contributions to such NIL organizations are deductible.
• The IRS determined that the private benefit provided to student-athletes by the NIL organizations is in many cases beyond the incidental private benefit that the law allows.
• Prior to the ruling, the IRS had granted tax-exempt status to dozens of NIL organizations.

The Bottom Line

The ruling gives some clarity in the NIL landscape because many NIL organizations will no longer be able to offer tax-deductible donations, although uncertainty remains for the existing NIL organizations.

In a non-binding generic legal advice memorandum (GLAM), the IRS finally weighed in on the ongoing debate as to whether organizations that develop paid name, image, and likeness (NIL) opportunities for collegiate student-athletes can receive federal tax-exempt status as a 501(c)(3) organization. These NIL organizations (the NIL Collectives) often are incorporated as state nonprofit entities and have applied for, and at times received, recognition of tax exemption under section 501(c)(3) of the Internal Revenue Code (section 501(c)(3)).

A typical nonprofit NIL Collective pools contributions from donors, identifies and partners with local and regional charities to develop paid NIL opportunities for student-athletes of the university for which the collective is created to support, and pays compensation to the student-athletes in exchange for their NIL. The paid NIL opportunities for student-athletes typically include promoting the collective or a partner charity through a video or social media post, attending a fundraising event, autographing memorabilia for the collective or a partner charity to sell, or participating in or leading a sports camp.

The rise in popularity of NIL Collectives resulted in the Internal Revenue Service Office of Chief Counsel issuing the GLAM (Memorandum Number AM 2023-004) on June 9, 2023, setting forth the IRS’s position that many NIL Collectives cannot receive tax-exempt status.

Section 501(c)(3) provides an exemption from federal income tax for organizations that are organized and operated exclusively for one or more of the exempt purposes set forth in section 501(c)(3): “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”

An organization will not be considered to be operated exclusively for tax-exempt purposes unless it serves a public rather than a private interest. However, an organization may serve both public and private interests if the private benefit is clearly incidental to the overriding public interest. Prior to this memorandum, dozens of NIL Collectives had been granted tax-exempt status from the IRS claiming that they satisfy an exempt purpose under section 501(c)(3).

The IRS Office of Chief Counsel said in the GLAM that the private benefit provided to student-athletes by the NIL Collectives is in many cases far beyond the incidental private benefit that the law allows. Further, the “[s]tudent-athletes generally benefit from a nonprofit NIL collective through the compensation paid by the collective for use of their NIL. This private benefit is not a byproduct but is rather a fundamental part of a nonprofit NIL collective’s activities.”

The GLAM provides some clarity in the NIL landscape in that many NIL Collectives will no longer be able to offer tax-deductible donations. However, many NIL Collectives already in existence and new NIL Collectives that are being formed will need to consider the implications of the GLAM and may need to consider alternatives to the 501(c)(3) structure that many NIL Collectives have in place.

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