Recently, the IRS Office of Chief Counsel issued a generic legal advice memorandum (GLAM) AM 2023-004 that concludes that an NIL collective that develops paid NIL opportunities for student athletes may be operating for a substantial nonexempt purpose – serving the private interests of student athletes – which is more than incidental to any exempt purpose furthered by the activity.
NIL policy allows college student athletes to receive compensation for their accomplishments and personal brand without violating National Collegiate Athletic Association (NCAA) limitations on player compensation. Student athletes may receive compensation from the use of their name, image, or likeness, including endorsements, autographs, clothing apparel, charitable appearances, training camps, and other business partnerships. However, there must be a quid pro quo for the compensation received. An NIL collective is an organization, typically formed by boosters or other supporters of a college athletic program, to develop, fund, and facilitate NIL opportunities for student athletes. The NIL collectives can be independent organizations or can be affiliated with existing tax-exempt organizations, which provide support to the affiliated university or athletic program.
In 2020, the U.S. Supreme Court unanimously affirmed a district court’s ruling in NCAA v. Alston, and the NCAA subsequently adopted a uniform interim policy on NIL in the summer of 2021, which states that:
The recent IRS guidance addresses whether operation of an NIL collective furthers an exempt purpose under IRC Section 501(c)(3). The GLAM focuses on the private benefit doctrine and when an organization is operated for private benefit rather than public interests, and thus does not qualify for tax-exempt status. The GLAM reinforces the tax law under IRC Section 501(c)(3) and the IRS’ position that private benefit is permissible only if it is both qualitatively and quantitatively incidental to the charitable organization’s exempt purpose. The GLAM also reaches the conclusion that the private benefits conferred by NIL collectives on student athletes are, in many cases, neither qualitatively nor quantitatively incidental to the organization’s exempt purpose. While a GLAM may not be cited as precedent, it does provide a general indication of the IRS’ current views on the issue.
Crowe observation
NIL collectives that have received a tax determination letter as an organization described in IRC Section 501(c)(3) should evaluate their current and planned activities, including payments to student athletes, to determine if they provide private benefits that are more than incidental to the organization’s exempt purpose. NIL collectives also should determine if additional steps should be taken to clarify their standing with the IRS, donors, and potential donors.
Donors should understand that charitable contributions to NIL collectives, even those with a tax determination letter recognizing it as a public charity as described in IRC Section 501(c)(3), might be subject to further scrutiny, and contributions made after the release of AM 2023-004 no longer may be tax deductible under IRC Section 170. While donors generally may rely on Publication 78 data contained in the IRS’ Tax Exempt Organization Search Tool when determining the deductibility of contributions, Revenue Procedure 2018-32 states that “the safe harbor is unavailable if the grantor or contributor had actual knowledge of the loss of qualification or after the date of the public announcement that the organization ceases to qualify.” As a result, donors should discuss the potential risks for deducting charitable contributions to such entities with their tax advisers.
