Tuesday, January 31, 2023

Name, Image and Likeness (NIL) Nonprofit Organizations

I am glad student athletes can be paid for their game, but I swear, the whole NIL infection has pretty much ruined everything from a fan standpoint.  Before NCAA v. Alston, when everybody made money except players, and players were locked into their team (economically, if not legally) like indentured servants or baseball players before free agency, you could watch a kid for at least three years.  You kinda felt like you "knew" the kid and the team, and that feeling contributed to your rabid affinity for your team.  But the market is amoral and doesn't care about your stinking feelings!  So I guess we better get used to student athletes acting just like the head coaches who condemn NIL money have been acting for years.  Go where the money is, forget team loyalty.  


Anyway, here is an excerpt from an interesting Forbes article regarding NIL money being funneled through nonprofit organizations:

Across the country, groups known as collectives have sprung up to channel money to high school and transfer-willing superstars looking to finally get their cut of the multibillion-dollar enterprise that is college athletics. Some of the groups — at least five by Forbes’ count — do so as IRS-approved, tax-exempt organizations. Rather than stuffing paper bags with cash in the hopes of luring a can’t-miss prospect to campus, donors can make “charitable” gifts that, after a bit of transmogrification, are every bit as tax deductible as a check sent to St. Jude. Think of it. For decades, college football’s legions of followers have shown they’re not only willing to pay for game tickets and jerseys, they’ll fork over cash just for the remote possibility their team might beat State, or whomever their rival is, with no other return on investment expected.

That’s where non-profit collectives come into play. “The primary purpose for the tax-exempt collectives was to enable individuals to make tax-deductible charitable contributions,” Larry Mohr, a tax partner at Baker Tilly, told Forbes. “The key with the tax-exempt organizations is making sure they have a charitable mission.” Rather than raising money from the local car dealership or fireworks store, it’s coming from donors. But there’s a rub. For a collective to be a nonprofit, contributions can’t go directly to players.

The workaround involves a bit of theater. Donations to the nonprofit collective are said to be a gift to a charitable organization (which may or may not be directly affiliated with the collective itself). But rather than, you know, give the money to the charity to do its good deeds, the money is earmarked to pay players to, at least on paper, serve as fundraisers. The arrangement leads to a whole host of other questions. Unlike a business, charities can’t pay people whatever they feel like. To keep their tax-free privileges, charities must pay compensation considered “fair value.” And if players are essentially being paid to do charitable work, is it even charity? Stepping afoul of either guideline could put the player and the charity in jeopardy with the IRS.

“A commonly cited example of an appropriate payment is the payment of a ‘fair market value’ appearance fee at a fundraiser for a nonprofit organization,” attorneys Tom Molins and Ethan Sanders from Stinson LLP told Forbes in an email. “On the other hand, just paying a student-athlete a large sum to sign autographs may not be viewed as fulfilling a collective's charitable purpose. Similarly, paying student-athletes to donate their time working at a soup kitchen or homeless shelter probably will also not suffice. While those are clearly charitable endeavors, paying a student-athlete to do volunteer work is really not serving a public good that justifies payment.”

Something stinks, alright, but I think both points made in the article are incorrect and I sent a note to the author about it.  Here is the email I sent:

I just finished reading your interesting article “Looking for A Tax Break?  Buy Your Alma Mater Its Next Football Star.”  A few important quibbles:  (1) Actually, charities can indeed pay employees whatever they want.  That is, charities can pay “going rate,” and they are allowed to use for-profit business to determine going rate.  That’s why the head of Red Cross or some big nonprofit hospital can earn as much as the head of American Airlines or a for profit hospital.  So if the going rate for celebrity endorsements – broadly defined – is $13 million, a charity hiring a college football or basketball player to endorse it can pay whatever for-profits would have to pay for the same endorsement from a pro football or basketball player.  (2) People who work for charities – even just to appear at a “volunteer event” – are entitled to be paid the “going rate.” 

Once these two issues are understood, the only real (and real big) issue in your article is whether the charitable collectives are operating for a “public” rather than “private” purpose.  Clearly, there is a strong legitimate question whether these organizations deserve or qualify for tax exempt status.  I don’t think the article makes this point strong enough though it does quote a practitioner who says “charitable mission is key.”  And even that is a bit imprecise.  A hospital, for example, that dispenses health care might be deemed charitable, but if it does not distribute its beneficial impact to a broad swath of people, without regard to ability to pay in some instances, it is operating for a private purpose (that of those who can pay) rather than a public purpose.  It’s all right there in the easily accessible, fun to read (oh boy, oh boy!) tax regulations.  The collectives are likely operating for private benefit and therefore not entitled to charitable tax exemption. 

Besides, donors can get a trade or business expense deduction for the amount paid for NIL licenses, easy enough, and with a little creative or not so creative planning (form an LLC that does "something" business, and pay the kid to use his or her pic on a billboard or mailer!)  I am not quite clear what benefits are derived from funneling the money through a nonprofit but there must be something there because according to the article, two senators -- a Democrat and a Republican -- have sponsored a bill that would deny the charitable contribution deduction for NIL payments.  Here is how the bill was described in the Senators' press release:

“In this new NIL era, we want to ensure that the opportunities available for student athletes to benefit from their own name, image and likeness are protected,” said Senator Cardin. “We also have an obligation to protect taxpayer funds, which means that charitable deductions should be reserved for charitable activities. Purposefully blurring the line between private expenses and charitable contributions dilutes both these efforts.” 

“College athletes have the ability to benefit from opportunities related to their own name, image, and likeness, but outside organizations and collectives should not be able to write contributions off their taxes that are used to compensate athletes,” said Senator Thune. “This common-sense legislation would prohibit these entities from inappropriately using NIL agreements to reduce their own tax obligations. These basic taxpayer guardrails would protect athletes, strengthen NIL, and uphold the responsible stewardship of taxpayer dollars.”   

The bill proposes a new IRC 170(p).  Here is the gist of it:


‘(1) IN GENERAL.—No deduction shall be allowed for any contribution any portion of which is used by the donee to compensate 1 or more secondary or post-secondary school athletes for the use of their name, image, or likeness by reason of their status as athletes.

 (2) EXCEPTION.—Paragraph (1) shall not apply to any contribution made directly to an organization which is an eligible educational institution (as defined in section 25A(f) (2)).’’

I suppose a nonprofit can be structured to work, as suggested in this interesting On3 NIL article on the topic:

Winter says there is a way collectives can operate within the 501(c)(3) world, especially if the groups are paying the student-athletes for work that is serving a charitable purpose. For example, Winter said paying a student-athlete fair-market value to make an appearance on behalf of the charity at a fundraiser would probably “pass muster.” “But if you’re just paying guys for serving soup, I don’t see how that necessarily aligns with the charitable mission of the collective,” Winter said. “How does that serve the public good by paying to do volunteer work?”

Sure it works, even if you pay a celebrity to serve soup.  The celebrity is paid for the association of her name, image and likeness with the charity while serving soup.  Not for serving soup!  The celebrity endorsement need only be reasonably conducive to the accomplishment of the charitable purpose, it seems to me.  A celebrity endorsement -- like a commercial or billboard featuring a college athlete asking for donations to Save the Children or Ronald McDonald House -- seems reasonably conducive.  Maybe the issue is whether exempt organizations should even be paying for celebrity endorsements, particularly when the payment for the endorser is millions more than the cost of the soup.  Ahh, yes, now we have the private benefit issue cornered.  Read Judge Posner's opinion in United Cancer Council for an explanation of the private benefit issue when we suspect that the costs of charitable operations outweighs the charitable benefits derived by several multiples.  Anyway, all of this gnashing of teeth makes me ask the question, why?  What is the benefit derived from using a nonprofit? 


darryll jones





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