Wednesday, January 10, 2024

Can Tax Exempt NIL Collectives Even Be A Thing?

“We Are Looked at as a Necessary Evil”

From Sports Illustrated on NILs, August 20, 2022

NIL Collectives are necessary -- they might even be evil -- but only for winning in either case.  They are neither necessary for, nor incidental to the tax exempt educational goals of intercollegiate athletics.  They are just for winning.  From Monday's Chronicle of Philanthropy, this: 

Both Hail! Impact, an NIL organization for the University of Michigan’s Wolverines, and Montlake Futures, which supports athletes at the University of Washington, have philanthropy at their cores. They are both registered 501(c)(3) nonprofits. That’s increasingly rare in the NIL world, especially after the Internal Revenue Service issued guidance in May that NIL collectives may not qualify as tax-exempt if their main purpose is paying players rather than supporting charitable works.  Andy Johnson, co-founder of Hail! Impact, said his group, which launched in April, worked with the IRS and believes it is the first NIL collective to be designated a charity since the agency issued its guidance about donations. When Hail! Impact receives a donation, 70 percent of the gift goes to one of its partner charities in its community and 30 percent goes to the Michigan student athletes who work at events for the charities. Hail! Impact also lets supporters choose to have their donations go only to paying athletes, but those gifts are not tax deductible.

So let me see if I got this right.  The exempt NIL Collectives get "donations" from big donors and use all but 30% to support the programs throughout the athletic department.  Thirty percent is paid to 5 star athletes to keep them winning for the  university.  And the Service blessed this?  What if the Red Cross used 70% of its donations for disaster relief and paid the remainder to a rainmaker, who's name the Red Cross uses to raise more donations, also split 70-30 in the same manner? 

C'mon man!  The 30% diverted to NIL payments isn't just evidence of an unrelated business ya know.  The talent agency part of the operation is not conducted for profit and that seems to preclude its status as a "business."  The NIL part doesn't get a fee for placing the 5 stars in a do-nothing jobs.  Its not a placement agency, its not even a "business" never mind unrelated.  That's how I see it.  I mention that because if it is just an unrelated business, it can be taxed appropriately and perhaps not jeopardize the rest of the organization's tax exemption. Because it might not be a substantial non-exempt purpose. 

But if its private benefit, that is another story.   It has occasionally been asserted that insubstantial private benefit will not jeopardize tax exemption the way even de minimis inurement can jeopardize exemption.  That seems an implicit assertion in the description above.  But that misses the first half of the GCM 39862 analysis articulated years ago:

Any private benefit arising from a particular activity must be "incidental" in both a qualitative and quantitative sense to the overall public benefit achieved by the activity if the organization is to remain exempt. To be qualitatively incidental, a private benefit must occur as a necessary concomitant of the activity that benefits the public at large; in other words, the benefit to the public cannot be achieved without necessarily benefiting private individuals. Such benefits might also be characterized as indirect or unintentional. To be quantitatively incidental, a benefit must be insubstantial when viewed in relation to the public benefit conferred by the activity.

Its not precedent but it sure does make sense.  Schools can accomplish educational goals through athletics without NIL collectives.  They can't win without 'em anymore, but winning ain't the charitable purpose.  NIL Collectives, within or without a larger charity, aren't necessary to the charitable purpose and should disqualify even the larger operation from tax exemption.  

True, the private benefit seems facially tolerable if it is dwarfed by associated public good.  But it has to be a necessary private benefit.  Not what amounts to intentionally gratuitous private benefit.  Would it make any sense that the Red Cross could retain tax exemption because it spends 70% of its donations on disaster relief and intentionally spent "only" 30% to confer a private benefit for no good reason related to disaster relief?  There oughta be a law that says intentional non-qualitatively incidental private benefit precludes tax exemption. And then unintentional but qualitatively incidental private benefit would be tolerated until it becomes just too much (i.e. substantial).  In other words, the substantiality rule applies only when the private benefit is necessary to the charitable purpose. If it is necessary than a little bit won't hurt.  If we need an intermediate sanction, let's do that.  But let's not say that explicit, intentional private benefit unrelated to a charitable purpose is ok if the charity does a whole lot of good stuff otherwise.    

darryll k. jones

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