More Thoughts on NIL Collectives

Sometimes I like to share my own perspective on issues previously covered well by my colleague bloggers. In this case, I’m following up two posts (this one and this one) by my colleague Darryll Jones on IRS guidance issued last May about the possibility of tax-exempt status for so-called NIL collectives.  I also like to take the opportunity to recommend podcasts when they are informative, and in this case there are excellent episodes of The Daily and Taxes for the Masses (discussion of tax-exemption begins at minute 12:50).

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

In my view, the weakest part of the Memorandum is that it doesn’t really explain why NIL payments to student athletes do not potentially serve the charitable purpose of advancing education or amateur sports competitions, even though athletic scholarships presumably would. Instead of distinguishing between merit-based athletic scholarships (that presumably do not create an impermissible private benefit) and NIL payments (that do), it discusses need-based scholarships, which would clearly be permissible because mitigating poverty is a well-established charitable purpose. The comparison between need-based scholarships and NIL payments is kind of a red herring, since it’s so obvious how those two kinds of payments are different from each other. But I know of no authority to support the idea that scholarships based on athletic ability rather than need fail to advance a charitable purpose because they are not need-based. Obviously, NIL payments and athletic scholarships are different from each other, and so this weakness of the Memorandum does not mean that it is wrong. It just fails to explain what is materially different between NIL payments and athletic scholarships when evaluating private benefit to student athletes.

But the fact that NIL payments do not themselves constitute a charitable purpose does not mean that NIL Collectives that pay them necessarily fail to qualify for tax-exempt status. Once a noncharitable purpose (NIL payments) is identified, the collective must determine if its noncharitable activities constitute a private benefit to the student athletes that is too substantial, either quantitatively or qualitatively. Professor Jones’s January 10 post cites a Chronicle of Philanthropy article that describes a new charitable NIL collective (“Hail! Impact”) that purports to qualify for tax-exempt status even though it makes NIL payments to student athletes. The organization’s theory is that so long as 70% of its funds are used for a proper charitable purpose, the 30% of its funds that are used for NIL fees do not create a substantial private benefit, either quantitatively or qualitatively. The article also states that the organization, “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.” In other words, the IRS appears to have blessed this 70/30 split as the proper way to structure an NIL collective. Given that donating money in general support of athletic programs at a tax-exempt college or university has always been treated as a tax-exempt purpose, NIL Collectives could be formed to transfer 70% of all contributions to the university in support of its athletic programs (and presumably could be spent on merit-based athletic scholarships) and the remaining 30% could be spent on NIL payments to student athletes. It remains to be seen how many NIL collectives will choose this path and how many will simply organize as profit-making ventures for their investors, taking as much profit as they can from exploiting the NIL rights of student athletes.

The podcasts I recommended take the position that charitable NIL collectives are an abuse of the Tax Code. But the fact is that under current law, there is nothing impermissible about an NIL Collective making NIL payments to athletes, as long as that activity is insubstantial in relation to its charitable activities. That’s why charities can engage in lobbying activities, for example, or enter into a joint venture with for-profit partners, or pay relatively high (but reasonable!) fees to fundraising firms, or engage in any number of other activities. As many of the Nonprofit Law Professor Blog posts point out, there are areas in which the law of private benefit probably fails to sufficiently protect the nonprofit sector. I definitely agree that a more coherent framework would be preferable to the one we have. But I’m not sure I am persuaded that I should be outraged by tax-exempt NIL collectives. If donors want to give to universities’ athletic programs and “on the side” provide NIL payments to student athletes, I’m OK with that. I think these NIL payments are less likely to undermine the educational objectives of the schools than those made by ordinary for-profit investors, and I even (perhaps naively) think they might be less exploitative of the athletes. If fans want to donate to make payments to student athletes, don’t we imagine, at least as a starting point, that they are might care more about those student athletes than investors who are simply trying to make a buck off a teenagers’ NIL value? Or do I need to go back and re-read my Milton Freidman?

--Benjamin Leff