Nonprofit NIL Collectives are All Over the Place - Literally and Figuratively...

I'm updating some of the prior reporting by my co-bloggers, Benjamin Leff and Darryll Jones, on the issue of the exempt status of nonprofit NIL collectives - see Darryl's posts here and here, and Benjamin's response here.    I'm going to shamelessly block quote Benjamin's description here:

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.

With the Men's and Women's college basketball tournaments in full swing,  NIL collectives are again all over the place - literally, in the news.   A March 27 article in The New York Times has a full run down on the collectives of the men's Sweet Sixteen teams.  In it's breakdown, the Times noted that a number of these teams are nonprofit, or maybe are partially nonprofit, or maybe used to be nonprofit.   As I said in the title, they seem to be legally all over the place:

• Illinois ICON Collective is "a nonprofit, which says it gives 90% of donations to athletes for performing charity work."
• Alabama has "both a for-profit and nonprofit side."   The article then quotes a nonprofit board member on how it spends it funds, which the board member later walked back as      it appears to violate NCAA rules.   Oops. 
• Clemson "used to have a large nonprofit collective" which is has now shut down.  The Times goes on to say that  the IRS' position that pay athletes isn't charity, noting that position is "a warning many collectives have seemed to ignore."
• While it is unclear whether Purdue's collective is nonprofit, it has "lined up agreements with three Canadian charities" to work with its center, Zach Edey, who is Canadian.
• Gonzaga and Arizona are fun:  "Gonzaga’s collective is run by the B.P.S. Foundation, a tax-exempt charity that puts donor money at the disposal of for-profit collectives, letting the for-profit entities determine how money is given out. (Arizona also has a collective run by the B.P.S. Foundation.)"

The BPS Foundation angle was new to me, so I tried to look up more information on their website, here,  which says about as close to absolutely nothing as you can while still having a Donate Now button.   Here's a great article/expose from January (quoting another Nonprofit Law Prof Blogger, Phil Hackney) on BPS Foundation, describing it as "[i]n effect... serve[ing] as a donor advised fund for college sports boosters..."  BPS is affiliated with Blueprint Sports and Entertainment, a for profit organization that receives "around" a 10% service fee from the Foundation.  According to that article, BPS Foundation's exemption is from July, 2022 - I note that the Chief Counsel Memorandum discussed above is from May, 2023. (As an aside, can we look at that commercially-related DAF ruling again... ?  I'm not sure the proposed regs cover it.  It's still bad.)

From The New York Times' brief rundown, it seems clear that colleges just don't know what to do with these things, although they seem loathe to give them up (kudos to Clemson on that, I guess).  I have to say that I'm in the Darryll Jones camp in that I can't see how most of these aren't private benefit violations (I can't define it but I know it when I see it - Justice Stewart, or something...).   Back in my practice days, anytime we had private benefit or unrelated income or lobbying approaching double digits, I'd worry about the exclusively test and start talking to clients about remedial action.   I can't think of any other precedent for allowing much over that amount in non-charitable stuff before exemption becomes an issue - there's no good reason why NIL Collectives should be any different.   

With madness, outside of March, eww