IRS memo: Nonprofit NIL collectives are not tax exempt

Since NIL collectives started populating the college athletics landscape in the summer of 2021, there has been ongoing debate if collectives that have received 501(c)(3) status from the Internal Revenue Service can accept tax-deductible donations.

The IRS appears to have taken a stance.

In a 12-page memo released from the office of the IRS Chief Counsel on Friday, the revenue service believes donations made to nonprofit NIL collectives are not tax exempt. Sports Illustrated was first to report the news.

Dated May 23, the memo has started to make its rounds through NIL collective circles.

“It is the view of this Office that many organizations that develop paid NIL opportunities for student-athletes are not tax exempt and described in section 501(c)(3) because the private benefits they provide to student-athletes are not incidental both qualitatively and quantitatively to any exempt purpose furthered by that activity,” the memo states.

Collectives are groups of boosters that pool funds from a wide swath of donations to help create NIL deals for student-athletes. There are more than 200 collectives across the nation, with roughly 80 claiming nonprofit status. Accepting tax-deductible donations can make a significant difference when dealing with top-level donors, who would prefer to write off any contributions come tax season.

Some of the most aggressive collectives have applied and been deemed as 501(c)(3) organizations by the IRS. That does not mean, however, that the IRS has to sign off on their activity. Many of the nonprofit collectives in the space pay athletes for their work with charities, whether that is through civic work or promotion on social media.

“Step one is getting approval from the IRS,” Katie Davis, a practice lead for higher education and collegiate athletics at CPA firm James Moore & Co., previously told On3 said. “But then, they’re watching and monitoring. You have to go through annual reporting to say, ‘Yes, OK, I am actually operating with a charitable intent.’”

Speaking with a few anonymous Power 5 collectives on Friday night, the reaction was mixed. One organization immediately dubbed it as bad news, while another was unfazed.

“I don’t see how this would be possible, and if it is, no big deal,” Brian Schottenstein from the Ohio State-driven The Foundation said. “We will just have our collective setup as a LLC where nobody is making a profit where the others are.”

Nonprofit collectives have morphed recently, too. Back in February, Texas A&M announced the 12th Man Foundation — a nonprofit — had created the 12th Man+ Fund to provide NIL opportunities. The entity appears to be acting on behalf of the institution, which is against the NCAA’s policy. Texas A&M is believed to be the first school whose official athletic booster organization is directly fundraising for NIL opportunities.

There has been a rush from institutions to create similar entities in recent weeks. Friday’s news could put that movement on pause.

The argument over collectives accepting tax-deductible dollars became such a major conversation that U.S. Sens. John Thune (R-SD) and Ben Cardin (D-MD) introduced a new piece of NIL legislation in September.

“Many of these collectives that have popped up with a mission of 501(c)(3)s are simply looking for a way to launder money,” Jason Belzer, CEO of Student Athlete NIL, which manages the day-to-day operations of several successful collectives across the country, said. “They think they can get around the IRS. Somebody will go to jail for wire fraud because they think they are going to be able to get around the rules of what the IRS is trying to do. Great, you have a 501(c)(3) designation. But it doesn’t suddenly give you the opportunity to pay a student-athlete $100,000 and you give somebody a tax deduction on it.”

Some collective leaders when challenged about their 501(c)(3) turned to the impact athletes can have on their communities. Collectives have pointed towards the groups they’ve supported, such as YMCAs, Big Brothers Big Sisters groups, cancer research and programs focused on ending gun violence.

On3 will have more throughout the weekend on this developing story.