U.S. Sens. Cardin, Thune urge IRS to prevent NIL collectives from obtaining tax-exempt status

U.S. Senators Ben Cardin (D-Maryland) and John Thune (R-South Dakota) sent a letter to the Internal Revenue Service and Department of the Treasury on Monday urging the bodies to strengthen their stance on NIL collectives.

The office of the IRS Chief Counsel released a 12-page memo in early June, which outlined why the IRS believes donations made to nonprofit collectives are not tax exempt. Thune and Cardin both sit on the Subcommittee on Taxation and IRS Oversight. In Monday’s letter, they called for formal guidance.

Back in September, they introduced bipartisan legislation that would prohibit individuals and organizations — collectives — from using the charity tax deduction for contributions to compensate collegiate athletes in the NIL space. Titled the Athlete Opportunity and Taxpayer Integrity Act, the legislation is aimed specifically at collectives that have claimed 501(c)(3) status. Universities would be exempt from this legislation.

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.

“A fundamental requirement for tax-exempt status under section 501(c)(3) is that an organization must operate exclusively for a public benefit, such as a religious, charitable, scientific, or educational purpose,” the senators penned Monday in their letter. “The GLAM [general legal advice memorandum] concludes that ‘many organizations that develop paid NIL opportunities for student athletes are not tax-exempt as 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.’ We agree with this conclusion that many NIL collectives should not be granted tax exempt status.”

Current IRS memo is not actionable

Some of the top-funded NIL collectives have applied and been deemed as 501(c)(3) organizations by the IRS. Many nonprofit collectives compensate athletes for deliverables such as promoting charities on social media. Some have the athletes get out in the community and participate in work with other nonprofits.

Collective leaders have pointed toward the work athletes have done thanks to NIL since the memo was released. That includes efforts benefiting YMCAs, Big Brothers Big Sisters groups, cancer research and programs focused on ending gun violence.

Other organizations who earned 501(c)(3) status have put operations on pause or prepared to shut down, such as the Ohio State-driven collective Cohesion Foundation. President Gary Marcinick recently told The Columbus Dispatch the organization is taking steps to close to avoid further IRS action.

The memo does not give the IRS power to act. For the revenue service to actively strip collectives of their tax-exemption status, a formal guidance would need to be released. Monday’s letter could be a step towards a ruling on the situation.

“The GLAM is an encouraging step forward and more should be done,” the last paragraph of the letter stated. “We respectfully request that your agencies take the next step by adapting the GLAM’s conclusions into more formal guidance, such as a revenue ruling.”