Why the IRS-nonprofit NIL collective issue is a blast from the past

Within the high-stakes game of college sports recruiting, some 200 donor-driven, school-specific NIL collectives have launched over the last two years, including around 80 that sought and were granted nonprofit status.

That important 501(c)(3) status allows donations from university boosters – funds that ultimately find their way to student-athletes through a bevy of NIL opportunities – to be tax deductible. But now that practice is under scrutiny after an Internal Revenue Service memo, which attracted attention throughout the sports world last week, stated donations made to nonprofit NIL collectives are not tax-exempt because “private benefits they provide to student-athletes are not incidental both qualitatively and quantitatively to any exempt purpose.” Interestingly, NCAA President Charlie Baker told Sports Illustrated on Tuesday that he sides with the “ruling.”

The IRS memo, which casts uncertainty on the future of nonprofit collectives, is new. But the practice of boosters and nonprofit entities commingling to distribute money, in some cases, to tip the scales in recruiting battles is old hat. In the age-old recruiting playbook, there’s one constant: It’s a game of catch me if you can, with schemes hatched by third parties often far ahead of any enforcement apparatus. 

The eras are different: Players can now receive money as part of NIL deals that include a quid-pro-quo. But in many cases the vehicles are the same: entities established as nonprofits to entice boosters to make sizable tax-deductible donations, which in turn are funneled to athletes. At issue is whether a specific nonprofit is performing duties — such as charitable efforts — that legitimately warrant it receiving 501(c)(3) status.

More than 15 years ago, long before the NIL era provided college student-athletes the ability to monetize their brands, under-the-table payments to recruits (in violation of NCAA rules) served as a popular way to steer players to specific schools. The days of sending cash in FedEx envelopes to recruits were long gone, as an increasing number of prominent summer-league basketball programs – many of which wielded outsized influence and control over recruits – sought new, sophisticated ways to channel money to recruits specifically to avoid detection from NCAA enforcement. 

That ushered in a new era, with travel basketball programs being established as nonprofit charities. They were all the rage. Through months-long reporting for a story in The Washington Post, I revealed that the funneling of cash recruiting inducements between colleges and summer-league programs in the form of tax-deductible donations, usually made by college boosters at the behest of a coach, became common. That was according to 11 Division I head coaches – including multiple national title-winning coaches – five prominent travel team coaches and multiple sports agents throughout the country.

‘It is laundering money’

One summer-league coach told me that over the previous decade almost two dozen college coaches, including some from the Pac-12 and Big Ten conferences, had offered to arrange for donations, ranging from $20,000 to $50,000, to his foundation.

“Everyone is doing it,” one prominent travel team coach said. “But if there is a seller, there is a buyer, too. And it involves everyone from agents, runners, college coaches and boosters. [Summer-league] coaches say, ‘This is a better, easier way.’ It may seem right. But ethically it is laundering money. While it is different from handing someone a bag full of cash, the intent is the same.”

Former shoe company czar Sonny Vaccaro, often credited with or blamed for (depending on one’s perspective) creating the modern grassroots basketball ecosystem, called the scheme “brilliant.” He estimated that, in a given year, some 15 colleges arranged for booster donations to summer-league team foundations for recruiting purposes. 

“Why would you remember someone who did not help you, as opposed to someone who did help you?” Vaccaro told me at the time. “The person who gave the money would not give the money unless they thought it helped them. There is no benevolence on this level for saving mankind.”

‘Like buying a raffle ticket’

My reporting identified 45 of the top travel teams in the country and found that at least 30 were set up as nonprofits, according to IRS records. Because tax laws do not require nonprofits to identify their donors, almost all of them didn’t, making documenting the frequency of the practice difficult. There was no way of monitoring how the donations were spent. I reviewed hundreds of pages of tax documents, with some of the most high-profile programs disclosing that they received several hundred thousand dollars per year, which included their shoe company sponsorship dollars.

An IRS spokesman declined to comment at the time on whether the practice violated tax laws. And in interviews with NCAA enforcement staff, officials told me that the nonprofit summer-league team scheme was a particular source of frustration. Because the association could not compel nonprofit travel team programs to disclose donors without subpoena power, establishing a money trail proved next to impossible.

As one enforcement official told me, “We do believe that more than 50% of men’s basketball prospects have compromised their eligibility before they begin college.”

The college coaches, many of whom said they lost recruits because they refused to make donations, spoke on the condition of anonymity because they feared statements would hurt their chances of signing top players. The summer-league team coaches refused to be identified for fear of being ostracized by peers.

“Donating to a foundation is like buying a raffle ticket where the prize is a car,” one of the college coaches said. “If you buy the raffle ticket, it does not mean you definitely will get the car. But if you don’t buy it, you have no chance. The other problem is, if you buy the raffle ticket, you don’t know how many other raffle tickets have been sold. You may have one raffle ticket, and the guy next to you may have bought 30.”

Summer-league coaches are ‘street-smart. The NCAA is book-smart’

A donation merely meant that you were in the game in hopes of landing a player. A prominent college coach, however, said a very large donation usually means the team is guaranteed to land all but the most elite players. “You could spend $75,000 in recruiting or $25,000 to guarantee that you will get a player. What’s the better investment?” said the coach, who added that he had been solicited for donations six times over the previous decade.

Some donations were made more to maintain relationships than to secure players. One summer-league team coach said colleges needed to “neutralize” their surrounding territory by placating relevant programs within their area by making donations. Without this sort of maintenance, schools from outside the area can swoop in and make stronger bids for players. Sometimes money would indeed trickle down to the players or their families, sources said, but other times summer-league program coaches would retain most if not all of it.

One national title-winning coach told me, “It’s something [college] coaches would like to see go away, but we know that if it goes away, [travel team] coaches will just find the next thing to do, the next way around everything. The [summer-league team] coaches are street-smart. The NCAA is book-smart. Who wins that?”

Money to show you are ‘willing to dance’

Former Baylor coach Dave Bliss was found to have solicited boosters for at least $87,000 that was donated to a Houston-based summer-league program and donated $28,000 of his own money to Texas-based programs, according to an NCAA investigation in 2004.

In another instance, the focus was on a high-profile sports agent allegedly seeking influence. A former employee of then-sports agent Dan Fegan (Fegan died in 2018) accused Fegan in a sworn deposition of making donations to at least three summer league programs in exchange for help in landing the players as clients. In a sworn deposition that was part of a 2002 breach-of-contract lawsuit filed in Los Angeles Superior Court, Brian Dyke accused Fegan of making donations to Adidas-sponsored summer basketball programs in an attempt to sign some of their players.

“This is the most clever, best way of doing it,” Vaccaro said in general of the scheme. “There is no hiding. The guy who gave the check has to issue it. The guy who receives it has to deposit it. How they disperse the money is the discretion of the team, which I don’t feel there is anything wrong with. You worked in the shadows prior to this new way of doing it.”

One coach who has reached the Final Four said, “If you’re a young assistant, how are you going to get the [summer-league] coaches to talk to you? How are you going to make your phone call stand out from the rest? It’s something you have to do. . . . If you go to the bar and don’t drink, you don’t get any girls. It’s money to show that you are serious, that you are willing to dance.”

‘Do what you have to do to get the player’

The practice also served as a way to leverage coaches, whose job security hinges on landing – and winning with – top talent. One told me, “As soon as you say, ‘No,’ you are out. You have to do what you have to do to get the player.”

Last decade, the scheme already was evolving to directly involve player parents, thus at times eliminating the middleman (summer-league coach). One prominent college coach pointed to the chair in his office where he said the mother of a recruit once sat and told him she had joined a charity foundation that accepts donations. The coach said he understood the message.

And by 2017, the tentacles of the FBI investigation into the economic underbelly of college basketball extended to ensnare some nonprofit summer-league programs, including the Adidas-sponsored 1 Family, which was based in Orlando.

Whether it’s summer-league basketball programs over the years or donor-driven NIL collectives that are en vogue today, they come in many shapes, sizes and with varying ethical compasses. Not all look to skirt rules or laws. And some claim they have legitimate charitable elements.

But some are more brazen, looking for any edge they can find in an ultra-competitive recruiting landscape. The eras are different. But the gray areas remain. And in some ways, the more things change, the more they stay the same.