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In a generic legal advice memorandum (GLAM), the IRS Office of the Chief Counsel (AB 2023-004) asserted that many nonprofit organizations operating paid name, image, and likeness (NIL) collectives do not qualify as tax-exempt organizations under IRC Section 501(c)(3) because they more than incidentally further the private interests of student-athletes.

Background

In 2021, the National Collegiate Athletic Association (NCAA) adopted a policy allowing student-athletes to be compensated for use of their NIL without impacting their NCAA eligibility. "NIL collectives" were established by boosters and fans of university athletic programs to develop, fund or otherwise facilitate NIL deals for student-athletes. Some NIL collectives were formed as nonprofit entities and were granted tax-exempt status under IRC Section 501(c)(3). Other NIL collectives were established through a fiscal sponsorship agreement or as an activity or program of an existing IRC Section 501(c)(3) organization.

Nonprofit NIL collectives pool contributions, identify and partner with charities to develop paid NIL opportunities for student-athletes and compensate the student-athletes in exchange for their NIL. The paid NIL opportunities typically include having the student-athletes promote the collective or a partner charity through social media, attend fundraising events, autograph memorabilia for the collective or a partner charity to sell, or participate in or lead sports camps.

According to the IRS, nonprofit NIL collectives often serve two stated purposes: "(1) to raise awareness and to support the mission of the nonprofit NIL collective or of its charitable partners and (2) to compensate student-athletes for use of their NIL in the collective's activities."

Law

To qualify for tax-exempt status as an organization described in IRC Section 501(c)(3), an entity must be organized and operated exclusively for exempt purposes, which may be charitable, scientific or educational. Further, an entity must establish that it is not organized or operated to serve private interests (Treas. Reg. Section 1.501(c)(3)-1(d)(1)(ii)).

Under Treas. Reg. Section 1.501(c)(3)-1(c)(1), an organization is considered to operate exclusively for one or more exempt purposes only if it engages primarily, and not insubstantially, in activities that accomplish one or more of the exempt purposes specified in IRC Section 501(c)(3).

Under the operational test, a private benefit will not preclude an organization from exemption under IRC Section 501(c)(3) if the private benefit "is incidental in both a qualitative and quantitative sense."

To be qualitatively incidental, the private benefit must be a "byproduct of the exempt activity or a necessary concomitant to the accomplishment of the exempt purpose." A private benefit is not qualitatively incidental to exempt purposes when its activities result in a direct benefit to designated or identifiable individuals. To be quantitatively incidental, the private benefit must be insubstantial when compared to the overall public benefit resulting from the activity.

Analysis and conclusion

The IRS concluded that for many nonprofit NIL collectives, the benefit to private interests of student-athletes is more than incidental, both qualitatively and quantitively, to the collectives' tax-exempt purposes and, therefore, the NIL collectives do not qualify for tax exemption under IRC Section 501(c)(3). The IRS based its conclusion on the following facts:

• Compensation to student-athletes is a fundamental part and the primary purpose of many nonprofit NIL collectives' activities, not a byproduct and, therefore, is not qualitatively incidental to those NIL collectives' exempt purposes.
• The private benefit to student-athletes is not quantitively incidental because it is substantial compared to the overall public benefit from the collectives' activities.
• The private benefit to student-athletes is not a necessary concomitant to the nonprofit NIL collectives' exempt purpose of promoting themselves or their partner charities.
• Nonprofit NIL collectives often benefit student-athletes in ways beyond compensation, such as by working out deals with partner charities and providing services such as financial planning, tax assistance, legal advice and personal brand development.
• Student-athletes that benefit from the nonprofit NIL collectives are not a recognized charitable class.

The IRS noted in the GLAM that it may reconsider the exempt status of NIL collectives that have already applied for and received favorable IRC Section 501(c)(3) determination letters. The IRS, however, may be able to grant relief to those organizations under IRC Section 7805(b) to limit the retroactive effect of any revocations of their tax exemption.

Implications

Although the GLAM is not an official IRS ruling and, therefore, cannot be used as precedent, it does reflect the IRS's current perspective on NIL collectives so it is helpful in predicting the IRS's future actions regarding the exempt status of NIL collectives. Accordingly, it is crucial for existing tax-exempt NIL collectives, higher education organizations and athletic boosters that are considering establishing tax-exempt NIL collectives to carefully review the GLAM and take steps to avoid generating more than incidental private benefit to student-athletes. The GLAM leaves open the possibility that an NIL collective could be structured to avoid prohibited private benefit and obtain or retain exemption under IRC Section 501(c)(3) but does not specify how it could do so.

As a result of this GLAM, the IRS may examine and revoke the tax exemption of some NIL collectives and may deny pending applications for exemption of others. The GLAM could also have implications for donors to NIL collectives, who would not qualify to take an IRC Section 170 charitable deduction for a contribution to an NIL collective after its exemption has been revoked or its application for exemption denied by the IRS.

The GLAM does not address possible unrelated business taxable income (UBTI) implications of NIL collectives, higher education organizations or booster clubs that receive contribution income for programs that promote NIL opportunities for student-athletes. Presumably, that contribution income would be UBTI if any exempt purpose furthered by the NIL activity were secondary and incidental to its nonexempt purpose of benefitting student-athletes, suggesting that the activity is not substantially related to exempt purposes.

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RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us here.

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Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor