In recent years, universities and their donors have organized what are known as “NIL collectives” to develop revenue opportunities for college student athletes’ “name, image and likeness.” The NCAA approved its NIL policy on June 1, 2021, and during the first year of the policy alone, college athletes collectively earned more than $900 million from NIL payments.

Donors to higher education athletics have rallied around these opportunities to make what many thought would be tax-deductible contributions to fundraising entities established by universities to grow college NIL programs. Not so fast, said the IRS in a May 23, 2023 memo: many NIL collectives are not tax-exempt organizations after all.

The problem with NIL collectives, according to the IRS, is that they are organized for a “substantial nonexempt purpose.” In other words, these collectives serve the private interests of student athletes in ways that are more than simply “incidental” to any charitable purpose or public benefit.

Although the IRS issued its recent commentary in a “general legal advice memorandum,” which is non-binding, this development is nevertheless still important in sorting through the tax issues surrounding NIL-related activities. What’s more, the IRS’s May 23, 2023 memo appears to reflect a change of opinion from guidance issued previously. To be sure, the discussion is not over yet.

Regardless of where the law ultimately lands on its treatment of NIL collectives, the IRS’s advice memo is a terrific reminder that public versus private benefit is at the core of an organization's ability to achieve and maintain exempt status. A long-standing IRS doctrine for ensuring that 501(c)(3) organizations truly serve the public good, the concept of “private inurement” pops up occasionally to remind those involved with charitable giving that the IRS takes this seriously. Simply put, tax-deductible dollars cannot be used for private benefit. The whole point of the charitable tax deduction in the first place is to incentivize taxpayers to use their own money to help others. Organizations that attempt to benefit from tax-exempt status while also providing non-charitable benefits to individuals or businesses stand to lose their exemption altogether. You can’t have your cake and eat it too!

As always, YVCF is here to help you navigate charitable giving in all of its forms, whether you are supporting your alma mater, local social services organizations, the arts, or other causes near and dear to your heart.