An NIL collective is a group of boosters, donors, and community members (fans) or the like that contribute financial resources into a pool for the purpose of developing paid name, image, and likeness (NIL) opportunities for their preferred university’s student-athletes. Some collectives have for-profit arms and nonprofit arms. NIL collectives have structured their organizations to receive tax-exempt treatment from the IRS, although this was recently called into question when the IRS released a memo on the issue.
A nonprofit collective differs from for-profit and not-for-profit organizations by pooling the same resources and then identifying and partnering with local and regional charities to develop the NIL opportunities previously referenced. The nonprofit organizations claim tax-exempt status under section 501(c)(3) of the Internal Revenue Code. The nonprofit collectives operate to serve two purposes: 1) to raise awareness and support the mission of the collective and/or its charitable partners and 2) to compensate student-athletes for use of their NIL in the collective’s activities.
It is important to note that organizations can be “not-for-profit” businesses without receiving tax-exempt treatment by the IRS, which is reserved for “nonprofit” organizations. The main distinction between the two is the deductibility of donations from individual donors. Donors can “write off” donations to nonprofit organizations from their individual taxable income, while donors cannot from contributions made to not-for-profit—but not exempt—organizations.
How to Determine Exempt Status
The number one question to consider when discussing the tax-exempt status of nonprofit NIL collectives is whether the collective furthers an exempt purpose under section 501(c)(3). To answer this question, the operational test and the private benefit doctrine must be used. First, the collective is only operating exclusively for an exempt purpose if it engages primarily in activities that further the exempt purpose. Second, the collective must serve public, rather than private interests to be operating for an exempt purpose.
When determining whether the collective’s activities further an exempt purpose, the purpose of those activities is more important than the nature of them. Collective activities can be engaged in for more than one purpose (a “dual-purpose” activity). However, just one nonexempt purpose, if substantial enough to the collective’s activities, will mean the collective cannot claim exempt status no matter how many truly exempt purposes are present. Thus, to accurately evaluate whether the collective qualifies for exemption under section 501(c)(3), it is important to determine whether the collective’s activities further an exempt or nonexempt purpose, or both. If it is both, then the nonexempt purpose must be analyzed to determine if it is purely incidental to the exempt one, so the collective qualifies for exemption anyway.
Private Benefit Doctrine
The collective’s activities must be assessed to determine if there are any private benefits that result from them. If a benefit results from the collective’s activities that is incidental to the organization pursuing its exempt purpose, it will not usually cause the organization to serve private interests. But, if an organization serves both public and private interests, the private benefit must be clearly incidental to the public interest. This private benefit must also be incidental both qualitatively and quantitatively.
Being Qualitatively and Quantitatively Incidental
Being qualitatively incidental means the private benefit discussed above must be strictly a byproduct of the collective’s activity. In other words, the activity must be clearly related to the accomplishment of the exempt purpose and the exempt purpose would have to be impossible to accomplish without the private benefit of the activity. Another word for this benefit is a direct or intentional benefit.
On the other hand, being quantitatively incidental means the private benefit must be clearly substantial compared to the public benefit resulting from the activity. Revenue Ruling 76-152 provides a great example of being quantitatively incidental. The organization in this case was created to promote community understanding of modern art trends by exhibiting and selling local artists’ work at an art gallery. The organization then retained ten percent of all sales then gave ninety percent to the artists. However, the revenue ruling concluded that giving ninety percent over to the artists is such a substantial benefit because it is not merely incidental to their stated, exempt purpose(s).
Applying the above concepts to NIL collectives, it is believed (at least in the eyes of the IRS) that the benefits gained by private interests will more often than not be incidental or more both qualitatively and quantitatively. Student-athletes are beneficiaries of the collectives’ activities, which benefits private interests. Then, being compensated (i.e., the benefit) for their NIL licensing rights is a fundamental aspect of the nonprofit NIL collective rather than an incidental byproduct. Thus, most nonprofit NIL collectives neither pass the operational test nor the private benefit doctrine and cannot be considered tax-exempt under section 501(c)(3). Without treatment as a nonprofit and tax-exempt organization, donations to a collective will not be deductible for individual donors.
Collectives and donors should consider working with counsel to determine the tax status of donations to NIL collectives and tax treatment of NIL activity.