IRS Internal Memorandum Questions NIL Collectives’ 501(c)(3) Tax-Exempt Status

Section 501(c)(3) provides tax-exempt status for organizations created and operated exclusively for certain congressionally favored purposes (charitable, educational, religious, etc.). Organizations seeking an exemption must engage predominately in activities that further one of these exempt purposes and may participate in other activities only to an “insubstantial” extent. Additionally, such organizations must serve a public, rather than private, interest. Any private benefit must be “clearly incidental” to a more significant public benefit. In the IRS’s view, many NIL collectives do not meet these requirements.

The initial critical inquiry for tax-exempt status is the purpose of the organization. While many NIL collectives organize and participate in charitable and civic activities that benefit the community, the IRS noted that another significant purpose of those NIL collectives is the compensation of student athletes for the use of their name, image, and likeness. According to the IRS, compensation of student athletes is not an exempt purpose and for many NIL collectives that purpose rises to the level of greater than “insubstantial.” Additionally the memo concludes that compensation of student athletes provides a “private benefit” to the students that is not “clearly incidental” to a public benefit. In its view, the “primary beneficiaries” of these activities are the student athletes, not the community. For both of those reasons, the IRS has taken the view that many NIL collectives will not qualify for tax-exempt status.

The IRS recognized that some NIL collectives have already been formed as nonprofit entities and received a favorable determination of tax-exempt status. Those NIL collectives may be protected from retroactive application of this memo. In determining whether a revocation of tax-exempt status will apply retroactively to a given NIL collective, the IRS is likely to consider, among other things, the exempt purposes upon which the exemption was based and the extent to which the NIL collective adhered to such exempt purposes as expressed on its application for tax-exempt status.

Note that the position of the IRS is that the memo does not represent a change in law. Its conclusions are based on longstanding principles that were presumably overlooked when the IRS reviewed applications for tax-exempt status over the last couple of years.

We will continue to monitor this situation for new developments. Please let us know if we can be of further assistance. We are happy to jump on a call to discuss your particular situation.