The Internal Revenue Service (IRS) issued a memo recently suggesting that NIL collectives organized as 501(c)(3) charities and offering tax deductions to donors may actually be violating nonprofit regulations.

In the memo, the IRS Chief Counsel determined that donations made to nonprofit collectives “are not tax exempt” because the intended benefits to the college athletes are “not incidental both qualitatively and quantitatively to any exempt purpose.”

The 12-page memo was posted publicly on the IRS website last month, although it was originally written in May and circulated across the college athletics community as well as collectives.

Collectives are booster-led groups that typically solicit and accept donations to distribute to college athletes through various NIL deals. There are now over than 250 collectives with almost all major FBS schools having at least one. A large number of through had organized as nonprofits and were granted , 501(c)(3) recognition, which allowed them to accept tax-deductible contributions. Donations were solicited with the tax benefits in mind as donors were more likely to be incentivized by the deductibility of their donations.

IRS initially approved the 501(c)(3) nonprofit status for these collectives as many were submitted on the IRS’s Form 1023-EZ, which has limited upfront scrutiny with a more rigorous review in the entity’s fifth year. The number of collectives organizing as nonprofits proliferated forcing the IRS to take a closer look. Almost immediately, it set up a controversy over whether collectives really had a “for profit” or “non-profit” purpose. While these nonprofit collectives did have some charitable purposes, it would be difficult to justify that their primary purpose for existing was not to funnel money to student athletes. At a minimum, the entities may have a qualified purpose but not as a subsection (3) classification – which is the only one allowed to accept tax deductible contributions.

Lynne A. Camillo, the IRS’s Deputy Associate Chief Counsel who oversees exempt organization and employment tax issues, penned the memo with the stated purpose to “address whether developing paid name, image, and likeness (NIL) opportunities for collegiate student-athletes furthers an exempt purpose under section 501(c)(3),1 and to promote consistent treatment of similarly situated taxpayers and sound tax administration.”

Camillo concluded the memo stating, “Consequently, it is the view of this Office that many organizations that develop paid NIL opportunities for student-athletes are not tax exempt and described in section 501(c)(3) because the private benefits they provide to student-athletes are not incidental both qualitatively and quantitatively to any exempt purpose furthered by that activity.”

The immediate next steps are unclear for most nonprofit collectives. To play it safe, nonprofit collectives will likely stop accepting contributions as tax-deductible donations. This would alleviate any further complications under the circumstances until the issue can be sorted out. Some will likely reorganize or amend their purposes to better align to tax rules. It is yet to be seen how donations already made will be treated. 

"Typically, if an entity loses its 501(c)(3) status or donations are disallowed, the donors bear the risk of claiming a deduction for their donations on their tax returns," states sports attorney Andrew Bondarowicz. "So, to play it safe, donors should not claim the deductions as charitable contributions. They may have some leeway if such donations could be recharacterized as business expenses - such as advertising - but it is safe to say these contributions will be scrutinized."