The Rise and Fall of Collectives?
Today's Friday Feature dissects the recent IRS memo and analyzes possible effects on collective support going forward.
Breaking Down IRS Memo
Earlier this month, the IRS released to the public an internal memorandum: Whether Operation of an NIL Collective Furthers an Exempt Purpose Under Section 501(c)(3). This is not the first time that a federal entity has questioned the legitimacy of 501(c)(3) collectives. Back in September of 2022, Senators John Thune and Ben Cardin introduced the Athlete Opportunity and Taxpayer Integrity Act. The bill, if passed, would prohibit individuals and organizations from using the charity tax deduction for contributions which compensate student-athletes for use of their Name, Image, and Likeness. In light of the recent IRS memo, this bill seems unnecessarily redundant.
The IRS memo provides a brief conclusion to the issue: “An organization that develops paid NIL opportunities for student-athletes will, in many cases, be operating for a substantial nonexempt purpose—serving the private interests of student-athletes—which is more than incidental to any exempt purpose furthered by the activity.” In short, because 501(c)(3) collectives often seek to serve the student-athletes they are compensating, they are not operating as charitable organizations should.
The Matador Club and non-profit collectives
The Matador Club is a non-profit, 501(c)(3) collective focused on the well-being of Texas Tech student-athletes. In 2022, the Matador Club signed 100 football student-athletes to $25,000/year deals. In May of this year, the Club announced that they were expanding their NIL budget for the football team, now compensating 120 football student-athletes with $25,000/year deals. This takes their total annual contribution to $3,000,000.
The Matador Club has also signed all Texas Tech Softball student-athletes to $10,000/year deals, and all Texas Tech Baseball student-athletes to similar five-figure deals, although the specific amount remains undisclosed.
Despite the Club’s efforts to “make a positive impact on local charities,” it seems unlikely that, as a whole, the collective would pass the strict scrutiny announced by the IRS. According to the IRS’s operational test, even a single nonexempt purpose (such as compensation given to student-athletes for use of their NIL) will preclude exemption [under 501(c)(3)] regardless of “the number or importance of truly exempt purposes.”
The Matador Club is far from the only collective purporting to operative as a non-profit. The Michigan State-focused This is Sparta! collective, Tulane-focused Fear the Wave collective, and Notre Dame-focused Friends of the University collective are a few of the more than dozen current collectives operating as 501(c)(3) collectives.
NCAA President Baker Agrees
In a recent interview, NCAA President Charlie Baker agreed with the assessment made by the IRS. More on Baker’s statement is available in Monday’s newsletter HERE. In addition to supporting the memo put forth by the IRS, Baker revealed that the NCAA NIL working group is assembling a more strict framework around rules for student-athlete compensation. These rules would amend, and in other areas replace, the current temporary NIL policy.
What’s Next for Collectives?
In light of the IRS memo, several non-profit collectives paused or slowed operations, including limiting donations. Others, who believe that their charitable organization qualify for tax deductions, have operated as they did previously.
One associate athletic director felt vindicated by the IRS ruling: “I’m glad we didn’t go with the 501c3 model. What I tell my donors is [...] What charity are you donating to? You’re not. You’re lining kids’ pockets to keep them at your school. That’s not a charity. That’s a way to get around tax laws which leads to tax evasion and opens a whole different can of worms for donors.”
Corey Staniscia, CEO of the USF-focused Fowler Ave collective, which never operated as a 501(c)(3) tax-exempt organization, feels similarly: “I am not surprised at all by this news. These are not charitable organizations. These are service contracts and rights of publicity commercial organizations. It’s one thing to partner with a 501(c)(3), it’s another to claim to actually be a 501(c)(3). I have been asked more times than I can count why Fowler Ave Collective is not a nonprofit. It was always too risky.”
Offering tax deductions is a sure-fire way for collectives to encourage and attain donations. Without that advantage, donor funding is almost certain to decrease. Additionally, not only could the IRS tax future donations to collectives, but there is even the possibility that they could penalize donors and collectives for past donations made while the collective believed it was properly operating as a tax-exempt organization.
Not only could donor funding shift away from 501(c)(3)-badged collectives to other, non tax-exempt collectives, but it could shift away from collectives altogether. Donations to University Athletic Departments, which are typically used for student-athlete scholarships and facility upgrades, are often tax-exempt. As a result, the IRS memo may shift funding back to the institutions themselves, and away from the collectives that give directly to student-athletes.
Have you checked out OSC’s website?
Head to www.OptimumSportsConsulting.com to find important resources and features relating to all things NIL. These resources include State by State Resources for Admins, Agents and Athletes, including our initial “OSC Summaries” for over a dozen states coming soon.
More to come too, including links to helpful state information- agency laws and information about school policies, as well as seminar/congressional notes, worksheets, and much more!