Analysis of and reflections on recent cases and rulings.

• Author: Beavers, James A.

Exempt Organizations

Most NIL collectives do not further a Sec. 501(c)(3) exempt purpose

The IRS Office of Chief Counsel (OCC) advised that in many cases, name, image, and likeness (NIL) collectives, which provide opportunities for college athletes to be compensated for the use of their NIL, will be serving the private interest of student-athletes, a substantial nonexempt purpose, and not furthering an exempt purpose under Sec. 501(c)(3).

Name, image, and likeness collectives

In 2021, the National Collegiate Athletic Association (NCAA) adopted an NIL policy permitting student-athletes to be compensated for use of their NIL without its affecting their NCAA eligibility. Under the policy, student-athletes may receive compensation for NIL activities under an agreement if the agreement requires quid pro quo (i.e., work for the compensation) and the compensation paid under the agreement is not contingent on enrollment at a particular school or athletic participation or achievement.

Many NIL collectives have been established by boosters and fans of one or more of a university's athletic programs to develop and fund or otherwise facilitate NIL deals for student-athletes. NIL collectives generally are independent of the affiliated university, and, increasingly, multiple NIL collectives support a university's student-athletes.

Nonprofit NIL collectives

In IRS parlance, "nonprofit NIL collectives" are organizations claiming a tax exemption under Sec. 501(c)(3) that develop paid NIL opportunities for student-athletes, regardless of whether the organization engages in other purportedly exempt or nonexempt activities. These collectives pool contributions and develop paid NIL opportunities for student-athletes of the universities they are affiliated with and pay compensation to the participating student-athletes in exchange for their NIL in a manner that is consistent with NCAA regulations.

Some of these collectives tell donors that they will pay anywhere from 80% to 100% of all contributions as compensation for NIL rights, while others state only that their purpose is to create an endowment to support the payments to student-athletes. A collective may provide opportunities for all of a university's student-athletes, but some collectives support only a limited number of identified athletes or athletes in the affiliated university's high-revenue sports. Some nonprofit NIL collectives also assist student-athletes with NIL activity reporting required by state law or university policy. Other collectives go further and assist student-athletes with personal brand development, financial planning, and tax compliance and even offer legal advice.

Sec. 501(c)(3), the operational test, and private benefits

Sec. 501(c)(3) provides an exemption under Sec. 501(a) for organizations organized and operated exclusively for one or more of the exempt purposes. A test has been developed, called the operational test, which is designed to ensure that an organization's resources and activities are devoted to furthering those exempt purposes. Under this test, an organization is not operated exclusively for exempt purposes unless it engages primarily in activities that further an exempt purpose and it serves public rather than private interests.

Under the operational test, the purpose toward which an organization's activities are directed, and not the nature of the activities themselves, determines whether an organization is described in Sec. 501(c)(3). An activity may be engaged in for more than one purpose (a dual-purpose activity). However, a single nonexempt purpose, if substantial in nature, will preclude exemption regardless of the number or importance of truly exempt purposes.

With respect to private benefits, an occasional benefit to private interests, incidental to an organization's pursuing its exempt purpose, will not generally cause the organization to impermissibly serve private interests. However, the private benefit must be "clearly incidental to the overriding public interest" if an organization serves both public and private interests (Rev. Rul. 76-206). A private benefit to non-insiders that is incidental in both a qualitative and quantitative sense will be incidental to the overriding public interest and will not preclude an organization from exemption under Sec. 501(c)(3).

To be qualitatively incidental, the private benefit must be a byproduct of the exempt activity or a necessary concomitant to the accomplishment of the exempt purpose. To be quantitatively incidental, the private benefit...