GrayRobinson Higher Education Team: IRS Chief Counsel Issues Memorandum on Tax-exempt Collectives

June 13, 2023

By: Scott Cole

On June 9, 2023, the IRS Office of Chief Counsel issued a memorandum addressing the issue of whether collectives who compensate college athletes for their Name, Image, and Likeness (NIL) can still qualify as 501(c)(3) tax-exempt entities.

Are paid NIL opportunities for college student-athletes tax exempt under section 501(c)(3)?

Despite multiple instances of IRS regional offices issuing favorable determination letters to collectives, the memorandum makes it clear that IRS attorneys believe that, in many cases, these organizations do not further exempt purposes as required under section 501(c)(3) of the Internal Revenue Code. More specifically, the IRS stated:

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.

The memorandum describes a common scenario of how nonprofit collectives operate:

A nonprofit NIL collective pools contributions, identifies and partners with local and regional charities to develop paid NIL opportunities for student-athletes of the university for which the collective is created to support, and pays compensation to the student-athletes in exchange for their NIL in a manner that is consistent with NCAA regulations, university policies, and state and local law. Some nonprofit NIL collectives inform donors they intend to pay student-athletes anywhere from 80 to 100 percent of all contributions as compensation for NIL rights, while others state that their purpose is to create an endowment to support the payments to student-athletes…

These NIL activities are usually provided at no cost to partner charities. Nonprofit NIL collectives often serve two stated purposes: (1) to raise awareness and to support the mission of the nonprofit NIL collective or of its charitable partners and (2) to compensate student-athletes for use of their NIL in the collective’s activities.

How does an organization obtain tax-exempt status as a 501(c)(3)?

To obtain tax-exempt status as a 501(c)(3) organization, a nonprofit must be both organized and operated exclusively for one or more exempt purposes set forth in section 501(c)(3) of the Internal Revenue Code. An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in exempt activities. In other words, no more than an insubstantial part of its activities or resources can be used for non-exempt purposes. A single nonexempt purpose, if substantial, will preclude exemption regardless of the number or importance of truly exempt purposes.

How do you determine if a non-exempt purpose is fatal?

To maintain tax-exempt status, any non-exempt purpose must be both qualitatively and quantitatively incidental to its exempt purpose. To be qualitatively incidental, an organization’s activities must not directly benefit designated or identifiable individuals. To be quantitatively incidental, the private benefit must be insubstantial compared to the overall public benefit conferred by the activity.

For example, the memorandum cited Rev. Rul. 76-152, which involved a group of art patrons who formed an organization to promote community understanding of modern art trends by exhibiting and selling the work of local artists. The organization turned over 90 percent of the sales proceeds to the individual artists. The revenue ruling concluded, “Since ninety percent of all sale proceeds are turned over to the individual artists, such direct benefits are substantial by any measure and the organization’s provision of them cannot be dismissed as being merely incidental to its other purposes and activities.” As such, the organization was not operated for an exempt purpose.

Applying that analysis to collectives, the memorandum concluded:

Many collectives pay, or intend to pay student-athletes all funds after payment of administrative and other expenses. Some promise to pay out 80 or even 100 percent of all contributions to student-athletes. For payouts anywhere within this range, the benefit to private interests is substantial by any measure and cannot be dismissed as merely incidental.

Consequently, it is the view of this Office that many organizations that develop paid NIL opportunities for student-athletes are not tax exempt as 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.

How does this memorandum impact the future of collectives seeking exempt status?

It is important to remember that the Office of Chief Counsel’s memorandum has no precedential value and cannot be relied upon by taxpayers. However, it gives insight into how the IRS may respond to future applications for 501(c)(3) status and the position the IRS may take in audits of collectives and donors who attempt to claim a charitable deduction for contributions to a collective.

Whether any particular collective’s activities would survive an audit will depend on the specifics of how the collective is operated. Collectives may want to consider operational changes to bolster their argument that they are engaging primarily in exempt activities. It is clear that distributing 80 percent to 100 percent of the collective’s revenue as payments to student-athletes for services will be problematic.  Collectives may want to broaden the scope of their charitable activities (consistent with its statements in Form 1023) and reduce the percentage of revenues going to student-athletes. A more detailed analysis should be made in conjunction with qualified legal counsel.  

See IRS Office of Chief Counsel Memorandum “Whether Operation of an NIL Collective Furthers an Except Purpose Under Section 501(c)(3) released on June 9, 2023.


Contact GrayRobinson Higher Education Team Leader Scott Cole or a member of the Higher Education Team.