IRS Takes Skeptical View of NIL Collectives

5 min

In a recent memorandum issued by the Office of Chief Counsel, the Internal Revenue Service (IRS) concluded that many "NIL Collectives" may not qualify as tax-exempt under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Specifically, the IRS suggested that such organizations are not organized and operated exclusively in furtherance of charitable or educational purposes. Rather, by virtue of their functions, they operate in furtherance of the private interests of student-athletes, a group that the IRS suggested does not, in and of itself, constitute a "charitable class."


In 2021 the National Collegiate Athletics Association (NCAA) adopted an interim policy that permits a student-athlete to receive compensation for the use of the athlete's name, image, or likeness (NIL). This NIL policy was a fundamental change to long-standing NCAA practice that precluded any form of monetary compensation being paid to student-athletes. On the heels of the adoption of the NCAA NIL policy, some colleges and universities and/or their supporters formed "NIL Collectives" to facilitate compensatory NIL opportunities for student-athletes. By way of example, an NIL collective might connect student-athletes with local nonprofits that are willing to pay the student-athletes for appearing at a fundraising event or program. While some NIL collectives were formed as for-profit entities, others have sought and obtained recognition from the IRS as organizations exempt from federal income tax under Section 501(c)(3) of the Code. There are an estimated 200 NIL collectives across the country, dozens of which have been recognized as, or are seeking recognition as, Section 501(c)(3) organizations.

The IRS Position

The IRS has concluded that, in many instances, NIL collectives should not be deemed exempt from federal income tax under Section 501(c)(3) of the Code, because they operate in furtherance of the private interests of student-athletes. In order to qualify under Section 501(c)(3), a nonprofit must be organized and operated in furtherance of charitable, educational, or other exempt purposes. If the nonprofit is operated for any substantial nonexempt purpose, it will fail to qualify under Section 501(c)(3), even if such organization also operates in furtherance of permissible tax-exempt purposes.

In the case of NIL collectives, the IRS concluded that the primary purpose of many such organizations is to facilitate student-athletes' monetization of their NIL, which does not constitute a charitable purpose within the IRS definition of that term. As is always the case, the IRS will evaluate the purposes of an organization based on all applicable facts and circumstances, and the IRS noted several factors about NIL collectives that indicate a primary purpose of compensating student-athletes rather than achieving a charitable outcome. Among those factors, many NIL collectives represent to their donors that (a) all or most of a donor's support will go to student-athletes; (b) all student-athletes on a particular team will receive a specified amount; and (c) donors have the opportunity to designate which athletic teams will receive the funds that the donor contributes. Based on these types of factors, the IRS concluded that many NIL collectives operate primarily, or even exclusively, for the benefit of student-athletes, and any resulting benefit to partner charities as a result of the NIL collective's activities is secondary and incidental.


The IRS memorandum did not say that an NIL collective cannot qualify for tax exemption under Section 501(c)(3). Rather, it highlighted the types of factors that will typically preclude such exemption. With that being said, some NIL collectives may be able to obtain or retain Section 501(c)(3) status by demonstrating that (a) their primary purpose is other than compensating student-athletes, or (b) the student-athletes receiving compensation constitute a charitable class. For example, if an NIL collective limited NIL deals to student-athletes based on demonstrated financial need, the student-athletes might constitute a charitable class. Other NIL collectives that focus on pairing student-athletes with charitable organizations might be able to demonstrate that the primary purpose of the collective is to provide awareness, fundraising, and promotional support to charities, such that the benefit to student-athletes is simply a necessary by-product of the manner in which the NIL collective promotes charitable organizations.

For those NIL collectives that operate in the manner described in the IRS memorandum, it is foreseeable that the IRS may seek to revoke their tax-exempt status. This of course has implications both for the organizations themselves and for their donors. NIL collectives that applied for and received favorable determination letters and whose exemption is subsequently revoked as a result of the IRS position may seek to have the revocation apply prospectively, instead of retroactively. At this time, it is unclear whether the IRS might seek to retroactively disallow charitable deductions for contributions made to NIL collectives with 501(c)(3) status. Generally, donations to a charitable organization with Section 501(c)(3) status are deductible until the IRS publishes an announcement that contributions to the organization are no longer deductible.

The IRS memorandum on NIL collectives provides a well-reasoned and substantive discussion of the standards for exemption under Section 501(c)(3) and the private benefit doctrine. We expect that the IRS position in this memorandum will affect many nonprofit NIL collectives. Furthermore, while the memorandum addresses general facts regarding nonprofit NIL collectives, the discussion of the private benefit doctrine is applicable to other scenarios where tax-exempt organizations undertake activities that fundamentally include benefits to individuals who do not constitute a charitable class. As such, while the group of organizations directly affected by the IRS memorandum is relatively small, the principles underlying the IRS analysis apply to a much wider range of scenarios.