Thune Supports IRS Push to Tax Collectives Profiting on Student-Athletes

The NCAA started letting student athletes make money by making endorsements with their names, images, and likenesses in 2021. Of course, it takes some hustle for individual students to seek out, negotiate, and manage such deals, so naturally, some middlemen have sprouted to help athlete-endorsers and get a piece of the NIL pie.

Some of these firms, called NIL collectives, admit they are plain old businesses seeking profit, but some masquerade as non-profits to entice donors and avoid taxes (translation: exploiting young student-athletes isn’t enough; these groups also want to exploit taxpayers). On June 9, the Internal Revenue Service issued a memo saying that NIL collectives aren’t focused serving some charitable public interest that deserves a tax break; they are mostly just helping students (and themselves) make money:

Because the term “NIL activity” covers a range of activities, such as social media marketing, camps, and speaking engagements, among others, the public benefit from those activities will necessarily vary. However, the public benefit from those activities is also accompanied by a private benefit to the student-athletes, who are compensated for engaging in each activity. Many collectives pay, or intend to pay, to 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 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 [Linda Camillo, IRS Deputy Associate Chief Counsel, Memo 2023-004, on “Whether Operation of an NIL Collective Furthers an Exempt Purpose Under Section 501(c)(3),” released 2023.06.09].

Senator John Thune (R-South Dakota) seconds the IRS’s effort to enforce tax law and reminds us that he and Senator Ben Cardin (D-Maryland) proposed a bill last September to deny NIL collectives tax-exempt status. That bill has seen no action in Congress.

The Thune/Cardin bill may not need action; the IRS memo alone may shut down the NIL collective racketeers:

“There’s a high likelihood we will cease operations, within the next period of months,” said Gary Marcinick, founder of the Cohesion Foundation, a collective formed to connect Ohio State athletes with charities for name, image and likeness (NIL) promotional deals. “In our space, we are donor driven. … It’s not only a game changer, it’s a game ender, I think, in the vast majority of cases.”

…”The big question is whether this memo will spook donors enough that they will no longer want to donate to nonprofit collectives, and schools enough that they tell donors not to donate to them,” said Mit Winter, a sports law attorney in Kansas City, Missouri, who tracks issues in the college athlete marketplace.

…”The only question was to what extent would the IRS would put its thumb on the scales. It was pretty clear many of these organizations were pushing the boundaries,” said Brian Mittendorf, an accounting professor at Ohio State with a concentration on nonprofits.

“The IRS memo put a line in the sand,” Mittendorf said. “Paying college athletes is not a charitable purpose. Paying an athlete and doing some charitable work on the side, is also not a charitable purpose.”

The IRS warning should not have come as a surprise, said Jason Belzer, founder of Student Athlete NIL, which operates several commercial collectives for schools across the country.

“All of these nonprofits were paid solely for paying student athletes, not for doing the charitable work,” Belzer said. “That’s racketeering” [Jim Vertuno, “IRS Throws a Chill into Collectives Paying College Athletes While Claiming Nonprofit Status,” AP, 2023.06.30].

College sports is big business. Senator Thune evidently agrees with the IRS and me that everyone making profits doing that business should pay their fair share of taxes.