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On June 9, 2023, the IRS published a memorandum dated May 23, 2023, wherein IRS representatives cast doubt upon whether NIL collectives qualify for tax-exempt status under Internal Revenue Code Sec. 501(c)(3).  A NIL collective is an organization established, typically by fans or boosters of a higher education institution’s athletic program, to develop, fund, and/or facilitate “name, image, and likeness” (NIL) opportunities for the student athletes of that athletic program.  Many of these NIL collectives are organized as tax-exempt nonprofit entities, which provides donors the ability to deduct contributions made to the organization and shields the organization from paying various federal, state, and local taxes. 

The IRS memorandum concludes that an organization that develops paid NIL opportunities for student-athletes will not, in many cases, qualify for tax-exempt status because the private benefits to student-athletes are not incidental to the exempt purpose of the organization.  The memorandum, which is not technically binding on taxpayers, describes in more detail the IRS’s concepts of what might be “incidental” for this purpose based on existing regulations and case law, separating the analysis into both qualitative and quantitative factors.  As a result, even NIL cooperatives that provide relatively small benefits from a quantitative perspective will need to take note of this guidance.  

Entities involved, directly and indirectly, with NIL opportunities should take note of the IRS memorandum.  While every situation will be examined and treated on its own merits, the fact that the IRS is expressing some level of skepticism on the tax-exempt status of NIL collectives should cause NIL organizations to proceed with caution when they are attempting to use a tax-exempt status.  The loss of such status would result in the loss of the tax deduction for donors – which not only impacts the donor’s tax return but also, where unexpected, can impact the relationship between the higher education institution and the donor (even though the institution and the NIL collective operate as separate entities).  Loss of tax-exempt status also would subject the NIL collective to various taxes that it many have not budgeted for.

If you have questions about this particular topic and how its impacts you organization, please reach out to your Michael Best attorney.