IRS: Some nonprofit NIL groups may not qualify
The rapidly expanding landscape of nonprofit, donor-backed collectives paying college athletes to promote charities has been hit with a potentially seismic disruption.
A recent 12-page memo from the Internal Revenue Service determined that, in many cases, such collectives may not qualify as tax-exempt if their main purpose is paying players instead of supporting charitable works.
If the collectives aren’t tax-exempt, the donations they collect that are used to pay quarterbacks, point guards and pitchers may not be, either.
“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 collectives were born out of the massive change that hit college sports in 2021 when athletes were allowed to earn money in ways that had been prohibited for decades.
Some collectives — and there are dozens of them — are set up as for-profit entities that help connect athletes with endorsement deals as the new market swelled into the millions and NIL became a recruiting tool. Opendorse, a company that partners with schools to help initiate, track and monitor NIL deals, projected nearly $1.2 billion flowing through the industry in 2023.
The nonprofit model was an attractive option for some donors and entrepreneurs, who tout such things as appearances at sports camps and fundraisers and social media promotions for select charities. There are an estimated 80 such collectives.
Charities gained exposure from star athletes who earned money. And donors got the promise of a tax-deductible donation.
According to the IRS, those collectives already granted tax-exempt status don’t lose it as a result of the June 9 memo. But it does lay out new guidelines for how they are expected to operate if they want to keep it.
“These collectives may face future examinations or enforcement action by the IRS,” the agency said without elaboration.
“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.
Congress has also been watching. A bipartisan bill filed in 2022 would limit tax deductions for bankrolling nonprofit NIL collectives, but it has yet to pass.
The IRS was granting tax-exempt status to collectives for more than a year before issuing the memo that determined, in many cases, paying players isn’t merely incidental to the charitable cause but “is the very justification for the organization’s existence.”
“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.”
The NCAA has raised concerns about the collectives, but the federal government is a different story when it comes to enforcing rules that have been somewhat murky when it comes to athlete compensation.
“The IRS,” Belzer said, “is not the NCAA.”
Eventually, annual financial disclosures required by state and federal regulators will show how much money is collected, spent and to whom. Because these organizations are so new, many of those records haven’t been filed yet.
Marcinick said Cohesion has partnered nearly 80 Buckeyes athletes from multiple sports for NIL deals totaling more than $1.5 million. Partner charities include the Ronald McDonald House, Special Olympics, an area food bank and drug and emotional abuse support groups.
“Unfortunately, there are bad actors out there. They have used [nonprofit status] as a way to harvest donations that have nothing to do with a charitable purpose,” Marcinick said. “We’re a good actor. … We’re paying the price for others.”
On June 9, Ohio State‘s all-Big Ten defensive end J.T. Tuimoloau hosted a football camp for about 80 children backed by the Boys & Girls Club of Central Ohio and the Lindy Infante Foundation, which helps local nonprofits create and improve youth sports programs.
“He talked to the kids, went to every station, signed autographs,” said foundation President Stephanie Infante, calling the IRS memo potentially “devastating” if it effectively ends partnerships like that one.
“It was such a great day and great event,” Infante said. “Nonprofits struggle as it is. To be able to interact and get involved with athletes who are reaching out … It’s been such a great opportunity for athletes to get involved in their community.”
Not everyone is ready to back out of the marketplace.
The Texas One Fund, a multi-pronged collective that includes the Horns With Heart program and its promise of $50,000 for scholarship offensive linemen, intends to keep doing business as usual. The Texas One Fund has long had a disclaimer that a donation could be tax deductible but advice should be sought from a tax attorney.
Texas One Fund will show any nervous donors the group’s March 2022 IRS letter granting nonprofit status, said Patrick Smith, the collective’s president.
“All we can do is continue to perform the mission of our [nonprofit],” he said. “If that whole thing is disallowed. It would be sad for the charities we are helping out.”
Texas One Fund also has a new connection with the university that should help keep the money flowing in. Starting July 1, donors can earn loyalty points with the school-affiliated Longhorn Foundation for season-ticket selections and upgrades.
“I don’t know what effect the memo will have on NIL giving,” Smith said. “Whether it’s a [nonprofit] or not, money is still going to flow to college athletes.”
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Heather Dinich, Senior College Football Insider
ATLANTA — Notre Dame athletic director Pete Bevacqua said the independent Irish are comfortable continuing to give up access to a first-round bye in the College Football Playoff — something currently granted to only the four highest-ranked conference champions — as long as the fate of conference championship games remains the same.
“We’re comfortable that if conference championship games continue as they’re currently configured, part of the deal we made is that we wouldn’t get a bye, and that’s understandable,” Bevacqua said Saturday, speaking to a small group of reporters at the national championship game media availability at the Georgia World Congress Center. “And quite frankly, I wouldn’t trade that [first-round] Indiana game at Notre Dame Stadium for anything in the world, but you also have to be smart and strategic, and your odds of making a national championship game are increased if you get to play one less game.
“So I think a lot is going to depend on the fate of the conference championship games,” he said. “Should they go away? And that’s obviously not my decision. Should they be altered in some sort of material way where it’s not the top two teams playing for a championship, but something else? Then I think we absolutely have to re-look at Notre Dame’s ability to get a bye if we end up being one of the top four teams.”
Bevacqua’s comments come as he and the FBS commissioners prepare to meet Sunday to begin their review of the inaugural 12-team field, which will produce a national champion on Monday with the winner of Ohio State vs. Notre Dame.
Bevacqua is part of the CFP’s management committee, which is also comprised of the 10 FBS commissioners tasked with determining the format and rules of the playoff to eventually send to the 11 presidents and chancellors on the CFP board for their approval. The commissioners and Bevacqua will have a 90-minute business meeting to start to discuss possible changes for the 2025 season, which would require unanimity, leaving many CFP sources skeptical that next season will look much different.
Bevacqua said he thinks “there’s a chance” the group could agree on a change to the seeding, but one option that has been floated by sources with knowledge of the discussions is having the committee’s top four teams earn the top four seeds — which opens the door for Notre Dame to earn a first-round bye without playing in a conference championship game.
“I think everybody wants what’s best for the overall system,” he said. “It was interesting, when you think about those four teams that got a bye, they didn’t advance. Now I don’t think that has anything to do with the fact that they got a bye, I think that was mostly competition and happenstance. But I think there’ll be a good, honest conversation that will start tomorrow. Are there any changes that we ought to make from this year to next year and make something that’s worked really well work even better? Will there be changes? I’m just one person. I’m not sure.”
CFP executive director Rich Clark, who also spoke to a small group of reporters at the media day event, said some changes for 2025 would require “more lead time than a few months to implement,” so no major structural changes like the size of the bracket are expected for 2025.
Clark said the commissioners will talk about every aspect from “cradle to the grave,” including seeding and re-seeding possibilities.”
Clark said whatever changes are made for 2026 and beyond — the start of a new, six-year contract with ESPN — need to be determined by the end of the calendar year. That could include increasing the bracket size, possibly to 14 or 16 teams.
“We’re trying to beat that timeline,” Clark said. “We don’t want to obviously wait until the limits of it. So we want to move smartly on these things, but we don’t want to make bad decisions, either.”
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