Legal Standpoint: IRS Weighs In on Name, Image, and Likeness Collectives

A Gain or Loss for Today’s Game?

By Margaret Jarrell-Cole    //    Volume 31,  Number 4   //    July/August 2023

The commercial use by student athletes of their name, image, and likeness, or NIL, is here to stay, allowing them to share in a small part of the billions of dollars created by the commercialization of college athletics. NIL includes appearances, autographs, social media endorsements, EFTs, and merchandise and is permissible under the current National Collegiate Athletic Association (NCAA) rules so long as the payment to the student does not come from the university. Often, NIL collectives are formed by university supporters to steer deals to student athletes and are increasingly being formed as tax-exempt businesses that must follow myriad IRS and other rules. A black eye for an NIL collective benefiting your institution could negatively affect its reputation.

How did we get here and how do institutions, institutionally related foundations (IRFs), and their boards responsibly interact with NIL collectives?

Pre-Game Actions
The NCAA’s argument for regulating the amount of education-related compensation (such as laptops, living expenses, and tuition expenses) universities could provide to student athletes was rejected by the United States Supreme Court in the 2021 NCAA v. Alston case as a violation of antitrust laws. Worse, in a blunt concurring opinion, Justice Brett Kavanaugh warned the ideals of amateurism “cannot justify the NCAA’s decision to build a massive money-raising enterprise on the backs of student athletes who are not fairly compensated.”

The weakened NCAA then revoked its rule prohibiting athletes from receiving compensation for NIL, allowing states to decide if they wanted to pass their own NIL laws. The laws vary from state to state, creating confusion for recruits, parents, and even university presidents and boards. IRF boards should always try to operate effectively and ethically in this confusing environment, aware that an uncertain and rapidly changing area of law surrounds the NIL business model.

Although NIL payments are allowed, paying a recruit to play for a school, or pay-for-play, is still a violation of NCAA rules. Institutions should be vigilant as these rules are being tested, and the NCAA even sent a memo to some universities reminding them that they are not allowed to pay athletes in this way.

Current Game Highlights
In many ways the NCAA is now on the sidelines, watching as recruits, current and past college athletes, colleges and universities, IRFs, athletic departments, agents, and sponsoring companies enter into richer and more questionable NIL deals. More hard hits to the NCAA’s regulatory authority keep coming. The National Labor Relations Board and some states are moving to classify student athletes as employees. And, in April 2023, the firm representing the winners in the Alston case filed a new suit on behalf of current and former players for back pay of educational expenses.

Despite NCAA lobbying, federal legislation is unlikely to come soon. So, the current wild field of play is expected to continue.

What the IRS Says About Tax-Exempt NIL Collectives
Many NIL collectives distribute all or most of their revenues to student athletes in return for use of the athlete’s name, image, and likeness in speaking opportunities, mention of products or services on social media, or public appearances. Some activities are performed for businesses while others are for charities. Many NIL collectives have been issued tax-exempt status, meaning contributions to the collective may be tax deductible. Some have been wondering whether the business of NIL collectives merits tax-exempt status.

Tax exemption is not permanent and could be revoked. In June, the IRS issued an Office of Chief Counsel memorandum on tax-exempt collectives. It stated:

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 quantitively to any exempt purpose furthered by that activity.

Although these memoranda do not have precedential value, they indicate the approach the IRS may take when considering new applications for exemption or when auditing a tax-exempt entity or donor.

Collectives may want to stop issuing tax-deductible receipts for contributions or to add a statement about the recent IRS publication until the issue is resolved. Stay alert, follow any other IRS publications on this topic, and seek advice from general counsel.

Balancing the Rewards of Enhancing the Student Athlete Experience While Putting NIL Policies in Place
For any type of collective, action to limit risk from inexperienced collectives calls for staff to educate collectives and their donors. Institutions may also endorse a collective—even requesting donors to support certain NIL collectives—and leadership may choose this course to encourage donors to use a well-staffed and managed collective rather than risk a loss of reputation. Institution presidents and boards and their IRFs, however, should examine whether the NIL collective competes with their own fundraising and, if so, how close their relationship with the collective should be.

IRFs and their boards should draft policies aligned with the practices they think will best reflect the level of involvement they want to engage in with collectives and the risk they are comfortable accepting. Some IRFs are comfortable sharing donor information and offering recognition credit for their donors who contribute to collectives, while some are taking a completely hands-off, wait-and-see approach. Others are considering providing back-office services to collectives for a fee—to enhance quality of services to the IRF’s constituents.

Remember one important change when reflecting on policies. Recently, the NCAA flipped the standard of care for investigations related to NIL. It will presume the institution committed a violation unless the institution shows it did not violate the NIL rules. Think “we’re guilty until proven innocent!”

Whether the new NIL collectives environment is a gain or loss depends on which team you’re on—athletes, colleges and universities, presidents, IRFs, donors, the NCAA, conferences, corporate sponsors, or the media. There is more to come. Let’s look out for our student athletes, and keep our eyes on the rapidly spinning legal ball.

Margaret Jarrell-Cole, JD, is a senior consultant at AGB Consulting. She also is associate vice president for administration and legal counsel for the University of Central Florida.

Explore more on this topic:
The owner of this website has made a commitment to accessibility and inclusion, please report any problems that you encounter using the contact form on this website. This site uses the WP ADA Compliance Check plugin to enhance accessibility.