Resources

As of this writing, we have made it through the College Football Playoffs, including the National Championship. Next on the horizon is the month of March and the frenzy of Men’s college basketball. As the landscape of player compensation is ever evolving, it is interesting to review what groups of interested parties have tried to do in forming business “groups” to pay college student-athletes.

Background

In 2021, the governance bodies in all three NCAA divisions adopted a uniform policy on name, image, and likeness (“NIL”). The policy provided guidance to college athletes, recruits, families, and member schools:

• Individuals can engage in NIL activities that are consistent with the law of the state where the school is located. Colleges and universities are responsible for determining whether those activities are consistent with state law. 
• College athletes who attend a school in a state without an NIL law can engage in this type of activity without violating NCAA rules related to name, image and likeness.
• Individuals can use a professional services provider for NIL activities.
• Student-athletes should report NIL activities consistent with state law or school and conference requirements to their school.

After adoption of the policy, the Office of Chief Counsel of the Internal Revenue Service (“IRS”) released memorandum AM 2023-004 on June 9, 2023. In the memorandum, the IRS addressed whether operation of an NIL “Collective” furthers an exempt purpose under Internal Revenue Code Section 501(c)(3) (“Code §”). In this 12-page memorandum, the IRS opined that many “organizations” that develop paid NIL opportunities for student-athletes are not tax exempt because the private benefits they provide to student-athletes are not incidental both qualitatively and quantitatively to any exempt purpose furthered by that activity. Simply put, there is not enough of a public benefit provided by a Collective paying a student-athlete, and the private benefit to the student-athlete far outweighs any incidental public benefit.

Over a year later on December 27, 2024, the IRS released Private Letter Ruling 202452017 (PLR), a final determination on the tax-exempt status of a not-for-profit corporation formed to confer benefits primarily on student-athletes of a university’s men’s basketball and football teams for the use of their NIL.

Private Letter Ruling 202452017

This PLR involved the applicant’s creation of a not-for-profit corporation that would contract with college student-athletes at an unnamed university with a men’s basketball and football team. The contracts involved using the athlete’s NIL for work with local nonprofit organizations. The applicant indicated that the local nonprofit organizations benefited from the contracting athlete’s personal platform. Many of the athletes have a “huge following on social media and massive fan bases” the PLR indicated.

In denying tax-exempt status to the applicant, the IRS cited Treasury Regulations, Revenue Rulings, and court cases that generally stand for the rule that if an organization is not organized or operated exclusively for exempt purposes, it cannot be tax-exempt as the organization serves a private interest, and not a public interest. Any private interest must be qualitatively incidental. Thus, serving as a middleman to arrange NIL opportunities for the University’s student-athletes, that is, coordinating deals between local nonprofit organizations and student-athletes, served a private, rather than public interest. The IRS went as far as to state that the applicant’s “entire enterprise, therefore, is carried on in such a manner that the student athletes benefit substantially from your operations.” The applicant could not prove that student-athletes belonged to a charitable class.

The PLR is crucial to the applicant because donors or other “boosters” of the university mentioned cannot contribute money to the applicant-not-for-profit corporation and receive an income tax deduction. The consequence is that the applicant-not-for-profit corporation will probably cease use, rendering its formation essentially a waste. If the end zone was to pay top student-athletes with the extra benefit that the pay is “tax deductible”, the applicant fell short of the goal line.

This is not a coincidence and coincides with the anticipated implementation of the House settlement in July 2025. The settlement will allow schools to share up to $22 million annually with athletes, potentially reducing the reliance on NIL collectives.

The IRS has identified NIL collectives as a compliance enforcement priority for the 2025 fiscal year, potentially threatening the tax-exempt status of many collectives. Recent developments only reinforce the direction this is heading. The BPS Foundation, which managed NIL funds for multiple schools, announced it would shut down by year’s end. In a donor memo, the foundation declared there is no path forward. Other nonprofit collectives tied to major programs like Alabama and Notre Dame have similarly folded, signaling a broader reckoning is already underway.

The fallout will be significant. Without the tax incentives that come with the non-profit designation, these collectives will likely see a decline in donations. Programs that relied heavily on these contributions to support athletes now need help with decisions because they either have to pivot to for-profit models, which come with their challenges or potentially scale back operations entirely. Athletes, particularly those in non-revenue sports, could feel the pinch as funding shrinks.

Conclusion

Although a private letter ruling cannot be relied on as precedent by other taxpayers or by IRS personnel, it sends a clear indication on how the IRS views certain collective structures and NIL. Accordingly, if you are a student-athlete, the parent of a student-athlete, a university/college, or “booster”, it behooves you to understand these evolving issues.  By July 2025 the landscape of athlete funding will look nothing like the current landscape, so preparing now is a must.

For guidance on complying with these rules and regulations, reach out to your BMD legal advisors or contact BMD Member Scott A. Norcross  at sanorcross@bmdllc.com or Partner Paige M. Rabatin pmrabatin@bmdllc.com.