Following the National Collegiate Athletic Association’s 2021 adoption of its name, image, and likeness (“NIL”) policy permitting student athletes to profit from the use of their NIL, organizations known as NIL collectives have formed to facilitate NIL deals for student athletes. Some NIL collectives are organized as nonprofit entities under state law and have applied for (and some have been granted) federal tax-exempt status under section 501(c)(3) of the Internal Revenue Code of 1986, as amended.
As a general rule, to qualify as an exempt section 501(c)(3) organization, an organization must be organized and operated exclusively for an exempt (e.g., a charitable or educational) purpose.[1] Yet, an organization that serves both exempt and nonexempt purposes may still qualify for section 501(c)(3) tax-exempt status, provided that the nonexempt purpose is not substantial (i.e., the benefits to private interests must be incidental to those to the public interests).[2] Over the past few years, the IRS has been looking closely at NIL collectives that have claimed to qualify as tax-exempt charitable organizations and has made public announcements and released informal guidance and rulings indicating tax-exemptions of NIL collectives are solidly on the IRS’s radar. Another such private letter ruling was recently released.
Private Letter Ruling 202504020:
Analyzing the line between private and public benefit, in a final determination letter dated October 31, 2024, but recently released on January 24, 2025, the IRS found that an NIL collective that contracts with student athletes to perform charitable work in exchange for money is not organized for section 501(c)(3) charitable purposes because the NIL collective’s payments to student athletes are not incidental to and outweigh the charitable purposes.[3]
At issue in the ruling was an NIL collective that paid student athletes to attend certain charitable events and post content related to the event on social media. These charitable events ranged from staffing public service announcements to providing resources to underserved communities. The NIL collective’s website stated that its mission was to provide NIL opportunities for student athletes, secure charitable contributions, and facilitate other NIL partnerships. The website also offered memberships based on contributions to the NIL collective and stated that a certain percentage of these contributions would be paid to the student athletes, with the remaining funds used to cover operational expenses. The NIL collective did not indicate that these payments were contingent on the student athlete being a member of a charitable class nor based on financial need.
Although the NIL collective argued that these NIL agreements were the most efficient way to raise awareness of the charitable events, the IRS determined that the monetary benefits to the student athletes were too substantial to be considered merely incidental to the exempt activities.[4] The IRS found that the NIL collective was akin to an employment registry operated by an organization to streamline employment opportunities for its members and that the members received direct monetary benefits from the activities intended to enrich the community.[5] Furthermore, the IRS found that the benefits received by the student athletes were neither qualitatively incidental to the charitable purpose of the NIL collective nor that the NIL collective could not accomplish its exempt purposes without privately benefitting the student athletes.[6]
IRS’s Position:
Prior to the recent private letter ruling, in 2023, the IRS released a comprehensive generic legal advice memorandum issued by the IRS Office of the Chief Counsel on the topic of NIL collectives. Among the advice in that Memorandum, the IRS stated its position that NIL collectives organized to create or facilitate NIL agreements would not be considered tax-exempt due to the NIL collectives substantially serving the student athletes’ private interests.[7]
However, the IRS hinted at the idea that NIL collectives may pass muster if payments to a student athlete were based on and reasonably calculated to meet the student athlete’s need.[8] If such preliminary determination with respect to the participating student athletes were made, then the payments could be considered serving the public interest as the payments would be for the relief of the poor. This may rebalance the private and public interests enough to qualify for section 501(c)(3) exemption.
NIL Collectives Continue to Be an IRS Priority:
The IRS has and continues to prioritize review of tax-exempt NIL collectives. In an October 2024 Tax Exempt and Government Entities (“TE/GE”) Program Letter (“Letter”), the TE/GE Commissioners of the IRS announced that one of the priority areas the IRS is targeting for compliance enforcement in 2025 is focused on tax-exempt collectives utilizing NILs. This Letter goes on to provide specifically that the TE/GE intends to collaborate across the IRS on issues that include examinations of such NIL collectives.[9] Given the IRS’s activity in this area, the IRS seems primed to begin examinations of those NIL collectives that may have received 501(c)(3) status. Founders and managers of NIL collectives who are concerned about their current tax status or are interested in learning more about their options should contact their tax advisors.
1 Treas. Reg. §§ 1.501(c)(3)-1(a)(1), (d)(1).
2 Better Bus. Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279, 283 (1945).
3 Please note that these determinations are taxpayer-specific and cannot be relied upon by other taxpayers. However, these letters provide valuable insight on the IRS’s position on certain issues and may provide guidance on specific tax scenarios.
4 Treas. Reg. § 1.501(c)(3)-1(c)(1).
5 See Rev. Rul. 61-170, 1961-2 C.B. 112 (denying section 501(c)(3) status to an organization established to streamline employment opportunities for its members because it substantially served private interests); Rev. Rul. 76-152, 1976-1 C.B. 151 (denying section 501(c)(3) status to an organization formed to promote community art because the artists received 90 percent of the sales proceeds, thus the private interests of the artists were more than merely incidental to the community’s interests in art).
6 See Rev. Rul. 70-186, 1970-1 C.B. 128 (granting the organization section 501(c)(3) status because the activities primarily benefited the general public and it would be impossible to accomplish the activities without providing some private benefit).
7 IRS G.L.A.M. 2023-004 (June 9, 2023) (concluding that NIL collectives that foster paid NIL opportunities will generally be found to be operating for a substantial nonexempt purpose that is more than incidental to the exempt purpose furthered by the activities).
8 Id. at 10.
9 IRS Publication 5313 is available at: https://www.irs.gov/pub/irs-pdf/p5313.pdf.
