NIL organization denied tax-exempt status

In Letter Ruling 202606003, the IRS issued a final adverse determination to an organization whose sole activity was creating opportunities for designated collegiate student-athletes to receive payments for NIL-related services. The ruling continues the IRS’s close scrutiny of NIL-focused organizations seeking Sec. 501(c)(3) status.

Facts: The organization was formed to assist a school in compensating student-athletes for NIL rights in exchange for providing community service to local nonprofit organizations in accordance with National Collegiate Athletic Association rules and regulations. The organization provided monthly and one-time sponsorship payments to athletes. The student-athletes’ activities included signing autographs, posting on social media, and attending a youth camp related to their sport.

The organization stated that student-athletes were selected to receive sponsorship payments based on their willingness, notoriety, and alignment with the values of the organizations that would benefit from their appearances at events and programs.

The entity’s application for exemption asserted that its exempt purpose under Sec. 501(c)(3) would be furthered by its activities (donating the time and the inherent benefits of celebrity through the NIL of student-athletes to local charities, which should benefit those charities through increased attendance and fundraising). The organization also cited the encouragement of athletes to support themselves financially and pursue higher education opportunities as advancing its exempt purpose.

Discussion: The organization’s purpose, as stated in its bylaws, was to give money to student-athletes for services and use of their NIL. As the student-athletes received “a direct economic benefit,” the organization had to establish that it was not operated for private interests and that the student-athletes constituted a charitable class or were benefited through activities furthering a charitable purpose. The IRS determined that the organization failed to prove that the criteria it used for selecting student-athletes to receive sponsorships established that the student-athletes were a charitable class and that the organization’s activities served a charitable purpose (Regs. Sec. 1.501(c)(3)-1(d)(2)). Accordingly, the organization was not operated for exempt purposes under Sec. 501(c)(3).

The organization also failed to prove its claim that the compensation paid to the student-athletes for donating their services and NIL to local charities served an educational purpose, as it did not provide instruction useful to individuals or the community (Regs. Sec. 1.501(c)(3)-1(d)(3)(i); see also Miss Georgia Scholarship Fund, Inc., 72 T.C. 267 (1979)). Therefore, since the student-athletes were not considered a charitable class, the IRS ruled that the organization’s primary activities substantially furthered an impermissible purpose under Sec. 501(c)(3), precluding tax-exempt status (Regs. Sec. 1.501(c)(3)-1(c)(1); see also Better Business Bureau of Washington, D.C., Inc., 326 U.S. 279 (1945)).

Furthermore, the IRS stated, the organization’s purpose was similar to those of the organizations seen in Rev. Rul. 61-170 and Rev. Rul. 75-286, in that employment opportunities were provided to a limited and specified group of individuals and served private interests rather than public ones. In those revenue rulings, the IRS concluded that the organizations were not exempt under Sec. 501(c)(3).

Conclusion: The IRS concluded that the organization’s only activity was creating opportunities for designated student-athletes to sell their NIL rights. Thus, its activity served private interests, and it was operated for a substantial nonexempt purpose. Consequently, the organization did not qualify as exempt under Sec. 501(c)(3).

• IRS Letter Ruling 202606003

— Isaac Chasen is a J.D. candidate at Cornell Law School; John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business; and Austin Arnold, CPA, is a lecturer in taxation and financial literacy in the Cornell Law School, all at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA‘s tax editor.