How NIL in college sports has raised questions about nonprofits

By THALIA BEATY Associated Press

NEW YORK (AP) — Three years into a new era in college sports, one in which athletes are allowed to profit from their successes through name, image and likeness deals, everyone is still trying to figure out what the new normal will be.

Southeastern Conference commissioner Greg Sankey, speaking at SEC Media Days in Dallas in July as the college football season approaches, called it “uncharted waters of change.” “Any time you go through a reset, it’s tough,” said Sankey, whose conference includes not only perennial powers Georgia and Alabama but, as of this year, Texas and Oklahoma.

Those uncharted waters aren’t limited to football. The complicated, often murky world of NIL has not only touched every corner of college sports, but has also had an unexpected effect on the charitable organizations that have sprung up to help players secure these sponsorship deals.

The basic question NIL asks nonprofits is: What is charitable about paying college players?

To unpack how NIL deals in college sports relate to the nature of tax-exempt organizations, we have to go back to 2021, when a Supreme Court ruling forced the NCAA to charge players for the use of their name, image and likeness. The ruling finally allowed players to enter into sponsorship and endorsement deals for everything from the highly anticipated EA Sports College Football 25 video game to promotional appearances for local restaurants and car dealerships.

The fallout from the Supreme Court decision continues, with rules governing NIL deals evolving in response to new lawsuits and state laws. Initially, the NCAA prohibited colleges and universities from paying their players directly, though that may soon change. But to fill that gap, a cottage industry of outside groups emerged to facilitate contracts between boosters and athletes.

Some of these outside groups were set up as businesses, with fans donating money and the groups taking a small cut passing it on to the school’s athletes. In return, the athletes are expected to provide a service to the group, such as signing merchandise or posting on social media. Other groups were set up as nonprofits and successfully filed for tax-exempt status with the Internal Revenue Service.

“The concern was that the public would get the idea that these are just greedy athletes, right? So we have to clean that up, and the way you do that, as always, is through nonprofit work, charity work,” said Darrell Lovell, an assistant professor of political science at West Texas A&M University who has written a book about NIL initiatives.

What percentage of these new organizations are for-profit and what percentage are nonprofit? It’s hard to say, since no single entity is keeping tabs on them all. The NCAA recently contracted with a company to create a voluntary registry for agents, service providers, and deals over $600, which could yield better information about the estimated $1.2 billion that flows through NIL collectives.

On the nonprofit side, however, the IRS issued a memo last June stating that the activities of many NIL nonprofits were not tax-exempt. In essence, the agency wrote that NIL deals serve the private interests of players, not the public interest.

Phil Hackney, an associate professor at the University of Pittsburgh law school, said the IRS offering tax-exempt status to organizations that likely shouldn’t qualify “happens more often than we would think.”

“There are probably a lot of nonprofits that no one is targeting and that probably shouldn’t have an exemption, but they do,” said Hackney, who previously worked in the IRS’s Office of Chief Counsel.

IRS spokesman Anthony Burke said in May that the agency has a compliance strategy to ensure that NIL nonprofits “fully comply with existing statutory requirements,” but did not elaborate. Since January, the IRS has issued three rulings denying tax-exempt status to specific, but unnamed, organizations that offer NIL contracts to college players.

Some of NIL’s non-profit organizations are still active, but others have closed.

The Texas One Fund, which supports the Texas Longhorns, continues to promote its tax-exempt status on its website and held a fundraising concert at the football stadium in May. It did not respond to a request for comment.

University of Utah athletes were awarded leases on new cars last year in one of the highest-profile NIL deals. The Crimson Collective, the school’s official NIL, is registered as a nonprofit in Utah and successfully applied for tax-exempt status with the IRS. Its most recent 2022 tax return shows it reported less than $50,000 in revenue.

Erin Trenbeath-Murray, vice president of philanthropy for Ken Garff Enterprises and Crimson Collective, said the organization was not involved in facilitating the lease agreements and that its purpose is to support other charities in the state, such as Make A Wish Foundation, Huntsman Cancer Institute, Junior Achievement and other nonprofits.

The Cohesion Foundation, which supports Ohio State athletes, said it stopped taking new donations after the IRS memo but continued to pay out its contracts through the end of last year. Executive Director Dan Apple said the collective is currently “inactive” but has not taken down its website or publicly announced it is closing in case things change again.

These nonprofits survive, in part, because major donors like to donate through charities so they can get tax deductions.

“Where the big dollars come in, and I’m talking six figures,” said Tom Dieters, president of the nonprofit Charitable Gift America, “They come from grants. From donor-advised funds. Private foundations. Charitable trusts. We even have charitable IRA rollover money. You can only get those gifts as a public charity.”

Dieters said his organization helps donors sign NIL contracts with players at 10 schools across the country, including his alma mater, Michigan State. In return, athletes promote Charitable Gift America — through social media posts, for example.

“We’re no different than a car dealer promoting his cars,” Dieters said. “We’re simply promoting philanthropy.”

Brian Mittendorf, the HP Wolfe Chair in accounting at Ohio State, said he sees a window where it might be possible for a tax-exempt organization to enter into NIL contracts, but it would be a tricky line to draw. A nonprofit that existed before it began offering NIL contracts still has to make sure its work furthers its charitable mission, he said.

“(Organizations must) be able to demonstrate that the contracts they enter into are intended to further that charitable purpose and not to specifically benefit certain individuals,” Mittendorf said.

The waters remain uncharted in the upcoming school year following a $2.8 billion settlement between the NCAA and the nation’s five largest conferences that could create a revenue-sharing model with their athletes. At least one school, Houston Christian, has challenged the settlement in court, arguing it would divert money from the schools’ core missions of education and research to sports.

Elsewhere, Virginia recently passed a law allowing schools to enter NIL deals with players. Other states are grappling with whether players can unionize.

Hackney sees an opportunity for schools to pay players directly in some way, but he argues that this will call into question whether the schools are primarily serving a charitable educational mission.

“The system that allows this large corporation, a large TV sports products corporation, to operate as a charity has long been problematic,” he said, in part because the athletes doing the work were not paid until recently.

“It’s important to give athletes dollars for the real work that they do,” Hackney said. “But once you start paying them, you’re no longer running a charity where you’re honestly there to educate these athletes. You’re there to pay them for a transactional business that’s no longer charitable.”

Above: Ohio State University forward Ronnie Hein guides the puck during a practice on April 4, 2018, in St. Paul, Minn. (Anthony Souffle | Star Tribune via AP, File)

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