The IRS said NIL collectives shouldn't be 501c3s. So why hasn't anything changed?

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When NIL collectives first started forming in 2021, they were typically organized in one of three ways. A few operated as for-profit, full-service marketing agencies. Most other groups incorporated themselves as LLCs and ran themselves as not-for-profits, seeking to distribute as much revenue to athletes as possible.

But some went a step further and incorporated as 501c3 non-profits. Just like with donations made to athletic departments, donations to 501c3 organizations are tax deductible. Funds given to a regular ol’ LLC…are not.

“I was surprised to see so many NIL collectives initially be given 501c3 status,” said University of Buffalo Tax Policy professor Stuart Lazar. “The IRS says the earnings from those organizations cannot inure to the benefit of any private shareholder or individual.”

Bridget Stomberg, an accounting professor at Indiana University, was even more blunt. “In my professional opinion, no NIL collective should have been granted non-profit status by the IRS,” Stomberg said.

Eventually, the IRS agreed…kind of. In June of 2023, the IRS Office of the Chief Counsel published a memo stating that most NIL collectives should not, in fact, be classified as non-profits.

More than six months later, multiple NIL collectives are still advertising themselves as non-profits, eligible for tax deduction benefits. We’re unaware of any NIL collective being formally investigated or accused of violating IRS policies.

So what happened after the memo? What did this advice actually mean? And will the IRS ever do anything more than write another memo?

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Since 2023, more than 40 NIL collectives have shut down, merged or relaunched under a new name. While some of the consolidation had nothing to do with the IRS, several collectives decided to reclassify or merge with other entities after the memo.

The Clemson collective TigerImpact reported $3.9 million in revenue to the IRS for the 2022 tax year. It awarded 60-some athletes with one-year contracts, which valued at a combined $2.3 million and paid the athletes monthly. However, TigerImpact ceased operating, effective Dec. 31, 2023.

Last November, Clemson announced the founding of 110 Society, its “new one-stop shop for all things Clemson NIL.” It’s one of numerous examples of restructuring within a school’s collective ecosystem.

Bobby Couch served as the executive director of TigerImpact and he since joined 110 Society to help onboard the new collective. Couch said that after the release of the IRS memo, TigerImpact’s board held a vote in June to dissolve the nonprofit and operate through a separate LLC and “keep the purpose-driven model,” which it did for the remainder of the 2023 calendar year.

“We thought, ‘Hey, this is inevitable,’ and then our lead counsel basically said that you just need to shut it down,” Couch said.

Couch said from 2022 to the first half of 2023, TigerImpact’s number of contracts tripled to roughly 185 contracts. The nonprofit maintained a similar level of expenses from 2022 to 2023, according to Couch, who said the collective’s spending was more strategic in 2023 such that contracts might range in value from $2,000 to six figures.

Couch said that soon after TigerImpact’s board held the vote last summer, a working group formed within Clemson’s NIL ecosystem. That led to the formation of the 110 Society and the shut down of all of the operations for TigerImpact and the LLC that served as the bridge.

Cohesion Foundation, which is one of several Ohio State collectives, reported $1.49 million in revenue in 2022. Founder Gary Marcinick, who said he also served as the collective’s primary fundraiser, stepped away in mid-2023 from the collective. He said he wasn’t comfortable discussing potential contributions when those contributions may not be tax-deductible for donors in the future.

“The IRS ruling kind of put a cloud over it,” Marcinick said.

He said he’s proud of the collective’s charitable purpose and he thinks the collective has been fiscally responsible in having the revenue to back its NIL agreements with athletes.

The UConn nonprofit collective Bleeding Blue for Good Fund filed its Form 990 last November and it indicated that it has considered changing its organizational status.

The form states, “As of the date of these financial statements, the fund has not received a revocation of its 501(c)(3) status, but believes such action is likely. Management is considering alternatives to its organizational structure should such a revocation be made by the IRS and expects to convert to a 501(c)(4) organization, which would maintain tax-exempt status.”

“We love our mission,” said co-founder and president John Malfettone. “There’s something called a 501(c)(4) where the donor doesn’t get the tax deduction.”

Brent Blum, the executive director of We Will Collective at Iowa State, said the collective has plans in place if the IRS ever revokes its 501(c)(3) status.

“It’s a big if at this point,” said Jacob Schmidt, the executive director of the Northwestern collective TrueNU.

Schmidt said TrueNU’s board frequently discusses the IRS’s memo and its potential ramifications, but that the collective’s leaders don’t think the IRS will force changes anytime soon. “We’d invite anybody to come and lift our hood and take a peek at how we operate and so we think we’re going to be fine,” Schmidt said.

If needed, Schmidt said TrueNU would be ready to pivot to a non-tax-exempt model, including potentially launching a new commercial arm, while maintaining its mission.

If a nonprofit collective has assets remaining if it shuts down or theoretically loses its tax-exempt status in the future, expect for the leftover money to benefit the local university or charities.

“Chances are if it’s a large amount, they’re going to donate it to the university,” said James Moore & Co. partner Katie Davis, CPA. “It would be liquidating the excess funds to avoid having to pay the taxes and penalties because they’re no longer tax-exempt.”

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A handful of nonprofit collectives reported making financial contributions directly to charities, which could prove beneficial if they additional face scrutiny from the IRS.

“The other part of our model,” Bleeding Blue For Good’s Malfettone added, “is we always leave money behind for the charity.”

He said the collective’s standard contribution used to be $15,000. Now, the collective encourages its partner charities to solicit sponsors. Malfettone said the collective and a charity share the sponsorship revenue 50/50 after a certain threshold is reached.

Friends of the University of Notre Dame reported cash grants between $7,000 and $9,400 to a local Boys & Girls Club, the Center for the Homeless, Cultivate Food Rescue and YMCA of Greater Michigan.

“I’ve got this paper that’s forthcoming. I actually talk about this very specifically in one of my recommendations, saying if these collectives want to stay afloat, there’s a couple things they should be doing,” said Clemson University associate professor Kathryn Kisska-Schulze, JD, LL.M.. “One is that they should be putting a lot more of that revenue that’s coming in – this $3 million, $4 million, $7 million – into the actual charities that it’s supporting and less so in the pockets of the student-athletes who they are contracting with to help bring these charitable causes to a social media base.”

Hail! Impact, a collective with an all-volunteer staff that supports Michigan, received IRS approval last September, three months after the IRS released its memo. Hail! Impact co-founder Andy Johnson told the AP he believes it’s the first collective to receive such approval since the IRS released its memo last summer. Hail! Impact also has a partner LLC called Hail! NIL, which helps operate the program and has a charitable lean, too.

However, Hail! Impact’s model might make it an outlier. The collective gives 70% of its charitable gifts to charities and 30% goes toward its operating expenses. According to Hail! Impact’s initial plans, those percentages were the other way around, with athletes receiving 70% of the collective’s revenue.

Hail! Impact President Chin Weerappuli previously founded The Underdog Family, a Denver-based nonprofit that supports small businesses. He said anecdotally, through conversations with attorneys, many nonprofits allocate 35% of their budget or less to operating expenses.

“What we realized after the initial conversations with the IRS is that directly giving dollars from the nonprofit to student-athletes is what they’re cutting down on,” Weerappuli said. “From a strictly landscape perspective, there’s a lot going on, or at least there was before even we popped into the space, of charitable organizations that a dollar would come into and then would distribute it out directly for NIL purposes that quite frankly weren’t necessarily in the most charitable way.

“There were discrepancies in how the payouts were made. The amounts were not considered reasonable or market rate, and so that’s what the IRS was really trying to snuff out.”

Hail! Impact has raised more than $1 million since Michigan’s win over Alabama in the Rose Bowl, according to Weerappuli.

“We do a ton of work with Hail! when it comes to coordinating with charities and doing the logistics and building those relationships, marketing, asset distribution to the athletes and so that justifies a 30% number,” Weerappuli said. “(It) is what we worked with, with the IRS, in terms of the value we’re providing. In a lot of ways, what’s unique about our model is it’s almost like every staff member at Hail! is just donating in-kind what they would’ve been making to the ability to support the athletes themselves, which is one of the reasons I personally don’t think this model has been replicated thus far after us receiving the approval letter.

“I’ve actually spoken to a few collectives where if you’re on the hook for keeping your program single-handedly competitive, I don’t think you can do it with a 70/30 split. We’re kind of blessed to the Robin in a lot of ways to the Champions Circle and Jared (Wangler)’s group’s Batman, where they do the heavy lifting. They’re not pretending to be tax-deductible and we’re just kind of there to give this other option and feed into the general pot to support Michigan Athletics.” 

So some collectives are voluntarily changing their classifications, and others are changing how they distribute funds to partner charities. But others aren’t changing a thing. So what happens next?

Dr. Stomberg pointed out that the IRS memo isn’t technically settled law. “The IRS would issue a memo to attempt to change behaviors, or to signal how they plan to enforce a particular policy,” Stomberg said, but there aren’t immediate penalties for not complying with the memo’s recommendations or assertions.

She added that “it is more common for the IRS to sue a single organization, rather than an entire class of taxpayers” meaning that it is more likely that the IRS would go after one or two NIL collectives, rather than several dozen. After that litigation, Stomberg added that based on recent corporate precedent, a possibility would be for the IRS to offer a settlement to the remaining collectives…simply change your behavior and classifications, and avoid future penalties.

A 501c3 collective that loses that designation would no longer be able to advertise that their donations offer a tax benefit, but simply losing that classification would not automatically trigger criminal penalties.

IRS investigations move slowly, and the federal government likely won’t be able to open investigations into every NIL collective it believes is not following non-profit tax law.

If a collective believed that operating as a non-profit gave them a critical fundraising advantage, perhaps they could conclude that the potential benefits outweigh the risks. The IRS won’t make you vacate a championship, after all. Programs have made similar calculated risks about NCAA enforcement since the dawn of the NCAA, and many of them, after all, were proved right.

The IRS has made its opinion very clear. Many collectives have decided to change how they operate in response.

Who will be right? That story hasn’t been written yet.

Andy Wittry contributed in the reporting and writing of this story.

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