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The IRS STILL thinks most NIL collectives shouldn't be non-profits

Also, lets talk about two super league proposals that won't happen

Good morning, and thanks for spending part of your day with Extra Points.

The internet is going to be jam-packed with takes and analysis of South Carolina’s championship last night. I want to talk about that too, but I want to think a teensy bit more before I write. So today, I’d like to do a little #counter #programming:

The IRS, once again, is saying most NIL collectives shouldn’t be non-profits

But it’s been nearly a year since that memo, and while multiple NIL collectives have voluntarily shut down or reclassified as LLCs, the IRS hasn’t actually sued any 501c(3) collectives or forced them to change.

But on Saturday, Sportico published a story showing that the IRS is starting to deny non-profit certification to new collectives. Via the story, which is referencing a letter the IRS sent to a collective whose application they denied:

“Based on the facts presented in your application, you serve a private rather than a public interest, because you confer benefits primarily on student athletes of a particular university’s sports teams for the use of their NIL,” the IRS wrote. “You have not demonstrated that these student athletes belong to a charitable class.”

Furthermore, the letter stated, the group’s proposed activities would result in a direct benefit “to a limited group of individuals,” a group of college athletes, irrespective of their “demonstrated need.” The letter noted that the collective proposed spending a significant portion of its gross receipts to acquire NIL rights, such that this could not be considered “incidental” to its exempt purpose.

The letter of the law and the consensus interpretation of the law appear clear to me. Fundraising to give money to athletes, even if those athletes do charitable work, is not charity. College athletes are not a charitable class. If a collective wants to operate as a non-profit, then the majority of their money needs to directly benefit charitable organizations, not athletes.

But a few large NIL collectives are making the bet that they can simply run out the clock on an overworked and unstaffed IRS. Worse case scenario, one or two collectives get sued, pay a modest penalty, and reclassify…years after the athletes they paid have completed their eligibility. Nobody is going to jail or anything for this. And the IRS can’t take away a championship trophy.

This is worth monitoring, as IRS classifications are a big deal in the collective industry and NIL Industrial Complex. If you’re advising a new collective, I think the evidence is clear…the safest thing to do would be to not seek non-profit classification.

Multiple P5 FARs advocate for a completely new college sports subdivision

NCAA President Charlie Baker took the first step towards moving structural college sports reform out of the text-chains and hotel bars and into the spotlight with his Project D1 proposal. Among other things, Project D1 would allow schools to directly compensate some athletes via trust funds, which would create a quasi-new division in D-I.

In an editorial in Inside Higher Ed, A former Faculty Athletic Representative at Nebraska, and a current one at Texas Tech, argue that Project D1 doesn’t go far enough. The NCAA should create an entirely new subdivision…based on total athletic budgets. They write,

A better approach {than trust funds} is simply to set a budget threshold for inclusion that could be adjusted upward over time. Baker noted that 59 Division I institutions spend more than $100 million annually on their athletics programs. We’re not saying that’s the magic number, but we think that some such threshold is needed for the new subdivision to succeed.

…no viable reform appears possible unless a new subdivision is created. It is an idea well past its time, and we applaud Baker for taking the first step. But we also think the NCAA’s approach is, once again, much too slow. It should not take until January 2025 just to create the subdivision. The Division I Board need only embrace—finally—the concept of a new subdivision and set the criteria for entry. At that point, the new subdivision needs to get to work—quickly.

From my private conversations and from what I’ve read, administrators across D-I are grateful for Baker in trying to jump-start the conversation around structural reform, but are more lukewarm about the specifics of Project D1. The highest resourced institutions, particularly in the Big Ten and SEC, would like to do even more, while even the relatively modest trust funds and additional permitted spending would be outside the feasibility of dozens and dozens of current D-I programs.

I’m not sure exactly where (or how) to draw a dividing line, but I do think it’s notable to see a few FARs take a public stance on the issue. Faculty don’t have nearly the specific influence on college sports reform as conference commissioners, television executives, or even ADs. But they can influence university presidents, who still have significant power and influence in deciding NCAA governance issues, especially FARs like Brian Shannon and (Jo) R. Potuto, who have served on NCAA governance councils. To what extent other FARs try to influence presidents and other stakeholders is worth keeping an eye on.

And oh, speaking of structural reform,

No, the CST College Sports Super League isn’t happening.

On Wednesday, The Athletic shared a story about a potentially massive college football super league proposal, a “College Sports Tomorrow” system promoted NFL executive Brian Rolapp, 76ers owner David Blitzer, and other executives in the professional and college sports ecosystems.

Conspicuous in their absence, as Ross Dellenger pointed out: leadership from the Big Ten, SEC, or current broadcast partners. To underscore that, Mississippi State president and chairman of the College Football Playoff board Mark Keenum, when asked about the proposal discussed in The Athletic, said "I don't see us moving in that direction anytime soon.”

On Thursday, I wrote that I don’t think the math can math for this particular idea. Beyond the fact that I believe it would invite future litigation on both antitrust and athlete labor grounds, and be unlikely to generate enough new broadcast money to placate everybody, the current broadcast agreements make the timing too difficult.

I’ll also add that if the CST folks wanted to find a university president to sell an idea to other skeptical university presidents…let’s just say they probably shouldn’t have picked Gordon Gee.

The most interesting thing about all of this, to me, is that capital outside the college sports industrial complex is getting more vocal and more interested in being involved in Whatever Happens Next, be that the NFL, venture capital, private equity, or something else. As labor and legal costs rise, I think the odds are pretty good that eventually, college sports leaders are going to be more interested in having these sorts of breakaway conversations.

But I don’t think that time is Spring of 2024.

March Madness Bonuses: Not just for coaches!

It’s standard practice for basketball coaches to earn bonuses for making the NCAA Tournament, even if their team loses in the first round. But a quick look at my old FOIA Files shows that athletic directors, and even other entities, enjoy bonuses and perks from elite March Performance too.

Take Akron Athletic Director Charles Guthrie. Based on a copy of his employment agreement that I previously obtained via Open Records, Guthriee is awarded a $10,000 bonus for the men’s basketball participating “in an NCAA sanctioned Post-Season” event (it would be $5,000 for the women’s team). UConn AD David Benedict’s contract, per the version we have in our records, awards him a bonus equal to what a coach would earn for any varsity team winning a conference title or earning the NCAA Tournament, with an additional bonus of one-month salary for any team winning an NCAA title (with bonuses capped at $50,000 a year). Utah’s Mark Harlan would be eligible for $10,000 thanks to the Utah women’s basketball team making the NCAAs, plus an additional $4,000 for their opening round win over South Dakota State.

Schools occasionally will also get bonuses from athletic apparel partners for NCAA tournament appearances/wins, which can be paid out in cash and/or product, depending on the contract.

Not every AD has these specific bonuses (and I checked contracts at major programs and lower-resourced schools), but they are certainly not uncommon. If there’s interest, I can try to compile a more comprehensive list of postseason awards for our Premium Subscribers.

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We’ll get back to our premium newsletters tomorrow. I have some reporting I’d like to share.

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