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In January, the IRS sent a newly formed NIL collective an “adverse determination” letter, notifying the collective that it failed to qualify as a nonprofit under Section 501©(3) of the Tax Code.
As the IRS sees it, a collective is an NIL (Name, Image, Likeness) organization that pools money from “fans, alumni … and generous private donors.”
Furthermore, the IRS has explained that collectives “serve a private rather than a public interest.” This is because they “confer benefits primarily on student-athletes of a particular university’s sports teams for the use of their NIL,” without demonstrating “that these student-athletes belong to a charitable class.”
Does this mean that the IRS is going to try to shut down NIL collectives as tax-exempt corporations?
Tax experts think this is unlikely because spending cuts to the IRS are forcing the agency to be more selective about cracking down on tax code violators.
My research shows that NIL collectives are probably an intermediate step in the pay-for-play model — in other words, the questionable tax advantages of NIL collectives are probably going to be a moot point as NIL collectives are gradually absorbed in athletic departments or adjacent university foundations.
Texas A&M formed a branch for its NIL collective within the university’s foundation — a strategy that offered more fan engagement by directly linking donations to access to athletes. But Texas A&M shut this down after concerns arose about the foundation losing its tax-exempt status.
Such a result would be very damaging to the welfare of any university.
No other university is known to have tried to link its collective to its foundation, but tax filings of NIL collectives show that there are similar ways to achieve this outcome.
Foundations and collectives
ICON Collective Inc. offers an example. Its most recent tax return (for 2022) showed on Part III, Line 28: “The organization worked to identify, communicate with and engage with student-athletes at the University of Illinois Urbana-Champaign to perform work aimed at achieving one or more charitable, educational or scientific purpose.”
In Part IV — “List of Officers, Directors, Trustees, and Key Employees” — Mary Ellen Penicook is listed as a director who made $0 in this role. She also appears as a governing director of the University of Illinois Foundation.
This does not appear to be an uncommon relationship.
The University of Iowa’s NIL collective is named Iowa Swarm.
The collective’s website lists Jayne Oswald as Iowa Swarm’s “Vice President of Events & Engagement.”
Her bio explains: “Jayne has served as the Director of Events with Iowa Athletics Development at the UI Center for Advancement since 2010, overseeing the department’s donor events, game day related activities, the Hawkeye Events tour, Hawkeye Huddles and management of I-Club Chapters.”
If anything, the functional connection between the University of Iowa Foundation and its athletic department is more explicitly delineated by Iowa Swarm’s website than by ICON Collective Inc.’s tax filing.
In other words, if we put Texas A&M, Illinois and Iowa in the same picture, we see that all three universities have formed linkages between their foundations and NIL collectives.
Three of a different kind
Of the three schools, Texas A&M tried to bring the NIL collective in-house and backed off.
Iowa doesn’t go that far but has a key foundation employee co-listed as an executive officer of its NIL collective.
Illinois, by comparison, has a more remote and cautious linkage, albeit a functional relationship in the governance structure of its collective and its foundation.
Nonetheless, the UI Foundation’s new building, located in the midst of the Illini sports complex, furthers the impression that foundation work and athletics are closely intertwined.
Legislation in Virginia suggests that NIL collectives will eventually be housed directly in athletic departments.
Currently, HB 1505 is sitting on the desk of Virginia Gov. Glenn Youngkin.
Republicans and Democrats in this politically polarized state “overwhelmingly passed” this bill in both chambers of the state’s assembly.
The law would prevent the NCAA from prohibiting Virginia colleges from compensating athletes for their NIL.
In other words, an NIL collective could either remit its funds to Virginia universities, which, in turn, could pay athletes; or the NIL collective could somehow be absorbed into athletic departments.
And really, how much different is that from what is happening at Texas A&M, Iowa and Illinois?
Only a matter of time
In my judgment, it’s not a question of if but when will NIL be housed in athletic departments.
But that won’t be the end of the story.
This will ratchet up the pressure on schools to explain why NIL money does not equate to an employment relationship.
In that case, we will have a payroll model that resembles “tip pooling” for the restaurant industry.
When we pay a tip or service charge, the restaurant is permitted to “pool” this money to pay not only our server, but the cooks, dishwasher, bus people and greeters.
This payment process is regulated by the U.S. Department of Labor.
In the case of the restaurant — and possibly Virginia athletic departments and others to follow — it’s the patron who pays the labor.
If the Supreme Court’s 9-0 vote in NCAA v. Alston is any indication, courts won’t see a legal difference between paying servers, cooks, greeters and bus people wages out of pooled tip money and paying college athletes in all sports out of pooled NIL donor money by a university’s athletic department under an outdated amateur model that forbids employment.
Michael LeRoy is the Labor and Employment Relations Alumni Professor in the School of Labor and Employment Relations and College of Law at the University of Illinois.
