Does IRS memo on tax deductions for NIL collective donations have local ramifications?

An IRS memo written in May, made public in early June, got noticed pretty quickly around the local college sports landscape.

“Did you read that Wall Street Journal story?”

“Saw it already on [another] site.”

The memo was written to address “whether developing paid name, image, and likeness (NIL) opportunities for collegiate student-athletes furthers an exempt purpose …”

The gist of it, can these new NIL collectives set up as nonprofits offer tax deductions to donors? La Salle and Temple both had such 501(c)(3)s. Interestingly, the two collectives are interpreting the memo in different ways, maybe based on how they promoted them to donors.

Back to the memo: “We believe that the benefit to private interests will, in most cases, be more than incidental both qualitatively and quantitatively.”

Private interests, meaning in this case, athletic interests.

The memo: “Student-athletes generally benefit from a nonprofit NIL collective through the compensation paid by the collective for use of their NIL. This private benefit is not a byproduct but is rather a fundamental part of a nonprofit NIL collective’s activities.”

La Salle’s collective honchos figure that for 2023, they won’t take any chances, since they raised the money before the memo came out. The money raised will go right to the athletic department instead, earmarked for basketball.

“There was definitely a group [of donors] at La Salle who prepared in anticipation of not having the write-off,” said Greg Webster, a former La Salle player himself. “That probably represented 75 percent.”

Webster made it clear he is just pulling that percentage out of the air.

“I’m speculating,” Webster said. “I think the other 25 percent care [about getting a write-off] and it will impact how much we raise.”

“I came up with the idea,” Keith Morris, son of Speedy, said of this new collective, which, he said, is now defunct. “How do we do something to get the small donors involved? We had a little cocktail thing at the Great American Pub in Conshohocken. We asked for a minimum donation of 250 bucks. We’re not looking to knock people over the head.”

There’s another La Salle collective, Morris pointed out, looking for bigger donors.

The 501(c)(3) wasn’t designed to simply pay athletes, by the way. It was set also up with charitable aims.

“That was always our belief — if you’re paying a kid through that, he has to earn it,” Webster said.

Andy Carl, director of the Tuff Fund collective working with Temple athletes, said they are looking at everything put out on the subject — “I feel like there’s memos for memos” — but on this issue, “I feel like it’s an opportunity to prove our charitable worth.”

The memo again: “Because the term ‘NIL activity’ covers a range of activities, such as social media marketing, camps, and speaking engagements, among others, the public benefit from those activities will necessarily vary. However, the public benefit from those activities is also accompanied by a private benefit to the student-athletes, who are compensated for engaging in each activity.”

“From our perspective, we’re actively looking to fulfill our mission,” Carl said. He described that mission: “Partnerships with national nonprofits on campaigns to fulfill the passions of our student-athletes. As you can imagine, there are a lot of charitable missions that can be fulfilled around the North Philadelphia area — all over Philadelphia — and we feel that our student-athletes are the best to fulfill those initiatives.”

Most collectives are not set up as nonprofits. Villanova’s primary collective, Friends of Nova, is not, for instance. Cody Wilcoxson, an attorney at Blank Rome who has the Tuff Fund as a client and is looking closely at the entire NIL landscape, said he wasn’t surprised by the IRS memo.

Seeing state and federal entities jumping in to look at what is going on, Wilcoxson said the question was, “Who is going to be the first entity that is going to crack down on the collectives? I think a lot of people thought it would be the IRS.”

Wilcoxson said the nonprofit collectives will have to pass a test on how they were set up, “for public benefit and incidental private benefit. … This is not a new test. You always have been able to pay contractors and vendors and employees of your nonprofit a reasonable compensation. … It has to be necessary to what you’re trying to accomplish.”

Keith Morris, a financial adviser himself, and a former Explorers walk-on, isn’t arguing with the intent of the IRS memo. He gets it. He sees all sorts of financial finagling in big-time sports. To his thinking, the big boys won’t be hurt by this.

Consider that many colleges with billion-dollar endowments and robust athletic programs are themselves registered as nonprofits. But the memo goes through all sorts of precedents. For instance, a 1975 ruling held that an organization formed by the residents of a city block to beautify and preserve that block did not qualify for exemption because “the restricted nature of the organization’s membership and the limited area in which its improvements were made indicated that the organization was organized and operated to serve private interests by enhancing the value of its members’ property rights.”

“I just think it hurts La Salle,” Morris said of this memo. “We’re trying to scrape together every dollar we can. It’s peanuts, what we raised, 15 or 20 grand. But this knocks out some of the mom-and-pop donations, and at a place like La Salle, it’s one more kick in the pants.”